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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                           -------------------------

                                  FORM 10-KSB
                           -------------------------
                                 ANNUAL REPORT
                       PURSUANT TO SECTION 13 OR 15(d) OF
               THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]

                    FOR THE FISCAL YEAR ENDED JUNE 30, 1999

                         COMMISSION FILE NUMBER 0-13022

                                  INTELLI LOGO
                 (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)

<TABLE>
<CAPTION>
                          DELAWARE                                                    94-2756073
<S>                                                          <C>
       (STATE OR OTHER JURISDICTION OF INCORPORATION)                    (I.R.S. EMPLOYER IDENTIFICATION NO.)
</TABLE>

         1975 EL CAMINO REAL WEST, MOUNTAIN VIEW, CALIFORNIA 94040-2216
             (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)

                                 (650) 965-5500
                               (TELEPHONE NUMBER)

        SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                         COMMON STOCK, $.001 PAR VALUE
                                (TITLE OF CLASS)

     Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act 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  [ ]

     Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. Yes  [X]     No  [ ]

     Registrant's revenues for its most recent fiscal year: $21,961,000

     The aggregate market value of the voting stock held by nonaffiliates on
September 15, 1999, computed by reference to the closing price as of that date
was $21,222,000.(1)

     As of September 15, 1999, 16,401,981 shares of registrant's Common Stock,
par value $.001 per share, were outstanding.
                      DOCUMENTS INCORPORATED BY REFERENCE

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                          DOCUMENT                           INCORPORATED IN FORM 10-KSB
                          --------                           ---------------------------
<S>                                                          <C>
Definitive Proxy Statement to be filed with the Securities   Part III
and Exchange Commission on or prior to October 27, 1999 and
to be used in connection with the Annual Meeting of
Stockholders to be held December 7, 1999.
</TABLE>

---------------
(1) Excludes 3,826,184 shares held by directors, officers and 10% stockholders
    of registrant.
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                                     PART I

ITEM 1. BUSINESS

GENERAL

     IntelliCorp, Inc., (IntelliCorp or The Company) develops, markets and
supports a comprehensive suite of business process management, applications
integration, and customer relationship management tools, training and consulting
to maximize Enterprise Resource Planning (ERP) efficiencies and data utilization
throughout the ERP lifecycle. IntelliCorp has used its expertise in business
process modeling, object technology and knowledge-based systems to create
products and services for organizations to gain greater benefit from their
purchased packaged applications. In particular, over the past year, IntelliCorp
has refined its focus on supporting activities across the entire lifecycle of
ERP ownership, in order to add value long after the package is initially
implemented.

     IntelliCorp's product family includes LiveModel(TM), LiveInterface(TM),
LiveTransfer(TM), LiveCompass(TM), LiveCapture(TM), MigratorPlus(TM),
LiveAnalyst, and legacy products. IntelliCorp has developed its initial business
in the packaged applications market by targeting the SAP(TM) R/3(TM) market
segment. The strategy is to build a strong development partnership with SAP AG
(SAP), a leading supplier of enterprise business software, so that the products
created by IntelliCorp are best able to deliver the necessary functionality to
SAP's customers. Since the SAP R/3 system is installed by consultants, called
Implementation Partners, who also have requirements for business process
software tools, IntelliCorp has also focused on working with these
Implementation Partners to satisfy their tools requirements and gain their
support for including the IntelliCorp products into their implementation
methodology.

     IntelliCorp delivers solutions for lifecycle management of ERP systems
through the Business Process Management product family -- LiveModel,
LiveCompass, LiveCapture, TestDirector(TM), and the IntelliCorp Business
Visualizer (IBV) as well as through the Enterprise Application Integration
product family -- LiveInterface, LiveTransfer, and MigratorPlus. LiveModel is a
business process-management tool based upon the Microsoft Windows(TM) platform
and focused on the SAP R/3 system. LiveCompass is a product and services bundle
that extracts a blueprint of an installed R/3 system to be used in adapting that
system to business change. LiveCapture is the product component of the
LiveCompass bundle that reverse engineers an R/3 system and generates a business
blueprint of its configuration. TestDirector (licensed for resale from Mercury
Interactive) is an integrated management tool for organizing and deployment of
business-critical SAP R/3 applications by enabling testing to begin earlier in
the deployment process. TestDirector is integrated with LiveModel to enable
users to create test plans directly from business process models, ensuring the
application meets end-user needs. IBV was previously known as the Visio Business
Modeler (VBM) and was developed by Visio Inc. of Seattle, Washington. In late
1998, IntelliCorp entered into an agreement with Visio to provide support for
the most recent versions of the SAP R/3 Reference Model and to rename and
distribute VBM as the IntelliCorp Business Visualizer. LiveInterface is a
software solution for developing and managing data interfaces into R/3; it
quickly generates interfaces with a minimum of specialized programming expertise
required and provides the management infrastructure to ensure reliable data
transfer. LiveTransfer is a data cleansing and transformation tool that works in
conjunction with LiveInterface to provide end-to-end integration. The product
was first sold in January 1999. MigratorPlus is a product and services bundle
that converts existing SAP interfaces to the management and monitoring
infrastructure of LiveInterface.

     IntelliCorp believes that increased acceptance of its software products
depends in large part on the adoption of these products by consulting firms who
assist their customers in implementing complex systems such as SAP's R/3 system,
and the successful use of LiveModel, LiveInterface and LiveCompass in actual SAP
R/3 implementations. To stimulate and support the development of such customer
applications and adoption of these tools, IntelliCorp provides training, support
and consulting services through, for example, the JumpStart consulting program.

     In addition to business process modeling and applications integration, the
Company is increasing its focus on its Configure-To-Order (CTO) consulting
business and expanding this business to support more of the

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larger Customer Relationship Management (CRM) applications market as well as
SAP's New Dimension and mySAP.com offerings. IntelliCorp's CRM business provides
CRM solutions to SAP customers with configurable products, primarily in the
high-tech and the engineering & construction industries. IntelliCorp's CRM
solutions include internet sales, sales force automation for the direct sales
force, sales force automation for distributors, and configuration for services
management. The key differentiation for IntelliCorp CRM solutions is
IntelliCorp's deep knowledge of SAP's Sales Configuration Engine and SAP's Sales
Pricing Engine gained while consulting on the development of the products and
consulting on the vast majority of pilot implementations. IntelliCorp's strength
in business process management and applications integration enables IntelliCorp
to integrate and streamline manufacturers' front-office and back-office business
processes. By implementing and integrating business processes across the
extended supply chain, IntelliCorp CRM solutions help clients increase
e-commerce revenue, increase sales productivity, and better manage inventory
costs.

     IntelliCorp markets its products directly in the United States as well as
through independent software vendors ("ISVs"), value-added resellers ("VARs"),
representatives and distributors in other regions around the world. Its
customers are mostly large end-user corporations.

     For the last year, the Company focused on the SAP market and promoted its
products at two SAPPHIRE(R) User Conferences, one in Europe and the other in the
United States, in addition to various SAP user group meetings around the world.
The Company has continued to grow its relationship with SAP which has included a
Licensing and Distribution Agreement to package the R/3 Reference Model with the
Company's products and a Joint Development Agreement for future technical
investment by both parties. During 1999 the Company entered into a number of
agreements with SAP for the development of the Diagram Explorer, which is
bundled and distributed by SAP with its ASAP Toolkit, and for Configure to Order
products also to be distributed by SAP. See Dependence on SAP under the Risk
Factors section of this report for additional information and risks related to
SAP.

     IntelliCorp's legacy software development tools which are maintained but
not further developed, represent a decreasing percentage of the Company's
business, include PowerModel(R), Kappa-PC(R) and Knowledge Engineering
Environment (KEE(R)), PowerModel is an object-oriented development and delivery
environment for UNIX/X-Motif and MS-Windows client-server applications and
Kappa-PC provides similar capabilities for PCs running DOS/MS-Windows. A number
of these products can be connected to databases and software applications on
mainframe, UNIX and PC platforms, and offer organizations the ability to
translate business model definitions and needs into cost-effective software
applications.

TECHNOLOGY BASE

     IntelliCorp's products derive from several important software technologies
including object-oriented programming, client/server architecture, and modeling
and encapsulating technology, as well as from technologies acquired and/or
licensed from third parties.

     In terms of the LiveModel product, the current approach used in SAP R/3
implementations relies on substantial knowledge and experience of the
implementation team. Based on the R/3 Reference Model (a business blueprint of
the R/3 software) those business processes that are not relevant in a specific
implementation context need to be identified and pruned, remaining processes
adapted where necessary and new processes added as appropriate. The result is an
implementation specific model that defines the scope for the customization
activities necessary to configure the R/3 software to implement those business
processes. LiveModel: SAP R/3 Edition is a business process modeling tool,
tailored to support the SAP R/3 implementation process using the SAP R/3
Reference Model. It provides a mechanism for SAP R/3 implementation team members
to review the SAP Reference Model, revise the model, and validate changes prior
to actual R/3 code configuration. It accelerates R/3 implementations by enabling
users to better understand the R/3 system and to better articulate their
business requirements. Version 2.0, released in fiscal year 1998, extended the
tool's usefulness by enabling customers to animate design decisions and links to
live R/3 transactions, both to describe behavior and predict change. In version
3.0 released in fiscal year 1999, IntelliCorp extended the LiveModel
functionality to include support for an ERP-independent modeling notation called
the Business Definition Layer, which provides a customized view of business
processes,

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including manual processes, depending on the audience perspective
(executive-level, IT professional, business owner, or end user), and
bi-directional integration with the SAP AcceleratedSAP tools to immediately
visualize the business implications of changes made in the ASAP Q&A database.

     LiveCompass combines the technology of LiveModel with the expertise of the
IntelliCorp consulting organization. Using its proprietary LiveCapture
technology, IntelliCorp consultants reverse-engineer a model from a customer's
existing R/3 system, populating a LiveModel repository with an accurate
reflection of the current state of the R/3 system. Using this model as a base,
the consultants work with the customer to develop a strategy for addressing
business change, ensuring that the LiveModel repository continues to reflect the
desired business processes of the customer.

     IntelliCorp's Business Visualizer is an upgrade to VBM, supporting versions
4.0 and 4.5 of the SAP R/3 Reference Model. Business Visualizer is used for
extracting EPC diagrams from the R/3 Reference Model for the purpose of creating
documentation and other types of visual communication. Business Visualizer is an
add-on product for the Visio Standard, Visio Technical, and Visio Professional
products. IntelliCorp and Visio entered an agreement in November 1998 whereby in
exchange for IntelliCorp assuming certain development and support obligations
for VBM, IntelliCorp was granted rights to rename and distribute the product.

     IntelliCorp has entered into an agreement with Mercury Interactive to
integrate LiveModel with Mercury's TestDirector product. This integration helps
an implementation team focus their testing activities based on their system
design in LiveModel, providing a business process-oriented view of the entire
design, implement, and test cycle.

     LiveInterface is both a developer's workbench and interface management
framework. After mapping the data that must be transferred between SAP R/3 and
one or more external computer systems, LiveInterface automatically generates the
code (in ABAP/4) for the required interface. The management framework not only
provides the necessary capabilities for defining how and when the interfaces
should run but also a view on how they are executing and capabilities for
recovery in case of failure.

     LiveTransfer is a product originally developed by Reliant Data Systems
(RDS) of Austin, Texas. IntelliCorp entered into an OEM relationship with RDS in
October 1998, for the purpose of extending the Enterprise Application
Integration offering and providing end-to-end application integration
capabilities. IntelliCorp has the right to sell LiveTransfer until October 2003
and RDS has agreed to provide technical customer support on the technology until
October 2000. To extend this period would require a re-negotiation of the
current agreement, or the Company could develop the expertise in-house, or it
could find an alternative to this technology from another third party vendor
(although none of these options are guaranteed). The product is sold under the
name LiveTransfer throughout the IntelliCorp worldwide sales distribution
network.

     LiveAnalyst, IntelliCorp's general purpose business process modeling and
simulation tool, supports organizational and knowledge integration features
essential when mapping strategic business objectives to SAP design requirements.
The ability to drag and drop Event Process Chain (EPC) objects from LiveModel
into LiveAnalyst and the interface to Human Resources (HR) makes it easy to test
and optimize configuration variants to show the impact of new workflows and to
optimally configure resources.

     In April 1996, IntelliCorp commercially released the PowerModel system,
version 3.2, one of the Company's key software development tools based on the
Cprogramming language, the UNIX operating system and the X Windows interface.
This product was initially introduced in 1990. PowerModel is aimed at corporate
and independent software vendor developers. These individuals are generally
trained as professional programmers and are familiar with more complex technical
issues. PowerModel 3.2 has many features including: portability across UNIX and
MS Windows platforms, new interface building tools, and C++ interoperability.

     The Kappa-PC product is based on the C programming language. Kappa-PC
features object-oriented programming, active graphics, compact code size, and
links to other software applications, spreadsheets and databases. Kappa-PC can
be used by customers on industry-standard PCs, and is aimed at the PC developer
building single user departmental applications.

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     Finally, IntelliCorp continues to market the Lisp-based KEE system
(originally introduced in August 1983) for complex AI and expert system
applications. The KEE system, version 4.1, released in May 1993, is available on
HP 9000 Series 700 and 800 workstations, the Sun SPARCstation and IBM RS6000
workstation. KEE 4.1 provides support for the X Windows interface, a color
capability and an enhanced development environment. The KEE system is typically
used for complex applications, enabling users to develop their own
knowledge-based systems for a broad range of commercial and scientific
applications.

CUSTOMER SERVICE AND SUPPORT

     To help customers become more productive using both the Business Process
Management and the Enterprise Application Integration tools families,
IntelliCorp offers a support package to its customers that includes program
maintenance and updates (including new SAP R/3 Reference Models), documentation,
training in the use of its software, on-site consultation and application
support via telephone, fax, email or world wide web. IntelliCorp offers
extensive support materials on it's world wide web site located at
http://www.intellicorp.com.

CONSULTING AND TRAINING SERVICES

     The Company also offers various consulting and training services to its
customers on a contract basis. For its SAP customers, IntelliCorp offers
programs such as LiveCompass(TM) and MigratorPlus services, as well as training
and consulting services to customers who have purchased the LiveModel and
LiveInterface tools. These programs enhance the benefit customers derive from
the use of the Company's modeling and applications integration tools.

     IntelliCorp also provides consulting services to SAP for the development
and roll-out of SAP's Sales Configuration Engine (SCE) and the development of
SAP's Sales Pricing Engine (SPE). IntelliCorp consulting staff have been
involved in a number of implementations of the SCE as part of SAP's SCE beta
program. This group, the IntelliCorp CTO consulting group, integrates both the
Company's and third-parties' products to build custom applications in support of
the SAP SCE and SPE.

     In addition, the Company offers custom development services to its key
business partners.

MARKETING AND SALES

     IntelliCorp's sales strategy utilizes multiple channels to reach the
customer. These include direct licensing to end-user customers (which is the
predominant channel), as well as the development and support of ISVs, VARs,
distributors and representatives outside the United States with whom the Company
has cooperative marketing agreements. The Company works closely with consulting
firms and system integrators to provide packaged solutions to its customers. The
Company focuses on those companies implementing SAP software as well as the
existing SAP R/3 install base. As SAP continues its move into the mid-market
($250M - $2B companies), IntelliCorp is likewise expanding its reach to
encompass this broader market.

     In June 1996, IntelliCorp entered into an agreement with Deloitte & Touche
Consulting Group/ICS (ICS) under which ICS will use LiveModel: Industry Print
Edition to help their customers make better business engineering decisions and
accelerate SAP implementations. Since that time, four of the "Big 5" accounting
firms have adopted IntelliCorp's products, as have IBM and other major SAP
Implementation Partners. In fiscal 1999, the Company signed agreements with
additional major implementation partners, including Cap Gemini in France and
Origin in Europe.

     IntelliCorp has sales offices in Mountain View and in multiple cities
around the United States, as well as in London, Paris and Frankfurt. Its sales
force uses direct mail, telephone and personal contact marketing to identify
potential customers, with an emphasis on major corporate accounts. The Company
also relies on customer referrals from SAP Implementation Partners. In addition,
the Company's sales and marketing efforts include a combination of exhibits and
demonstrations at trade shows and presentations at seminars. The marketing
efforts have expanded significantly in fiscal year 1999 to include web-based
teleconferences and e-mail direct marketing, as well as increased use of the
World Wide Web for prospecting, differentiation and

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education. Marketing efforts in fiscal 1999 also included engagement of public
relations firms in North America, UK and France in support of press and analyst
relations to raise brand awareness.

     Order backlog is not significant because IntelliCorp's practice is to
deliver its products promptly after the receipt of an order.

DISTRIBUTION

     IntelliCorp has entered into agreements pursuant to which distributors and
resellers in certain European countries, South Africa, Latin America and in the
Asia Pacific region have been granted non-exclusive rights to market and
sublicense IntelliCorp's products in their respective countries and certain
other territories.

COMPETITION

     The Company believes that its ability to compete depends on factors both
within and outside its control, including the timing and success of new products
developed by the Company and its competitors; product performance and price,
distribution and customer support. There can be no assurance that the Company
will be able to compete successfully with respect to these factors.

     One factor in the success of LiveModel: SAP R/3 Edition is the Company's
relationship with SAP. Continued growth of this relationship would help ensure
the Company's success in the SAP R/3 market. It is SAP's policy to provide
application programming interfaces (API) to its technology that allows existing
and potential competitors to access the models and other parts of the R/3
system, thereby ensuring that there is competition.

     Competitors in the SAP business process management marketplace have
included IDS Scheer with the ARIS product line, and Micrografx Inc. with the
Enterprise Charter. In November of 1998, an agreement was reached between
IntelliCorp and Visio under which the customer base for the Visio Business
Modeler was transferred to IntelliCorp, effectively eliminating one competitor
from the market. Other competitors are expected to enter the business process
modeling and management marketplace. In addition, SAP provides the ASAP
Implementation Toolkit at no-charge to licensees of R/3 for use in implementing
the system. SAP has stated that it intends to continue to develop this product
set for the foreseeable future. The Company's strategy is to collaborate with
SAP in creating components of the ASAP Toolkit for SAP distribution while, at
the same time, developing add-on products for sale by the Company. Such add-on
products greatly extend the value and continued use of the ASAP Toolkit and data
contained therein.

     With respect to LiveInterface, formerly known as UPI, the primary
competition comes from four companies: TSI, ETI, Neon and IBI. With the
introduction of LiveTransfer during fiscal 1998, steps were taken to increase
the scope of the Company's offering in this area and to reduce the threat from
other vendors. The continued sustainability of its competitive position in the
application integration market is dependent on the successful development of
future follow-on technology (refer to Item 6, Management's Discussion and
Analysis of Financial Condition and Results of Operations).

     See the Risk Factors section of this report for additional information
related to competition.

PRODUCT RESEARCH AND DEVELOPMENT

     To date, much of the Company's research and development has been done
in-house. IntelliCorp expects that most of its software products will continue
to be developed internally, although it may on occasion, as has been done in the
past, outsource certain projects or acquire ownership of, or rights to market,
existing technology.

     An agreement with Poet Software Corporation, completed in December 1995,
grants rights to IntelliCorp to license and deliver the Poet Object-Oriented
Database for use with LiveModel: SAP R/3 Edition and derivative products.
IntelliCorp resells the Poet Database as part of its ModelStore(TM)product in
both single user (Client) and multi-user (Server) configurations.

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     In April 1996, IntelliCorp announced the signing of two agreements with
SAP -- a licensing/distribution agreement to package the R/3 Reference Model
with the Company's products and a joint development agreement which includes a
formal commitment of resources on behalf of both parties to explore the utility
of IntelliCorp's technology within the content of the SAP R/3 system. In August
1997, the Company announced the signing of another License and Development
agreement with SAP. This agreement was further extended by SAP and IntelliCorp
at the end of its initial term. During 1999 a number of product development
extensions, as provided for in the agreement, were executed. See Dependence on
SAP under the Risk Factors section of this report for additional information on
this agreement.

     An agreement with ProUBIS, completed in April 1997, grants rights to
IntelliCorp to license and deliver the Bonapart Business Process Re-engineering
tool as IntelliCorp's LiveAnalyst product.

     In January 1998, IntelliCorp acquired UPI technology from ICS Deloitte
Management LLC. UPI is sold by IntelliCorp as LiveInterface. At the time of
acquisition, IntelliCorp hired a number of key development and support staff who
had worked on the UPI technology at ICS Deloitte and Touche Consulting/ICS.

     In October 1998, IntelliCorp entered into an agreement with RDS to obtain
the rights to resell the technology underlying its product known as LiveTransfer
(as explained earlier).

     An agreement with Visio Inc., completed in November 1998, grants rights to
IntelliCorp to distribute the VBM renamed to IntelliCorp Business Visualizer. In
accordance with the agreement, Visio has ceased distribution of the Business
Modeler and has transferred all then-current support agreements to IntelliCorp
for continued execution in return for the assumption by IntelliCorp of minimal
up-grade obligations.

     An agreement with DSC, a German Company, completed in May 1999, grants
rights for IntelliCorp to distribute DSC's CADAgent product. CADAgent is a
middleware that provides real-time synchronization between a CAD Model and the
contents of an SAP R/3 order BOM. CAD Agent currently supports CADSS5, AutoCAD
and Pro/Engineer.

PRODUCT PROTECTION

     IntelliCorp regards its software as proprietary and attempts to protect it
by relying upon copyrights, trade secret and patent laws and contractual
nondisclosure safeguards as well as restrictions on transferability that are
incorporated into its software license agreements. IntelliCorp licenses its
software products to customers rather than transferring title. In spite of these
precautions, it may be possible for competitors or users to copy aspects of
IntelliCorp's products or to obtain information which the Company regards as
trade secrets without authorization, or to develop similar technology
independently. In addition, effective copyright and trade secret protection may
be unavailable or limited in certain foreign countries. IntelliCorp has not
required end-users of LiveModel: SAP R/3 Edition and derivative products,
LiveInterface, LiveTransfer, LiveAnalyst and Kappa-PC to sign license
agreements. Instead, the license agreement for these products is included in the
product packaging, and the packaging explains that by installing and executing
the product, the user is agreeing to the terms of the license agreement. It is
uncertain whether "shrink-wrap" license agreements of this type are legally
enforceable.

     IntelliCorp currently has four patents on its technology. See Proprietary
Information under the Risk Factors section of this report for additional
information related to patents.

     In view of the rapid rate of technological change in the areas in which the
Company does business and the uncertainty of the scope of the protection
afforded by copyright and patent laws, IntelliCorp does not believe that
copyrights or patents will be of major competitive advantage to it. Rather,
IntelliCorp believes that it must rely primarily on the technical competence and
creative ability of its personnel to improve and update its software products
and create additional products in order to be successful.

EMPLOYEES

     As of June 30, 1999, the Company employed 126 people, many of whom hold
advanced degrees. IntelliCorp's development engineers come from a variety of
commercial and research backgrounds. IntelliCorp believes that its future
success will depend, in large measure, on its ability to continue to attract
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and retain qualified employees. None of IntelliCorp's employees is covered by a
collective bargaining agreement, and the Company believes that its relations
with its employees are good. The Company maintains competitive compensation,
benefits and equity participation programs. Competition for qualified personnel
is intense, and there can be no assurance that the Company will be able to
attract and retain qualified personnel in the future.

RISK FACTORS

     The information about the Company included or incorporated by reference
herein contains forward-looking statements that involve risks and uncertainties,
including the risks detailed below.

NEED FOR ACCEPTANCE OF THE COMPANY'S PRODUCTS

     The market for the Company's products is evolving, and its growth in the
area of business process management, in particular, depends upon broader market
acceptance of business process management and modeling technology. Business
process management represents a fundamental shift in the implementation and
management of customers' SAP R/3 systems, that, from time to time, may or may
not be compatible with implementation methodologies promoted by SAP. One such
example of this risk was SAP's shift in the fall of 1998 from the Business
Engineer technology (which relied more heavily on modeling technology) to their
ASAP(TM) methodology. It took a significant amount of time to effectively
integrate our BPM products with the ASAP methodology and to re-position our
solutions and their value appropriately in the marketplace. As a result, there
can be no assurance that organizations will choose to make the investment
required to use IntelliCorp's business process management tools and solutions
for their ERP lifecycle needs. In addition, even if these products gain broader
market acceptance, a number of other vendors offer competing products, and there
are also a number of other approaches to business and application modeling. See
Competition below.

     The market for enterprise application integration tools is well established
and is fought over by a number of successful companies. One of LiveInterface's
key differentiating characteristics is that it is written in ABAP, an SAP
proprietary language, and resides "inside" the R/3 system. The leading
competitors typically endorse an ERP-independent approach to application
integration, relying on a hub-and-spoke architecture for application
communication. There can be no assurance that the Company's approach will be
accepted over that provided by other vendors.

     In addition, sales of the Company's SAP R/3 based products will depend on
the acceptance and use by consulting firms and others who assist their customers
to implement the complex R/3 system. There can be no assurance that the Company
will be successful in achieving and sustaining partnerships with third party
packaged system vendors or with strategic consulting firms. SAP has formed
strategic alliances with other companies to develop R/3 modeling/implementation
software products as well as applications integration products, and SAP itself
offers products that include a subset of the capabilities of IntelliCorp's
products. While the Company believes that its products offer advantages over
competing products in this market, there can be no assurance that the Company
will be successful in refocusing its business in the SAP R/3 market or that the
Company's products will successfully compete with others in this market.

     The Company's fiscal 2000 sales forecast anticipates a predominant portion
of revenues to be derived from sales of and consulting and support services
related to LiveModel: SAP R/3 Edition, and LiveInterface, and derivative and
associated products. Factors which could impact the level of revenues generated
from these products include, but are not limited to, the timing and level of
market acceptance of these products, the timing of market introduction of
competing products, the timely and successful introduction of new technology
enhancements and follow-on products, the success of providing consulting
services and the success of sales efforts with strategic partners. There can be
no assurance, however, that the actual sales will not differ materially from the
sales forecast in the near term.

RAPID TECHNOLOGICAL CHANGE; PRODUCT DEVELOPMENT

     The market for the Company's products is characterized by ongoing
technological developments, evolving industry standards, rapid changes in
customer requirements and increasing customer demands. As a result, the
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Company's success depends upon its ability to continue to enhance its existing
products, develop and introduce in a timely manner new products that take
advantage of technological advances, and respond to new customer requirements
and demands. To the extent one or more of the Company's competitors introduce
products that fully address customer requirements, the Company's business could
be adversely affected. There can be no assurance that the Company will be
successful in developing and marketing enhancements to its existing products or
new products incorporating new technology on a timely basis, or that its new
products will adequately address the changing needs of the marketplace. If the
Company is unable to develop and introduce new products, or enhancements to
existing products, in a timely manner -- in response to changing market
conditions or customer requirements or demands, the Company's business and
results of operations will be materially and adversely affected.

     LiveInterface is written in the SAP ABAP programming language. There can be
no assurance that SAP will not discontinue or dramatically change the
specifications to this language. The competition for expert Windows and ABAP
programmers is highly competitive. In addition, customer requirements and
technology for the applications integration market is evolving very rapidly.
New, follow-on technology and products will be necessary to remain competitive.

     The Company also relies on licenses from third parties, such as POET, SAP,
Reliant Data Systems, and ProUBIS for some of its technology and product
functionality. There can be no assurance that these licensed technologies will
be maintained and/or enhanced by their owners such that they can continue to
provide the necessary functionality for IntelliCorp's products. For example, the
current agreement with Reliant Data Systems requires RDS to provide technical
customer support on the technology underlying IntelliCorp's LiveTransfer product
until October 2000. To extend this period would require a re-negotiation of the
current agreement, or the Company could develop the expertise in-house, or it
could find an alternative to this technology from another third party vendor
(although none of these options are guaranteed).

     Looking forward, IntelliCorp may consider, from time to time, purchasing or
licensing additional new technologies from third parties. However, there is no
assurance that the Company can do this successfully or that, if the Company does
acquire new technology, there is no assurance that it will not have an adverse
impact on the operating results of the Company as a result of the acquisition of
this technology.

     Although the Company has a number of ongoing development projects, there
can be no assurance that the development of these products will be completed
successfully or on time, that the projects will include the features required to
achieve market acceptance, or that enhancements to the product will keep pace
with broadening market requirements. From time to time the Company or its
competitors may announce new products, capabilities or technologies that have
the potential to replace or shorten the life cycles of the Company's existing
products. There can be no assurance that announcements by the Company or its
competitors of currently planned or other new products will not cause customers
to defer purchasing existing Company products. The Company has, in the past,
experienced delays in software development, and there can be no assurance that
the Company will not experience further delays in connection with its current
product development or future development activities. Delays or difficulties
associated with new product introductions or product enhancements could have a
material adverse effect on the Company's results of operations. Software
products as complex as those offered by the Company may contain undetected
errors when first introduced or as new versions are released. There can be no
assurance that errors will not be found in new products after commencement of
commercial shipments, resulting in loss of or delay in market acceptance. The
Company maintains no insurance for this risk.

DEPENDENCE UPON SAP

     IntelliCorp entered into a software license and development agreement with
SAP in August 1997. Under this agreement, which includes an extension of the
previous development agreement between the companies, SAP has contracted for
IntelliCorp to develop viewing and configuration technology to embed into SAP's
software. This agreement also provides a license to SAP for this viewing and
configuration technology. SAP has released the viewing technology to its users,
and is using LiveModel: SAP R/3 Edition internally as the authoring environment
for the R/3 Reference Model and Industry-Solution (IS) specific models. There
can

                                        9
<PAGE>   10

be no assurance that these actions will not affect IntelliCorp's own product
sales and have a negative effect on the Company's future revenue stream.

     In addition, IntelliCorp has subsequently entered into other custom
development projects with SAP. The revenues from these development agreements
have been one-time in nature. There is no guarantee that IntelliCorp will be
able to replace these revenues with other customer revenues, if and when these
custom projects for SAP cease. In addition, there can be no assurance that SAP
will continue their relationship with IntelliCorp. Termination of the SAP
arrangement could have a material adverse effect on the Company's financial
results.

COMPETITION

     The Company believes that its ability to compete depends on factors both
within and outside its control, including the timing and success of new products
developed by the Company and its competitors, product performance and price,
distribution and customer support. There can be no assurance that the Company
will be able to compete successfully with respect to these factors.

     The market for IntelliCorp's software products has been intensely
competitive and characterized by rapid change and frequent introduction of new
products. The important competitive factors in the industry are acceptance of
its products by the SAP implementation partners, continued close relationship
with SAP itself, product sophistication, features, reliability,
price/performance characteristics, ease of understanding and operating the
software, integration with conventional computing environments and the internet.
There can be no assurance that the Company will be successful in the face of
increasing competition from new products and enhancements introduced by existing
competitors and by new companies entering the market.

     The Company's advantage continues to be its close relationship with the SAP
development organization and continued growth of this relationship is necessary
to insure the Company's success in the SAP R/3 market. This relationship is
always at risk based upon the ability of the Company to perform the development
work desired by SAP and the alternatives available to SAP.

     The Company is at risk for encroachment into the value provided by
LiveModel: SAP R/3 Edition by SAP's continued improvement to the ASAP
Implementation Toolkit. As new facilities are added to this freely provided
component of the SAP R/3 implementation toolset, there is no guarantee that the
value of the facilities in LiveModel will not be jeopardized. The Company must
continue to enhance the facilities in LiveModel and/or introduce new products
that build upon the ASAP Implementation Toolkit to retain and grow its revenues.

     SAP also provides an environment that fosters competition to LiveModel
through a published API to the models in their repository. Existing competitors
such as IDS Scheer and Micrografx already have access to these APIs, and other
modeling tool companies may be interested in entering this market by using API's
and their existing or planned products to offer valuable business process
modeling capabilities to their customers.

     The major competitor in the SAP business process management marketplace is
IDS Scheer with the ARIS product line which offers broad BPR capabilities. Other
competitors are expected to enter this business modeling marketplace. In
addition, SAP offers the ASAP Implementation Toolkit with a subset of the
capabilities of the IntelliCorp products.

     The primary competitors to the Company's LiveInterface product today are
TSI, IBI, and ETI. However, there are numerous other competitors that include
data transformation and middleware vendors who have invested in technologies to
access data within SAP R/3. IntelliCorp's strategy is to partner with some of
these vendors and to develop follow-on product offerings that result in a more
complete solution for the customer. Refer to Item 6 "Management's Discussion and
Analysis of Financial Condition and Results of Operations", for additional
information on the risks related to LiveInterface.

     TestDirectors' primary competitors are Autotester Inc. and SAP. Both
companies have test automation tools and test management tools for use in R/3.
Both have a close focus on SAP implementations. In addition, SAP's Computer
Aided Testing Tool (CATT) is delivered free with the R/3 Developers Workbench.

                                       10
<PAGE>   11

IntelliCorp intends to compete with these tools in several ways, first, the
integration with LiveModel is a key differentiator as it supports process-based
testing. Second, IntelliCorp emphasizes the ability of TestDirector to address
all of a customer's enterprise systems, not just SAP.

     The PowerModel business continues to decline primarily due to the declining
market for internal application development and the focus for new application
development is on Windows and Java applications. Since neither of these
application delivery platforms is the primary development environment for
PowerModel, PowerModel is susceptible to competition from many sources. The
major market has been the existing customer base where the value of PowerModel
facilities are appreciated, and the applications built with PowerModel continue
to need support.

     Many of the Company's current and prospective competitors have
significantly greater financial, technical, manufacturing and sales and
marketing resources than the Company. These companies, as well as other hardware
and database software vendors can be expected to develop and market additional
competitive products in the future. In addition, a variety of established
companies are also building object-oriented products as extensions to their
existing product lines.

DEPENDENCE ON KEY PERSONNEL

     The Company is dependent upon a limited number of key management, technical
and sales personnel, the loss of whom would adversely affect the Company's
business. In addition, in the future, the Company may need to augment or replace
existing key management, technical, or sales personnel in order to maintain or
increase its business. Because of the complexity and breadth of the Company's
product line in certain technical areas, the Company may have only a single
employee with appropriate expertise. The loss of any such employee can have the
effect of slowing down or halting development with respect to a product until
the Company is able to locate and hire another technical person with the
requisite expertise. In addition, certain management, technical and support
personnel are relatively new to the Company, and the Company's success in the
future will depend in part on successful assimilation of new personnel. The
Company's future success will depend in part upon its ability to attract and
retain highly qualified personnel. The Company competes for such personnel with
other companies, academic institutions, government entities and other
organizations. The ability to recruit, on a timely basis, appropriate personnel
to staff the various development efforts will be a key factor in the success of
those projects. If the Company cannot recruit the appropriate personnel and must
hire outside consultants to perform the work, the contract margins may be
adversely affected. There can be no assurance that the Company will be
successful in hiring or retaining qualified personnel. It is particularly
difficult to hire personnel with SAP and configure to order expertise. Loss of
key personnel or inability to hire and retain qualified personnel could have a
material adverse effect on the Company's business and results of operations.
From time to time in the past, the Company has experienced significant turnover
in its sales force. There can be no assurance that the Company will be able to
reduce this periodic turnover in its sales force and, as a result, the Company
may lose sales opportunities, market share or customers.

DEPENDENCE ON LOWER MARGIN SERVICE REVENUES

     A significant amount of the Company's revenues has been derived from
contract and other services. The operating margins from revenues for such
services are substantially lower than the operating margins from revenues for
the Company's software products. This disparity is principally due to the low
cost of materials, royalties, and other costs of the Company's software
products, as compared to the relatively high personnel costs (including the
higher cost of using outside consultants) incurred in providing consulting
services. In addition, as the proportion of contract and other service revenues
increases, the overall margins will decrease accordingly. As a result of the
Company's reliance on contract and other revenues, the Company's overall
operating margins may be lower than those for software companies that do not
derive such a significant percentage of revenues from contract and other
services. In addition, the Company's operating margins have, in the past, and
may in the future, vary significantly as a result of changes in the proportion
of revenues attributable to products and services.

                                       11
<PAGE>   12

LACK OF PROFITABILITY, POTENTIAL FUTURE LOSSES

     Over the last five years, the Company has experienced aggregate
consolidated net losses of over $15,410,000, including a net loss of $6,202,000
for the year ended June 30, 1999, and a net loss of $698,000 for the year ended
June 30, 1998. The Company may also have losses in future years. There can be no
assurance that the Company will attain and maintain profitability.

     As of June 30, 1999, the Company has an accumulated deficit of $55.1
million, a cash and cash equivalents balance of $2.6 million, a working capital
balance of $3.0 million. In addition, it has a net loss of $6.7 million for
fiscal 1999. Management expects to incur additional losses through at least part
of fiscal 2000, including the first quarter, and it recognizes the need to
utilize all or some of its available financing resources as of June 30, 1999,
which is comprised of a $3.0 million common stock purchase agreement ($1.4
available as of June 30, 1999) and a bank credit facility which amounts to the
lessor of $3,000,000 or 80% of eligible accounts receivable (approximately $2.5
available as of June 30, 1999), to fund its cash requirements in fiscal 2000. At
this time, management's plans for fiscal 2000 anticipate that revenues together
with available financing alternatives will be sufficient to fund the Company's
cash requirements through at least June 30, 2000. However, if anticipated
revenues for fiscal 2000 do not meet management's expectations, and additional
financing, above the available resources, are not available, management has the
ability and may reduce certain planned expenditures to lower the Company's
operating costs.

     To allow its Common Stock to remain listed for trading on The NASDAQ
SmallCap Market tier of The NASDAQ Stock Market (NASDAQ), the Company is
required to maintain a minimum capital and surplus of $2,000,000 as well as a
closing bid stock price of at least $1.00 per share. In the past, the Company's
capital and surplus as well as its stock price have fallen temporarily below the
NASDAQ minimum. Significant additional losses could adversely affect the
Company's ability to maintain the required minimum capital and surplus in the
future, and potentially impact IntelliCorp's stock price. Should the Company's
Common Stock be delisted from the NASDAQ Stock Market, the trading market for
the Common Stock would likely be adversely affected.

POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS

     The Company's quarterly revenues and operating results have in the past,
and may in the future, vary significantly due to such factors as the timing of
new product introductions, changes in pricing policies by the Company and its
competitors, market acceptance of new products, enhanced versions of existing
products, the information systems department budgets of its customers, and the
length of sales cycles. Although a significant portion of the Company's revenues
in each quarter result from orders received in that quarter, the majority of the
Company's expense levels are fixed, based on expectations of future revenues. In
addition, a substantial amount of the Company's quarterly revenues have
typically been recorded in the third month of the fiscal quarter with a
concentration of such revenues in the last half of the month. The timing of the
closing of large license agreements increases the risk of quarter to quarter
fluctuations. As a result, if revenues are not realized as expected, the
Company's operating results will be materially adversely affected. Accordingly,
it is likely that the Company would experience disproportionate declines in its
operating results if revenues were to decline. In addition, it is possible that
in some future quarter the Company's operating results will be below the
expectations of public market analysts and investors. In such event, the price
of the Company's Common Stock would likely be adversely affected.

CONCENTRATED PRODUCT LINE

     The Company currently derives most of its revenue from LiveModel: SAP R/3
Edition and LiveInterface, and related products and services, and expects this
concentration to continue for the foreseeable future. As a result, any factor
adversely affecting the demand for, or pricing of, LiveModel and LiveInterface
and related products and services would have a material adverse effect on the
Company's business and results of operations. The Company's future financial
performance will depend significantly on the successful development and customer
acceptance of new and enhanced versions of its products.

                                       12
<PAGE>   13

CUSTOMER CONCENTRATION

     For fiscal 1999, revenues from the sale of products and services to one
related party accounted for 21% of total revenues. The level of revenues
received from this customer may not continue in future periods. In addition,
certain customers may account for a significant portion of net revenues in a
particular quarter, which may lead to significant variations in quarterly
results.

NEED FOR CHANNEL PARTNERS

     In order for the Company to reach higher levels of revenue and sustainable
growth, the Company may require channel partners for the sale, distribution and
co-marketing of its products. Such partners may include SAP, consulting firms,
systems integrators, traditional software distributors or hardware or software
companies with established distribution channels. The Company has an agreement
with some global SAP Implementation Partners to promote or utilize the Company's
LiveModel: SAP R/3 Edition, as well as its LiveInterface product. These channel
partners are instrumental in gaining acceptance of IntelliCorp's tools both for
their consulting methodology as well as by their customers for continuing
operating requirements. The Company anticipates that a significant portion of
fiscal year 2000 revenues will be generated through these arrangements and other
similar arrangements or agreements with consulting firms and hardware companies
There can be no assurance that the Company will be able to achieve significant
sales through its global implementation partner relationships or that the
Company will be successful in establishing additional channel partner
arrangements or that, if such relationships are established, they will prove to
be commercially successful. In addition, there can be no assurance that the
Company's partners will not utilize their relative size or financial strength to
the disadvantage of the Company.

MANAGING A CHANGING BUSINESS

     Since its inception, the Company has experienced changes in its operations
which have placed significant demands on the Company's administrative,
operational and financial resources. The Company's future performance will
depend in part on its ability to manage change, both in its domestic and
international operations, and to adapt its operational and financial control
systems as necessary to respond to changes in its business. The failure of the
Company's management to effectively respond to and manage changing business
conditions could have a material adverse effect on the Company's business and
results of operations.

INTERNATIONAL OPERATIONS

     Approximately 32% of the Company's net revenues for the fiscal year ended
June 30, 1999 and 28% of the Company's net revenues for the fiscal year ended
June 30, 1998 were attributable to international sales. Most international
revenues to date have been derived from license revenues. The Company currently
offers selected local language versions of its products. Although it does intend
to offer additional localized product releases in the future, there can be no
assurance that such releases will be successfully developed or, if developed,
that they will achieve market acceptance. The Company faces certain risks as a
result of international sales. The results of the Company could be affected
adversely by short-term fluctuations in currency exchange rates. Additionally,
the Company's international operations may be affected by changes in demand
resulting from long-term changes in interest and currency exchange rates. The
Company is also subject to other risks associated with international operations,
including tariff regulations and requirements for export licenses, particularly
with respect to the export of certain technologies, which may on occasion be
delayed or difficult to obtain, unexpected changes in regulatory requirements,
longer accounts receivable payment cycles, difficulties in managing
international operations, potentially adverse tax consequences, economic and
political instability, restrictions on repatriation of earnings, the burdens of
complying with a wide variety of foreign laws, and patterns of customers' staff
vacations, especially in Europe, that may reduce earnings in Company's fiscal
first quarter. In addition, the laws of certain countries do not protect the
Company's products and intellectual property rights to the same extent as do the
laws of the United States. There can be no assurance that such factors will not
have an adverse effect on the Company's future international sales and,
consequently, on the Company's business and results of operations. With the
exception of limited patent protection in Canada, the Company has no patents
protecting its products in foreign markets.
                                       13
<PAGE>   14

PROPRIETARY INFORMATION

     IntelliCorp regards its software as proprietary and attempts to protect it
by relying upon copyrights, trade secret and patent laws and contractual
nondisclosure safeguards as well as restrictions on transferability that are
incorporated into its software license agreements. IntelliCorp licenses its
software products to customers rather than transferring title. In spite of these
precautions, it may be possible for competitors or users to copy aspects of
IntelliCorp's products or to obtain information which the Company regards as
trade secrets without authorization, or to develop similar technology
independently. In addition, effective copyright and trade secret protection may
be unavailable or limited in certain foreign countries. IntelliCorp licenses
LiveInterface in a machine-independent form for users to install into their SAP
R/3 systems. This practice increases the possibility of misappropriation or
other misuse of the Company's products. IntelliCorp has not required end-users
of Kappa-PC (a PowerModel product), LiveModel: SAP R/3 Edition (and derivative
editions), LiveAnalyst and LiveInterface to sign license agreements. Instead,
the license agreement for these products is included in the product packaging,
and the packaging explains that by opening the seal the user is agreeing to the
terms of the license agreement. It is uncertain whether "Shrink-wrap" license
agreements of this type are legally enforceable.

     IntelliCorp's first three patents, relating primarily to knowledge-based
technology, were issued between June 1987 and May 1990. IntelliCorp's fourth
patent with respect to certain technologies integrated in its PowerModel product
was issued in May 1994. However, there can be no assurance that any further
patents will be issued with respect to the Company's products, and existing
patent and copyright laws afford only limited practical protection to
IntelliCorp. Although the Company believes that its products and technology do
not infringe on any existing proprietary rights of others, there exist several
patents with claims that might extend to IntelliCorp's products, which, together
with the growing use of patents to protect software, has increased the risk that
third parties may assert infringement claims against IntelliCorp in the future.
Any such claims, with or without merit, could result in costly litigation or
might require the Company to enter into royalty or licensing agreements. Such
royalty or license agreements, if required, may not be available on terms
acceptable to the Company or at all. The Company does not have insurance to
cover the risk of infringement claims.

     In view of the rapid rate of technological change in the areas in which it
does business and the uncertainty of the scope of the protection afforded by
copyright and patent laws, IntelliCorp does not believe that copyrights or
patents will be of major competitive advantage to it. Rather, IntelliCorp
believes that it must rely primarily on the technical competence and creative
ability of its personnel to improve and update its software products and create
additional products in order to be successful.

PUBLIC TRADING MARKET; POSSIBLE VOLATILITY OF STOCK PRICE

     The trading price of the Company's Common Stock is subject to wide
fluctuations in response to variations in the actual or anticipated quarterly
operating results of the Company, announcements of new products or technological
innovations by the Company or its competitors, and general conditions in the
industry. In addition, stock markets for securities of high technology companies
have experienced extreme price and volume trading volatility in recent years.
This volatility may have a substantial effect on the market prices of securities
of many high technology companies for reasons unrelated to the operating
performance of the specific companies. These broad market fluctuations may
adversely affect the market price of the Company's Common Stock.

     In March 1997, the Company had a preferred stock offering for shares of its
Series B Preferred Stock (the "Series B Preferred Stock"). The Series B
Preferred Stock may, at the option of the Company, be exchanged for convertible
promissory notes of the Company issued with the same terms as the Series B
Preferred Stock (the Notes). The Series B Preferred Stock or the Notes, if
issued, are convertible into Common Stock at the election of the holders. The
Company has registered for resale the shares of Common Stock issuable with
respect to the Series B Preferred Stock or the Notes, as well as the Common
Stock expected to be issued in payment of dividends or interest with respect to
the Series B Preferred Stock or Notes, as applicable. If all the shares reserved
for these purposes were issued, it would significantly increase

                                       14
<PAGE>   15

the number of shares outstanding. Sales or issuance of substantial amounts of
the Company's Common Stock by the holders of the Series B Preferred Stock or
others in the future could adversely affect the market price of the Company's
Common Stock. All of the outstanding shares of the Company's Common Stock are
eligible for sale in the public market. In addition, the holders of stock
options could exercise their options and sell the vested shares in the public
market.

ITEM 2. DESCRIPTION OF PROPERTY

     The Company's executive offices are located at 1975 El Camino Real West,
Mountain View, California. IntelliCorp leases approximately 34,000 square feet
of office and computer space at this facility pursuant to a lease which extends
through August 2003.

     IntelliCorp also leases space for offices in Chadds Ford, Pennsylvania, and
also leases its European sales offices in London, Paris and Munich.

     These facilities are adequate to meet the Company's needs in the
foreseeable future.

ITEM 3. LEGAL PROCEEDINGS

     Management is not aware of any material legal proceedings to which the
Company is a party or of which any of their properties are the subject.

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

     Not applicable.

                                       15
<PAGE>   16

                                    PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     The Company's common stock trades on The NASDAQ SmallCap Market tier of The
NASDAQ Stock Market under the symbol: INAI. The following table sets forth the
closing prices since July 1, 1997 for the common stock for the fiscal quarters
indicated as reported by NASDAQ. These over-the-counter market quotations
reflect inter-dealer prices, without retail mark-up, markdown, or commissions,
and may not necessarily represent actual transactions.

     At June 30, 1999, there were approximately 492 registered stockholders of
the Company's common stock. The Company has not paid any cash dividends on its
common stock and does not plan to pay any dividends in the foreseeable future.
The Company's future dividend policy will be determined by its Board of
Directors on the basis of many factors, including results of operations, capital
requirements and general business conditions.

<TABLE>
<CAPTION>
                                                    YEAR ENDED JUNE 30,
                                              --------------------------------
                                                   1999              1998
                                              --------------    --------------
                                              HIGH      LOW     HIGH      LOW
                                              -----    -----    -----    -----
<S>                                           <C>      <C>      <C>      <C>
1st Fiscal Quarter..........................  $4.13    $1.50    $6.25    $2.88
2nd Fiscal Quarter..........................   2.00      .78     5.19     3.13
3rd Fiscal Quarter..........................   1.63     1.03     5.00     2.88
4th Fiscal Quarter..........................   1.19      .81     4.50     3.44
</TABLE>

RECENT SALES OF UNREGISTERED SECURITIES

     In March 1999, the Company consummated an equity arrangement which requires
certain investors to purchase, in a private placement, up to $3,000,000 of the
Company's common stock through March 2000, if and when requested by the Company.
The purchase price is set at 10% above the market price at the time the purchase
is made, with a minimum price of $1.50 per share and a maximum of $3.00 per
share. As of June 30, 1999, IntelliCorp sold $1,740,000 of common stock under
this agreement, at a price of $1.50 per share. The shares sold under this
agreement will be registered for resale within three months after the end of the
one-year term of the agreement, or within three months of the last transaction
purchase date, if earlier.

     On January 23, 1998, the Company entered into an asset purchase agreement
with ICS Deloitte Management LLC, an affiliate of Deloitte & Touche, ("D&T") to
purchase the rights to the Universal Portable Interface ("UPI") technology. This
technology consisted of the intellectual and proprietary property comprised of
UPI and included all related copyrights, processes, designs, formulas,
inventions, trade secrets, know-how, technology, methodologies, principles of
operations flow charts, schematics, codes and databases, and related in-process
technology. In consideration for these assets, the Company paid D&T
approximately $2.6 million in cash and 1,000,000 shares of the Company's common
stock (with a fair market value of $3.56 per share) and assumed certain
liabilities totaling $453,000. The common stock was registered for resale on
December 17, 1998.

     On December 30, 1996 the Company issued 307,692 shares of common stock to
an existing stockholder at $1.625 per share in a private placement.

     On March 19, 1997, the Company issued 5,000 shares of 8% convertible Series
B Preferred Stock at $1,000 per share in a private placement to three investors.
Each share is convertible into 500 shares of common stock, subject to
adjustments, at $2.00 per share and carries 8% mandatory cumulative dividends.
The dividends for the first year were payable at the Company's option in cash or
common stock valued at 90% of the 20 day average bid price preceding the
distribution due date.

     In April 1996, the Company issued $3,400,000 of seven-year senior
convertible notes which are due April 30, 2003. Interest only is payable
semi-annually in October and April at 10% annum. Interest payments for the first
two years were payable, at the Company's option, in cash or in common stock
valued at 90% of the 20 day average bid price preceding the payment due date. In
June 1996, the Company agreed to issue 580,645

                                       16
<PAGE>   17

shares of Series A preferred stock and warrants to purchase 720,000 shares of
common stock at $3.50 per share in exchange for $1,800,000 of the convertible
debt. Such preferred stock and warrants were issued in August 1996. The
preferred stock is convertible into common shares on a one-for-two basis,
subject to adjustments for dilutive events, and carries 10% cumulative
dividends. The Company has reserved 3,480,010 shares of common stock for
issuance upon conversion of the Series B Preferred Stock. These shares were
registered on November 26, 1998.

     In the event of any liquidation, dissolution or winding up of the Company,
the holders of Series B Preferred Stock will be entitled to receive, junior to
the rights of the holders of Series A Preferred Stock, in preference to the
holders of common stock, an amount equal to $1,000 per share plus all
accumulated and unpaid dividends on the Series B Preferred Stock. The total
liquidation preference for Series B Preferred Stock would be approximately
$5,066,000 at June 30, 1999. The Company has reserved 2,500,000 shares of common
stock for issuance upon conversion of the Series B Preferred Stock. These shares
were registered on July 30, 1997.

                            SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                            YEAR ENDED JUNE 30,
                                             -------------------------------------------------
                                              1999      1998      1997        1996      1995
                                             -------   -------   -------     -------   -------
                                                 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                          <C>       <C>       <C>         <C>       <C>
STATEMENT OF OPERATIONS DATA
Net revenues...............................  $21,961   $24,445   $12,686     $10,992   $17,357
                                             -------   -------   -------     -------   -------
Loss from operations.......................    (6082)     (625)   (1,753)     (3,269)   (2,098)
Interest expense...........................     (197)     (177)     (153)        (69)       --
Interest income and other, net.............      136       310       161         109       203
                                             -------   -------   -------     -------   -------
Loss before income taxes...................   (6,143)     (492)   (1,745)     (3,229)   (1,895)
Provision for income taxes.................       59       206       139         113       232
Loss before extraordinary item.............   (6,202)     (698)   (1,884)     (3,342)   (2,127)
Extraordinary item.........................       --        --        --      (1,157)       --
                                             -------   -------   -------     -------   -------
Net loss...................................   (6,202)     (698)   (1,884)     (4,499)   (2,127)
Preferred stock dividend requirements:
  Series A and B...........................     (534)     (623)     (311)         --        --
  Embedded dividend(1).....................       --        --    (1,720)         --        --
                                             -------   -------   -------     -------   -------
Net loss applicable to common
  stockholders.............................  $(6,736)  $(1,321)  $(3,915)    $(4,499)  $(2,127)
                                             =======   =======   =======     =======   =======
Basic and diluted net loss before
  extraordinary item per common share......  $ (0.44)  $ (0.10)  $ (0.31)(1) $ (0.27)  $ (0.18)
Basic and diluted net loss per common
  share....................................  $ (0.44)  $ (0.10)  $ (0.31)(1) $ (0.37)  $ (0.18)
Shares used in computation of basic and
  diluted net loss per common share........   15,333    13,871    12,634      12,209    12,040
                                             =======   =======   =======     =======   =======
BALANCE SHEET DATA
Cash, cash equivalents and short-term
  investments..............................  $ 2,619   $ 6,186   $ 6,392     $ 4,124   $ 2,493
Working capital............................    2,999     6,973     6,838       2,851     2,272
Total assets...............................   13,190    18,454    12,064       7,401     8,100
Convertible notes..........................    1,600     1,600     1,600       1,600        --
Stockholders' equity.......................    5,201    10,157     5,948       2,097     3,312
</TABLE>

---------------
No cash dividends were declared or paid to the common stockholders during the
periods set forth above.

(1) Net loss per common share for the year ended June 30, 1997, gives effect to
    the accounting treatment relative to the Company's Series B convertible
    preferred stock having a beneficial conversion feature. The net loss per
    common share reflects a $1,720,000 preferred stock dividend as a result of
    this treatment.

                                       17
<PAGE>   18

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

RESULTS OF OPERATIONS

     Other than statements of historical fact, the statements made in this
annual report are hereby identified as forward-looking statements that involve
risks and uncertainties. The Company's actual results may differ materially from
the results discussed in the forward-looking statements. Factors that might
cause such a difference include, but are not limited to risks associated with,
competitors' product introductions, market price competition and market
acceptance of the Company's products, as well as, those discussed below and in
"Risk Factors."

     In particular, it is important to note that achievement of revenue goals is
affected by numerous factors beyond the Company's control. Historical results of
the Company may not be indicative of future operating results.

     The following table sets forth, for the periods indicated, certain
operational data as a percentage of total revenues and as a percentage change
from year to year:

<TABLE>
<CAPTION>
                                                                               PERCENT INCREASE
                                                                                  (DECREASE)
                                                     PERCENT OF REVENUES     --------------------
                                                     YEAR ENDED JUNE 30,       1999        1998
                                                     --------------------    COMPARED    COMPARED
                                                     1999    1998    1997    TO 1998     TO 1997
                                                     ----    ----    ----    --------    --------
<S>                                                  <C>     <C>     <C>     <C>         <C>
REVENUES:
  Software.........................................   31%     57%     52%      (51)%       109%
  Contract services................................   52      33      38        38          72
  Other services...................................   17      10      10        59          86
                                                     ---     ---     ---       ---         ---
          Total revenues...........................  100%    100%    100%      (10)%        93%
                                                     ===     ===     ===       ===         ===
COSTS AND EXPENSES:
  Cost of software revenues........................    6%      5%      8%       (2)%        19%
  Cost of contract service revenues................   38      20      21        72          87
  Cost of other services revenues..................    3       2       2        58          52
  Research and development.........................   27      24      30         2          54
  Marketing, general and administrative............   54      41      53        18          49
  In-process research and development charge.......   --      11      --        --         N/M
                                                     ---     ---     ---       ---         ---
          Total cost and expenses..................  128     103     114        12          74
                                                     ---     ---     ---       ---         ---
Loss from operations...............................  (28)     (3)    (14)      N/M         N/M
                                                     ---     ---     ---       ---         ---
Net loss...........................................  (28)%    (3)%   (15)%     N/M%        N/M%
                                                     ===     ===     ===       ===         ===
</TABLE>

---------------
N/M -- Not meaningful

REVENUES

     The Company's total revenue is derived from three sources: software
licenses, contract services and other services including product support and
training. Total revenues were $21,961,000, $24,445,000 and $12,686,000 for
fiscal years 1999, 1998, and 1997, respectively. This represents a 10% decrease
in fiscal 1999 total revenues as compared to fiscal 1998. The decrease is due to
reduced sales of software licenses associated with LiveModel: SAP R/3 Edition
and revenue recognized in connection with the license and development agreement
with SAP AG. The 93% increase in fiscal 1998 total revenues as compared to
fiscal 1997 is largely due to increased sales of software licenses and services
associated with LiveModel: SAP R/3 Edition and revenue recognized in connection
with the license and development agreement with SAP AG, which contributed
revenues primarily in fiscal 1998.

     Software revenues decreased 51% in fiscal 1999 from fiscal 1998. This
decrease is attributable primarily to two factors. First, IntelliCorp went
through a significant transition in its sales and marketing organization.
Second, SAP created uncertainties regarding their business process modeling
direction when they cancelled

                                       18
<PAGE>   19

the Business Engineer project and put more focus on their ASAP R/3
implementation methodology. It took the rest of the fiscal year for IntelliCorp
to re-build its sales organization to support scalable revenue growth, as well
as re-position its business process management solutions in the ASAP context,
including extension of its market reach and value to the large
post-implementation market. Sales of the Company's older products, including
PowerModel, Kappa-PC, and Kee, remained constant at 4% of license revenue, in
fiscal 1999 compared to 3% of license revenue in fiscal 1998. The Company's
ability to increase software revenues depends upon, among other things,
development of successful new and updated products, and upon these products
meeting customer requirements. There can be no assurance that the Company will
successfully develop these products or that these products will be successful in
the marketplace.

     Contract services revenues increased 38% during fiscal 1999 compared to
fiscal 1998. The increase is due to consulting revenue related to LiveModel SAP
R/3 Edition (including custom development projects), LiveInterface, and the
configure-to-order consulting business. The Company expects to perform
additional contract services in the future. However, because a majority of such
services are performed on a short-term basis, the ultimate trend for this type
of revenue and the timing of the services are difficult to predict.

     Other services revenues, which consist primarily of product support,
increased 59% during fiscal 1999 compared to fiscal 1998. This increase is
primarily attributable to product support revenues related to the LiveModel SAP
R/3 product and the LiveInterface product.

     The Company derived approximately 33%, 28% and 36% of its revenues in
fiscal years 1999, 1998 and 1997, respectively, from international sales. The
Company expects that export sales will continue to provide a significant portion
of total revenues. However, changes in currency exchange rates, strength of
local economies and the inherent uncertainties in the software market make these
revenues difficult to predict.

     The geographic breakdown of revenues is as follows:

<TABLE>
<CAPTION>
                                                                      PERCENT INCREASE
                                                                         (DECREASE)
                                                                    --------------------
                                        YEAR ENDED JUNE 30,           1999        1998
                                   -----------------------------    COMPARED    COMPARED
                                    1999       1998       1997      TO 1998     TO 1997
                                   -------    -------    -------    --------    --------
                                          (IN THOUSANDS)
<S>                                <C>        <C>        <C>        <C>         <C>
REVENUES:
  North America..................  $14,675    $17,595    $ 8,154      (17)%       116%
  Europe.........................    6,101      5,581      3,100        9          80
  Pacific Rim/Latin America......    1,185      1,269      1,432       (7)        (11)
                                   -------    -------    -------      ---         ---
          Total revenues.........  $21,961    $24,445    $12,686      (10)%        93%
                                   =======    =======    =======      ===         ===
</TABLE>

     The geographic revenue as a percentage of revenue is as follows:

<TABLE>
<CAPTION>
                                                              YEAR ENDED JUNE 30,
                                                              --------------------
                                                              1999    1998    1997
                                                              ----    ----    ----
<S>                                                           <C>     <C>     <C>
REVENUES:
  North America.............................................   67%     72%     64%
  Europe....................................................   28      23      24
  Pacific Rim/Latin America.................................    5       5      12
                                                              ---     ---     ---
          Total revenues....................................  100%    100%    100%
                                                              ===     ===     ===
</TABLE>

     The Company's fiscal 2000 sales forecast anticipates a predominant portion
of revenues to be derived from sales of and consulting and support services
related to LiveModel: SAP R/3 Edition, and LiveInterface, and derivative and
associated products. Factors which could impact the level of revenues generated
from these products include, but are not limited to, the timing and level of
market acceptance of these products, the timing of market introduction of
competing products, the timely and successful introduction of new technology
enhancements and follow-on products, the success of providing consulting
services and the success of sales efforts with strategic partners. There can be
no assurance, however, that the actual sales will not differ materially from the
sales forecast in the near term.
                                       19
<PAGE>   20

COSTS AND EXPENSES

     Cost of software revenues consists primarily of materials, documentation,
packaging, royalties and amortization of capitalized and purchased software
development costs. Cost of software revenues as a percentage of software
revenues decreased from 16% in fiscal 1997 to 9% in fiscal year 1998 and
increased to 18% in fiscal year 1999. The fiscal 1999 increase in software cost,
relative to software revenues, is attributable to higher capitalized software
amortization related to the UPI acquisition that occurred in the third quarter
of fiscal 1998, and to the significant portion of the expenses that are fixed
such as salaries and depreciation expenses; therefore, revenue fluctuations do
not result in comparable changes in related costs.

     Cost of contract services revenues consists primarily of personnel,
including outside consultants, and related costs. Cost of contract services
revenues as a percentage of the related revenues increased to 74% during fiscal
year 1999, compared to 58% and 55% for fiscal years 1998 and 1997, respectively.
The increase in fiscal 1999 is primarily due to absorption of existing staff
costs in light of lower consulting and training revenues related to decreased
LiveModel and LiveInterface license sales.

     Cost of other services revenues consists primarily of personnel providing
product support. Cost of other service revenues as a percentage of the related
revenues remained relatively flat at 20%, 20% and 24%, respectively for the
fiscal years 1999, 1998 and 1997. The higher percentage in fiscal 1997 was a
result of start-up costs associated with the establishment of a customer
satisfaction team during that year.

     The aggregate cost of revenues, as well as the resulting aggregate gross
margin, may fluctuate based on the mix of license, contract, or other services
performed in a particular period.

     Research and development expense consists primarily of personnel and
related costs. Research and development costs increased 2% in fiscal 1999
compared to fiscal 1998. The increase of 54% in research and development expense
in fiscal 1998 compared to fiscal 1997 is mainly due to increased headcount and
the associated costs and increased labor costs. Research and development costs
as a percentage of revenue remained relatively flat at 27% for fiscal 1999
compared to 24% in fiscal 1998. Research and development costs as a percentage
of revenues decreased from 30% in fiscal 1997 to 24% in fiscal 1998, as revenues
grew faster than research and development spending. The Company anticipates that
it will continue to invest substantial resources to research and development in
the future.

     Marketing, general and administrative expense consists primarily of
personnel and related costs for marketing, selling, administration, finance,
information systems, human resources, and general management. The increase of
18% in marketing, general and administrative expense in fiscal 1999 compared to
fiscal 1998 is mainly due to increased marketing and selling resource
investment, including the opening of French and German offices. The increase of
49% in marketing, general and administrative expense in fiscal 1998 compared to
fiscal 1997 is also mainly due to higher sales and marketing costs associated
increased sales volume, including increased marketing activities, and increased
marketing and selling headcount.

     On January 23, 1998, the Company entered into an asset purchase agreement
with ICS Deloitte Management LLC, an affiliate of D&T to purchase the rights to
the UPI technology. This technology consisted of the intellectual and
proprietary property comprised of UPI and included all related copyrights,
processes, designs, formulas, inventions, trade secrets, know-how, technology,
methodologies, principles of operations flow charts, schematics, codes and
databases. UPI is presently a stand-alone software product sold under the name
of LiveInterface and is used for automatically building and managing data
interfaces for SAP R/3. It is used to help facilitate the data transfer between
the new SAP R/3 software and pre-existing or legacy systems.

     In consideration for these assets, the Company paid D&T approximately $2.6
million in cash and 1,000,000 shares of the Company's common stock (with a fair
market value of $3.56 per share) and assumed certain liabilities totaling
$453,000. The acquisition was accounted for using the purchase method of
accounting. The Company's total purchase price, including liabilities assumed is
$6,638,000. For financial reporting purposes, values were assigned to acquired
in-process research and development, developed technology, customer base and the
assembled workforce. The in-process research and development charge of
$2,700,000 in 1998 is related to the acquisition of the UPI technology.
                                       20
<PAGE>   21

OTHER INCOME (EXPENSE)

     Interest income and other, net in fiscal 1999 and 1998, consists primarily
of interest income from cash, cash equivalents and short-term investments.

     Interest expense consists primarily of interest related to the convertible
notes issued in April 1996.

INCOME TAX

     The provision for income taxes primarily represents foreign withholding
taxes, federal and state income taxes (Alternative Minimum Tax). At June 30,
1999, the Company had net operating loss carryforwards of approximately
$35,000,000 for federal income tax purposes, which will expire in fiscal years
2002 through 2019. The Company also had net operating loss carryforwards of
approximately $16,000,000 for state income tax purposes and $10,500,000 for
foreign income tax purposes. The state net operating loss carryforwards will
expire in fiscal years 1998 through 2003. The foreign net operating loss
carryforwards have an indefinite carryforward period.

     Utilization of the federal and state net operating losses and credits may
be subject to a substantial annual limitation due to the "change in ownership"
provisions of the Internal Revenue Code of 1986 and similar state provisions.
The annual limitation may result in the expiration of net operating losses and
credits before utilization.

PRO FORMA NET INCOME (LOSS)

     On a pro forma basis, which excludes amortization charges and in-process
R&D charges related to purchased intangibles, the Company had a net loss of
($5,317,000) or ($0.38) per share in fiscal 1999, compared to a net income of
$2,498,000 or $0.14 per share in fiscal 1998. On a reported basis, including the
impact of purchased intangibles, the Company's net loss was ($6,202,000) or
($0.44) per share in fiscal 1999, compared to a net loss of ($698,000) or
($0.10) per share in fiscal 1998.

QUARTERLY RESULTS

     The Company's quarterly revenues and operating results have in the past,
and may in the future, vary significantly due to such factors as the timing of
new product introductions, changes in pricing policies by the Company and its
competitors, market acceptance of new products and enhanced versions of existing
products, the budgets of its customers and lengthy sales cycles. Although a
significant portion of the Company's revenues in each quarter result from orders
received in that quarter, the majority of the Company's expense levels are
fixed, based on expectations of future revenues. In addition, a substantial
amount of the Company's quarterly revenues have typically been recorded in the
third month of the fiscal quarter with a concentration of such revenues in the
last half of the month. The timing of the closing of large license agreements
increases the risk of quarter to quarter fluctuations. As a result, if revenues
are not realized as expected, the Company's operating results will be materially
adversely affected. Accordingly, it is likely that the Company would experience
disproportionate declines in its operating income if revenues were to decline.
In addition, it is possible that in some future quarter, the Company's operating
results will be below the expectations of public market analysts and investors.
In such event, the price of the Company's common stock would likely be adversely
affected.

LIQUIDITY AND CAPITAL RESOURCES

     The Company's cash, cash equivalents and short-term investments were
$2,619,000 at June 30, 1999, and $6,186,000 at June 30, 1998. The decrease in
fiscal 1999 is primarily due to a net loss of $6,202,000 offset by a decrease in
accounts receivable of $860,000 and non-cash amortization and depreciation
expense of $1,621,000. Spending for capital equipment was $632,000, $1,158,000
and $337,000 for fiscal years 1999, 1998 and 1997, respectively.

                                       21
<PAGE>   22

     As of June 30, 1999, the Company has an accumulated deficit of $55.1
million, a cash and cash equivalents balance of $2.6 million, a working capital
balance of $3.0 million. In addition, it has a net loss of $6.7 million for
fiscal 1999. Management expects to incur additional losses through at least part
of fiscal 2000 including the first quarter, and it recognizes the need to
utilize all or some of its available financing resources as of June 30, 1999,
which is comprised of a $1.4 million common stock purchase agreement and a bank
credit facility of the lesser of $3,000,000 or 80% of eligible accounts
receivable, to fund its cash requirements in fiscal 2000. At this time,
management's plans for fiscal 2000 anticipate that revenues together with
available financing alternatives will be sufficient to fund the Company's cash
requirements through at least June 30, 2000. However, if anticipated revenues
for fiscal 2000 do not meet management's expectations, and additional financing,
above the available resources, are not available, management has the ability and
may reduce certain planned expenditures to lower the Company's operating costs.

YEAR 2000 ISSUE

     The Company has conducted a comprehensive review of its information
technology and non-information technology systems to identify the systems that
could be affected by the year 2000 Issue. The year 2000 issue is the result of
computer programs being written using two digits rather than four to define
applicable year. Any of the Company's programs that have time-sensitive software
or micro controllers may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a major system failure or
miscalculations. The Company has made modifications deemed necessary and does
not believe that the cost of additional modifications, if any, will have a
material effect on the Company's operating results. Additionally, the Company is
in the process of evaluating the need for contingency plans with respect to year
2000 requirements. The necessity of any contingency plan must be evaluated on a
case by case basis and will vary considerably in nature depending on the year
2000 issue it may need to address. The Company's expectations as to the extent
and timeliness of modifications required in order to achieve Year 2000
compliance is a forward-looking statement subject to risks and uncertainties.
Actual results may vary materially as a result of a number of factors,
including, among others, those described in this paragraph and the paragraph
below. There can be no assurance however, that the Company will be able to
successfully modify on a timely basis such products, services and systems to
comply with year 2000 requirements, which failure could have a material adverse
effect on the Company's operating results.

     Based on the Company's assessment to date, all active products and services
of the Company are year 2000 compliant. The Company has been encouraging
customers on older versions of software no longer supported by the Company to
migrate to current product version. In addition, the Company faces risks to the
extent that suppliers of products, services and systems purchased by the Company
and others with whom the Company transacts business on a worldwide basis do not
have business systems or products that comply with the year 2000 requirements.
To the extent that IntelliCorp is not able to test technology provided by third
party hardware or software vendors, IntelliCorp has obtained assurances from
such vendors that their systems are year 2000 compliant. In the event any such
third parties cannot in a timely manner provide the Company with products,
services or systems that meet the year 2000 requirements, the Company's
operating results could be materially adversely affected. Although the Company
believes that the cost of year 2000 modifications, if needed, for both internal
use software and systems or the Company's products are not material, there can
be no assurance that various factors relating to the year 2000 compliance
issues, including litigation, will not have a material adverse effect on the
Company's business, operating results or financial position.

                                       22
<PAGE>   23

RECENT PRONOUNCEMENTS

     In October 1997, the AICPA issued Statement of Position ("SOP 97-2"),
"Software Revenue Recognition" which addresses software revenue recognition.
Statement of Position 98-4 was issued in March 1998 which delays for one year
the implementation of a narrow provision of SOP 97-2. SOP 98-9 amends SOP 98-4
to extend the deferral of the application of certain passages of SOP 97-2
provided by SOP 98-4 through fiscal years beginning on or before March 15, 1999.
SOP 97-2 supersedes SOP 91-1 and was effective for transactions entered into for
fiscal years commencing after December 15, 1997. The Company expects that the
adoption of these SOP's will not have a material impact on its financial
position or results of operations.

     In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 established accounting and
reporting standards for derivative instruments and for hedging activities. SFAS
No. 133 is effective for fiscal years beginning after June 15, 1999. The Company
expects that the adoption of SFAS No. 133 will not have a material impact on its
financial position or results of operations.

     In March 1998, the AICPA issued SOP No. 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. SOP No. 98-1 requires
entities to capitalize selected costs related to internal-use software once
specified criteria have been met. The Company expects that the adoption of SOP
98-1 will not have a material impact on its financial position or results of
operations. We will be required to implement SOP No. 98-1 for the fiscal year
2000, beginning on July 1, 1999.

                                       23
<PAGE>   24

ITEM 7. FINANCIAL STATEMENTS

                          CONSOLIDATED BALANCE SHEETS

                                     ASSETS

<TABLE>
<CAPTION>
                                                                     JUNE 30,
                                                              ----------------------
                                                                1999         1998
                                                              ---------    ---------
                                                              (IN THOUSANDS, EXCEPT
                                                               SHARE AND PER SHARE
                                                                     AMOUNTS)
<S>                                                           <C>          <C>
CURRENT ASSETS:
  Cash and cash equivalents.................................  $  2,619     $  4,714
  Short-term investments....................................        --        1,472
  Accounts receivable (less allowance for doubtful accounts:
     1999, $445; 1998, $591)................................     6,297        7,157
  Other current assets......................................       472          327
                                                              --------     --------
          Total current assets..............................     9,388       13,670
Property and equipment, net.................................     1,046        1,101
Purchased intangibles (less accumulated amortization:
  1999, $1,381; 1998, $496).................................     2,597        3,431
Other assets................................................       159          252
                                                              --------     --------
                                                              $ 13,190     $ 18,454
                                                              ========     ========
                        LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Accounts payable..........................................  $  1,272     $  1,410
  Accrued compensation......................................     1,266        1,321
  Accrued royalties.........................................        64          545
  Other current liabilities.................................     1,271        1,044
  Bank loan.................................................       453           --
  Deferred revenues.........................................     2,063        2,377
                                                              --------     --------
          Total current liabilities.........................     6,389        6,697
CONVERTIBLE NOTES...........................................     1,600        1,600
COMMITMENTS
STOCKHOLDERS' EQUITY:
  Preferred stock, $.001 par value; 2,000,000 shares
     authorized; shares issued and outstanding:
     Series A: 435,484 and 483,871 at June 30, 1999 and
      1998, respectively; aggregate liquidation preference
      of $1,372,000 at June 30, 1999........................         1            1
     Series B: 5,000 at June 30, 1999 and 1998; aggregate
      liquidation preference of $5,066,000 at June 30,
      1999..................................................        --           --
  Common stock, $.001 par value -- 50,000,000 shares
     authorized; shares issued and outstanding: 16,386,169
     and 15,110,358 at June 30, 1999 and 1998,
     respectively...........................................        16           15
  Additional paid-in capital................................    60,266       58,487
  Accumulated deficit.......................................   (55,082)     (48,346)
                                                              --------     --------
          Total stockholders' equity........................     5,201       10,157
                                                              --------     --------
                                                              $ 13,190     $ 18,454
                                                              ========     ========
</TABLE>

          See accompanying notes to consolidated financial statements.
                                       24
<PAGE>   25

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                YEAR ENDED JUNE 30, 1999,
                                                                      1998, AND 1997
                                                              ------------------------------
                                                                1999       1998       1997
                                                              --------    -------    -------
                                                                (IN THOUSANDS, EXCEPT PER
                                                                      SHARE AMOUNTS)
<S>                                                           <C>         <C>        <C>
REVENUES:
  Software..................................................  $  6,830    $13,861    $ 6,646
  Contract services.........................................    11,336      8,198      4,760
  Other services............................................     3,795      2,386      1,280
                                                              --------    -------    -------
          Total revenues....................................    21,961     24,445     12,686
                                                              --------    -------    -------
COSTS AND EXPENSES:
  Cost of revenues:
     Software...............................................     1,244      1,266      1,065
     Contract services......................................     8,383      4,877      2,615
     Other services.........................................       755        477        313
  Research and development..................................     5,922      5,818      3,771
  Marketing, general and administrative.....................    11,739      9,932      6,675
  Purchase of in-process research and development...........        --      2,700         --
                                                              --------    -------    -------
          Total costs and expenses..........................    28,043     25,070     14,439
                                                              --------    -------    -------
Loss from operations........................................    (6,082)      (625)    (1,753)
                                                              --------    -------    -------
OTHER INCOME (EXPENSE):
  Interest expense..........................................      (197)      (177)      (153)
  Interest income and other, net............................       136        310        161
                                                              --------    -------    -------
          Total other income (expense)......................       (61)       133          8
                                                              --------    -------    -------
Loss before income taxes....................................    (6,143)      (492)    (1,745)
Provision for income taxes..................................        59        206        139
                                                              --------    -------    -------
Net loss....................................................    (6,202)      (698)    (1,884)
Preferred stock dividend requirements:
  Series A and Series B.....................................      (534)      (623)      (311)
  Embedded dividend (see note 8)............................        --         --     (1,720)
                                                              --------    -------    -------
Net loss applicable to common stockholders..................  $ (6,736)   $(1,321)   $(3,915)
                                                              ========    =======    =======
Basic and diluted net loss per common share:
Net loss per common share...................................  $  (0.44)   $ (0.10)   $ (0.31)
                                                              ========    =======    =======
Shares used in computation of net loss per common share.....    15,333     13,871     12,634
                                                              ========    =======    =======
</TABLE>

          See accompanying notes to consolidated financial statements.
                                       25
<PAGE>   26

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                          YEARS ENDED JUNE 30, 1999, 1998, AND 1997
                                   ----------------------------------------------------------------------------------------
                                   PREFERRED
                                   STOCK AND    PREFERRED STOCK        COMMON STOCK      ADDITIONAL
                                   WARRANTS    ------------------   ------------------    PAID-IN     ACCUMULATED
                                   ISSUABLE    SHARES   PAR VALUE   SHARES   PAR VALUE    CAPITAL       DEFICIT      TOTAL
                                   ---------   ------   ---------   ------   ---------   ----------   -----------   -------
                                                                        (IN THOUSANDS)
<S>                                <C>         <C>      <C>         <C>      <C>         <C>          <C>           <C>
Balances, June 30, 1996..........     2,932      --        $--      12,381      $12       $42,263      $(43,110)    $ 2,097
Exercise of stock options........        --      --         --          65       --            75            --          75
Sale of shares...................        --      --         --         308        1           499            --         500
Issuance of Series A Preferred
  Stock and warrants.............    (2,932)    581          1          --       --         2,931            --          --
Issuance of Series B Preferred
  Stock, net of issue costs......        --       5         --          --       --         4,961            --       4,961
Issuance of common stock in lieu
  of payment of interest.........        --      --         --         106       --           199            --         199
Dividends on preferred stock.....        --      --         --          80       --           168          (168)         --
Dividends on preferred stock to
  be distributed.................        --      --         --          --       --           143          (143)         --
Dividends on Series B Preferred
  Stock issuance related to
  beneficial conversion
  feature........................        --      --         --          --       --         1,720        (1,720)         --
Net loss.........................        --      --         --          --       --            --        (1,884)     (1,884)
                                    -------     ---        ---      ------      ---       -------      --------     -------
Balances June 30, 1997...........        --     586          1      12,940       13        52,959       (47,025)      5,948
Exercise of stock options........        --      --         --         403        1           455            --         456
Exercise of warrants.............        --      --         --         350       --           712            --         712
Issuance of common stock in lieu
  of payment of interest.........        --      --         --          41       --           177            --         177
Dividends on preferred stock.....        --      --         --         183       --           531          (531)         --
Dividends on preferred stock to
  be distributed.................        --      --         --          --       --            92           (92)         --
Issuance of common stock in
  connection with UPI asset
  purchase.......................        --      --         --       1,000        1         3,561            --       3,562
Conversion of Series A Preferred
  Stock to common stock..........        --     (97)        --         193       --            --            --          --
Net loss.........................        --      --         --          --       --            --          (698)       (698)
                                    -------     ---        ---      ------      ---       -------      --------     -------
Balances, June 30, 1998..........        --     489          1      15,110       15        58,487       (48,346)     10,157
Exercise of stock options........        --      --         --          19       --            20            --          20
Issuance of common stock.........        --      --         --       1,160        1         1,739            --       1,740
Dividends on preferred stock.....        --      --         --          --       --            --          (534)       (534)
Conversion of Series A Preferred
  Stock to common stock..........        --     (48)        --          97       --            --            --          --
Stock options issued to board
  members with exercise prices
  below the fair market value of
  common stock on the date of
  grant..........................        --      --         --          --       --            20            --          20
Net loss.........................        --      --         --          --       --            --        (6,202)     (6,202)
                                    -------     ---        ---      ------      ---       -------      --------     -------
Balances, June 30, 1999..........        --     441        $ 1      16,386      $16       $60,266      $(55,082)    $ 5,201
                                    =======     ===        ===      ======      ===       =======      ========     =======
</TABLE>

          See accompanying notes to consolidated financial statements.
                                       26
<PAGE>   27

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
                INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

<TABLE>
<CAPTION>
                                                               1999       1998       1997
                                                              -------    -------    -------
                                                                     (IN THOUSANDS)
<S>                                                           <C>        <C>        <C>
CASH FLOW FROM OPERATING ACTIVITIES:
  Net loss..................................................  $(6,202)   $  (698)   $(1,884)
  Adjustments to reconcile net loss to net cash used in
     operating activities:
     Purchase of in-process research and development........       --      2,700         --
     Depreciation and amortization..........................    1,621      1,037        560
     Issuance of common stock in lieu of interest
       payments.............................................       --        177        199
     Issuance of stock options to board members.............       20         --         --
  Changes in assets and liabilities:
     Accounts receivable....................................      860     (2,327)    (2,613)
     Other current assets...................................     (145)      (195)        82
     Other assets...........................................       44        (15)         4
     Accounts payable.......................................     (138)       760       (285)
     Accrued compensation...................................      (55)       525        201
     Accrued royalties and other current liabilities........     (254)      (136)      (207)
     Deferred revenues......................................     (314)       528      1,103
                                                              -------    -------    -------
Net cash provided by (used in) operating activities.........   (4,563)     2,356     (2,840)
                                                              -------    -------    -------
CASH FLOW FROM INVESTING ACTIVITIES:
  Property and equipment purchases..........................     (632)    (1,158)      (337)
  Capitalization of software development....................       --         --        (91)
  Purchase of intangible assets.............................      (51)    (2,572)        --
  Purchases of short-term investments.......................       --     (5,092)    (2,029)
  Proceeds from sales of short-term investments.............    1,472      5,649        982
                                                              -------    -------    -------
Net cash provided by (used in) investing activities.........      789     (3,173)    (1,475)
                                                              -------    -------    -------
CASH FLOW FROM FINANCING ACTIVITIES:
  Borrowings under bank credit line.........................      453         --         --
  Cash received from exercise of warrants and options.......       20        712         --
  Issuance of preferred stock...............................       --         --      4,961
  Issuance of common stock..................................    1,740        456        575
  Cash dividends............................................     (534)        --         --
                                                              -------    -------    -------
Net cash provided by financing activities...................    1,679      1,168      5,536
                                                              -------    -------    -------
Increase (decrease) in cash and cash equivalents............   (2,095)       351      1,221
Cash and cash equivalents, beginning of year................    4,714      4,363      3,142
                                                              -------    -------    -------
Cash and cash equivalents, end of year......................  $ 2,619    $ 4,714    $ 4,363
                                                              =======    =======    =======
Supplemental disclosure of cash flow information:
  Income taxes paid.........................................  $    59    $   206    $   139
Noncash financing activities:
  Exchange of common stock for assets.......................       --      3,562         --
</TABLE>

          See accompanying notes to consolidated financial statements.
                                       27
<PAGE>   28

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

     ORGANIZATION AND PRINCIPLES OF CONSOLIDATION. IntelliCorp is a United
States-based corporation. The Company designs, develops, and markets business
process modeling and integration tools and provides related training, customer
support, and consulting services. The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries, IntelliCorp GmbH
(Germany), IntelliCorp Ltd. (United Kingdom), Nihon IntelliCorp K.K. (Japan),
and MegaKnowledge, Inc. All significant intercompany accounts and transactions
are eliminated.

     BASIS OF PRESENTATION AND ACCOUNTING PRINCIPLES. On January 23, 1998, the
Company entered into an asset purchase agreement with ICS Deloitte Management
LLC, an affiliate of Deloitte & Touche, ("D&T") to purchase the Universal
Portable Interface ("UPI") technology. This technology consisted of the
intellectual and proprietary property comprised of UPI and included all related
copyrights, processes, designs, formulas, inventions, trade secrets, know-how,
technology, methodologies, principles of operations, flow charts, schematics,
codes and databases, and related in-process technology. In consideration for
this asset purchase, the Company paid D&T approximately $2.6 million in cash and
1,000,000 shares of the Company's common stock (with a fair market value of
$3.56 per share) and assumed certain liabilities totaling $453,000.

     As of June 30, 1999, the Company has an accumulated deficit of $55.1
million, a cash and cash equivalents balance of $2.6 million, a working capital
balance of $3.0 million. In addition, it has a net loss of $6.7 million for
fiscal 1999. Management expects to incur additional losses through at least part
of fiscal 2000 including the first quarter, and it recognizes the need to
utilize all or some of its available financing resources as of June 30, 1999,
which is comprised of a $1.4 million common stock purchase agreement and a bank
credit facility of the lesser of $3,000,000 or 80% of eligible accounts
receivable, to fund its cash requirements in fiscal 2000. At this time,
management's plans for fiscal 2000 anticipate that revenues together with
available financing alternatives will be sufficient to fund the Company's cash
requirements through at least June 30, 2000. However, if anticipated revenues
for fiscal 2000 do not meet management's expectations, and additional financing,
above the available resources, are not available, management has the ability and
may reduce certain planned expenditures to lower the Company's operating costs.

     USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from
those estimates.

     CURRENT VULNERABILITY TO CERTAIN CONCENTRATIONS. The Company currently
derives most of its revenues from sales of and consulting services related to
LiveModel: SAP R/3 Edition and LiveInterface. These products and related
services are expected to account for the majority of the Company's revenue for
the foreseeable future. Factors which could impact the level of revenues
generated from LiveModel: SAP R/3 Edition and LiveInterface include, but are not
limited to, the level of market acceptance of the product, the timing of market
introduction of competing products, and the success of sales efforts and
relationships with strategic partners. Consequently, a decline in sales of this
product and related services, will adversely affect operating results.

     PURCHASED INTANGIBLE ASSETS. Purchased intangible assets primarily consist
of developed technology and other intangibles related to the acquisition of
assets from D&T accounted for by the purchase method. See Note 3. Amortization
of these purchased intangibles is provided on the straight-line basis over the
respective useful lives of the assets. The purchased intangible assets are
amortized over a period of 78 months or less. Acquired in-process research and
development without alternative future use was expensed when acquired.

     DEPRECIATION AND AMORTIZATION. Depreciation and amortization are computed
using the straight-line method over estimated useful lives of the assets ranging
from two to five years. Amortization of leasehold improvements is computed over
the shorter of the lease term or the useful life of the underlying assets.

                                       28
<PAGE>   29
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Software development costs are capitalized once technological feasibility
has been established and are amortized on a straight-line basis over the
estimated useful life of the related product (which ranges from one to three
years) or on the ratio of current revenues to the total of current and
anticipated future revenues from the product, whichever is greater. Amortization
of capitalized software development costs charged to software cost of revenues
was approximately $49,000, $138,000 and $187,000 in fiscal 1999, 1998 and 1997,
respectively. As of June 30, 1999 the net book value of capitalized software was
zero.

     REVENUE RECOGNITION. The Company has adopted Statement of Position 97-2,
"Software Revenue Recognition" ("SOP 97-2"), and State of Position 98-4,
"Deferral of the Effective Date of a Provision of SOP 97-2, Software Revenue
Recognition" ("SOP 98-4").

     The Company derives revenue from software licenses, post-contract customer
support ("PCS"), and services. Post-contract customer support includes telephone
support, bug fixes, and rights to updates on a when-and-if-available basis.
Services include training and consulting for software modification and
customization to meet specific customer needs.

     Revenue from license fees is recognized when persuasive evidence of an
agreement exists, delivery of the product has occurred, no significant
obligations with regard to implementation remain, the fee is fixed or
determinable, and collectibility is probable. If the fee is not fixed or
determinable, revenue is recognized as payments become due from the customer. If
collectibility is not considered probable, revenue is recognized when the fee is
collected.

     Contract service revenues include applications development and consulting
and training services. Contract revenues are recognized on a time and materials
basis or on the percentage of completion basis, for those fixed price contracts
which involves the use of estimates. Actual results could differ from those
estimates and, as a result, future profitability on such contracts may be more
or less than planned.

     In December 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position 98-9, "Modifications of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions" ("SOP 98-9"). SOP
98-9 amends SOP 98-4 to extend the deferral of the application of certain
passages of SOP 97-2 provided by SOP 98-4 through fiscal years beginning on or
before March 15, 1999. All other provisions of SOP 98-9 are effective for
transactions entered into in fiscal years beginning after March 15, 1999.
Adopting there provisions is not expected to have a material effect on the
results of operations.

     INCOME TAXES. Tax credits reduce the provision for income taxes when
realizable.

     NET LOSS PER COMMON SHARE. Basic net loss per share is computed using the
weighted average number of common shares outstanding during the period. Dilutive
potential common shares have been excluded from the net loss per share
computation in fiscal years 1999, 1998 and 1997, as their effect is
antidilutive.

     Stock options to purchase 3,214,000, 3,027,000 and 2,737,000 at an average
price of $2.03, $2.29 and $1.73 per share were outstanding during fiscal 1999,
1998 and 1997, respectively, but were not included in the computation of diluted
net loss per share for those years. Also excluded from net loss per share were
441,000 and 489,000 convertible preferred shares during fiscal 1999 and 1998,
respectively, warrants to purchase 720,000 shares, at an average exercise price
of $3.50 during fiscal years 1999 and 1998, and $1,600,000 of convertible debt,
at a conversion price of $1.55 per common share, during fiscal years 1999 and
1998. These dilutive potential common shares have been excluded because the
Company reported net losses and each of those potential shares would have had an
antidilutive effect on net loss per common share.

     For the fiscal years ended June 30, 1999, 1998, and 1997, preferred stock
dividends, including the assumed dividend recorded in 1997 as a result of the
"beneficial conversion feature" embedded in the Series B preferred stock, have
been included in the net loss per common share computation. The assumed dividend
in 1997 represents the difference between the fair market value of the Company's
common stock and the

                                       29
<PAGE>   30
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

conversion price of Series B preferred stock on the date of the Series B
issuance. The Series A and B preferred stock dividends has been deducted from
net loss to arrive at net loss applicable to common stockholders.

     CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS. The Company considers
all highly liquid investments with a maturity from the date of purchase of
ninety days or less to be cash equivalents. At June 30, 1999 and 1998, the
Company had $46,000 and $1,844,000, respectively, in money market mutual funds
which invest in various U.S. government securities including Treasury bills,
notes and bonds, and U.S. corporate paper, certificates of deposit, and bank
notes. These amounts are included in cash and cash equivalents.

     The Company invests its excess cash in accordance with a short-term
investment policy set by the Board of Directors. The policy authorizes
investments in government securities, time deposits and certificates of deposit
in approved financial institutions, commercial paper rated A-1/P-1, and other
money market instruments of similar liquidity and credit quality. As of June 30,
1998, short-term investments consisted of commercial paper issued by U.S.
corporations with maturities from the date of purchase of ninety days or more
and less than one year, and was stated at cost, which approximated market value.
There were no short-term investments as of June 30, 1999.

     The Company classifies its investments in debt and equity securities as
available-for-sale and, in accordance with Financial Accounting Standards Board
Statement No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" (SFAS 115), records its investments at fair value. However, as the
Company had no short term investments as of June 30, 1999, and as the difference
between amortized cost and fair value was immaterial as of June 30, 1998 there
have been no amounts recorded for unrealized gains and losses as a separate
component of stockholders' equity. Realized gains or losses from
available-for-sale investments have also been insignificant.

     FOREIGN CURRENCY TRANSLATION. The financial statements of foreign
subsidiaries are translated using the U.S. dollar as the functional currency.
Transaction and translation gains or losses have not been significant. The
Company does not enter into foreign currency forward exchange contracts.

     CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS. The Company
designs, develops and markets software tools and provides related training,
customer support and consulting services to customers in diversified industries.
The Company performs ongoing credit evaluations of the financial condition of
its customers, and generally requires no collateral for customer orders and
accounts receivable. To date, write-offs of accounts receivable have been small.

     Revenues from one related party accounted for 21% of total revenues during
fiscal 1999 and 19% for 1998 and 1997, and revenues from another related party
accounted for 10% of total revenues in fiscal 1999. No other customer accounted
for more than 10% during fiscal 1999, 1998 or 1997.

     FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying amounts of certain of the
Company's financial instruments, including cash and cash equivalents, short-term
investments, accounts payable, accrued expenses, the bank line of credit and the
convertible notes approximate fair value.

     STOCK-BASED COMPENSATION. As permitted under Statement No. 123 (SFAS 123),
Accounting for Stock-Based Compensation, the Company has elected to follow
Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued
to Employees in accounting for stock-based awards to its employees.

     COMPREHENSIVE INCOME. As of July 1, 1998, the Company adopted Financial
Accounting Standards Board Statement No. 130, "Reporting Comprehensive Income"
("FAS 130"). FAS 130 establishes new rules for the reporting and displaying of
comprehensive income and its components; however, the adoption of this statement
had no material impact on the Company's net loss or shareholders' equity.

RECENT PRONOUNCEMENTS.

     In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 established accounting and
reporting standards for derivative instruments and for
                                       30
<PAGE>   31
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

hedging activities. SFAS No. 133 is effective for fiscal years beginning after
June 15, 1999. The Company does not believe the adoption of SFAS No. 133 will
have a material effect on the Company's results of operations of financial
condition.

     In March 1998, the AICPA issued SOP No. 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. SOP No. 98-1 requires
entities to capitalize selected costs related to internal-use software once
specified criteria have been met. The Company expects that the adoption of SOP
98-1 will not have a material impact on its financial position or results of
operations. The Company will be required to implement SOP No. 98-1 for the
fiscal year 2000, beginning on July 1, 1999.

 2. NET PROPERTY AND EQUIPMENT

     Property and equipment are stated at cost and at June 30 consist of:

<TABLE>
<CAPTION>
                                                               1999           1998
                                                            -----------    -----------
<S>                                                         <C>            <C>
Equipment.................................................  $ 7,328,000    $ 6,796,000
Furniture and fixtures....................................    1,776,000      1,764,000
Leasehold improvements....................................    1,047,000        958,000
                                                            -----------    -----------
Total property and equipment..............................   10,151,000      9,518,000
Accumulated depreciation and amortization.................   (9,105,000)    (8,417,000)
                                                            -----------    -----------
Net property and equipment................................  $ 1,046,000    $ 1,101,000
                                                            ===========    ===========
</TABLE>

 3. ASSET PURCHASE AGREEMENT WITH D&T

     On January 23, 1998, the Company entered into an asset purchase agreement
with ICS Deloitte Management LLC, an affiliate of D&T to purchase the rights to
the UPI technology. This technology consisted of the intellectual and
proprietary property comprised of UPI and included all related copyrights,
processes, designs, formulas, inventions, trade secrets, know-how, technology,
methodologies, principles of operations flow charts, schematics, codes and
databases. UPI is presently a stand-alone software product sold under the name
of LiveInterface and is used for automatically building and managing data
interfaces for SAP R/3. It is used to help facilitate the data transfer between
the SAP R/3 software and pre-existing or legacy systems.

     In consideration for these assets, the Company paid D&T approximately $2.6
million in cash and 1,000,000 shares of the Company's common stock (with a fair
market value of $3.56 per share) and assumed certain liabilities totaling
$453,000. The acquisition was accounted for using the purchase method of
accounting. The Company's total purchase price, including liabilities assumed is
$6,638,000. For financial reporting purposes, values were assigned to acquired
in-process research and development, developed technology, customer base and the
assembled workforce.

     IN-PROCESS RESEARCH AND DEVELOPMENT. The write-off of in-process research
and development related to the asset acquisition described above totaled $2.7
million all of which was recorded in the quarter ended March 31, 1998. The value
was computed using discounted cash flow analysis on the anticipated income
stream of the related product sales. The discounted cash flow analysis was based
on forecasts of future revenues and expenses that management believes are likely
to occur. This analysis resulted in amounts assigned to in-process research and
development for the project which has not yet reached technological feasibility
(as defined and utilized by the Company in assessing software capitalization)
and does not have alternative future uses.

     DEVELOPED AND CORE TECHNOLOGY. To determine the value of the developed and
core technology, the expected future cash flows of the existing developed
technology, as well as the core technology to be embedded in future derivatives
of the UPI product, were discounted taking into account the characteristics

                                       31
<PAGE>   32
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

and applications of the product, existing and future markets, the aggregate size
and growth rate of the existing and future markets, and assessments of the
product sales cycle.

 4. INCOME TAXES

     The Company's provision for income taxes consists of the following:

<TABLE>
<CAPTION>
                                                            YEAR ENDED JUNE 30,
                                                      -------------------------------
                                                       1999        1998        1997
                                                      -------    --------    --------
<S>                                                   <C>        <C>         <C>
CURRENT:
  Federal...........................................  $19,000    $ 89,000    $     --
  State.............................................   38,000      29,000          --
  Foreign...........................................    2,000      88,000     139,000
                                                      -------    --------    --------
                                                       59,000     206,000     139,000
                                                      -------    --------    --------
DEFERRED:
  Federal...........................................       --          --          --
  State.............................................       --          --          --
                                                      -------    --------    --------
Provision for income taxes..........................  $59,000    $206,000    $139,000
                                                      =======    ========    ========
</TABLE>

     The Company's provision for income taxes differs from the amount computed
by applying the federal statutory rate to income taxes as follows:

<TABLE>
<CAPTION>
                                                                YEAR ENDED JUNE 30,
                                                              -----------------------
                                                              1999     1998     1997
                                                              -----    -----    -----
<S>                                                           <C>      <C>      <C>
Expected income tax provision/(benefit) at U.S. federal
  statutory rate (34)%......................................  (34.0)%  (34.0)%  (34.0)%
State taxes, net of federal benefit.........................    0.8     11.5       --
Net operating losses and credits not currently benefited....   17.3     (3.2)    30.7
Foreign losses not currently benefited/(utilized)...........   16.7     29.8      5.2
Federal alternative minimum tax.............................     --     53.7       --
Foreign withholding taxes...................................    0.1     53.0      8.0
Other individual immaterial items...........................   (0.9)    13.3     (1.9)
                                                              -----    -----    -----
                                                                0.0%   124.1%     8.0%
                                                              =====    =====    =====
</TABLE>

     Significant components of the Company's deferred tax assets for federal,
state and foreign income taxes as of June 30, 1999 and 1998 are as follows:

<TABLE>
<CAPTION>
                  DEFERRED TAX ASSETS:                        1999            1998
                  --------------------                    ------------    ------------
<S>                                                       <C>             <C>
Net operating loss carryforwards........................  $ 17,100,000    $ 14,100,000
General business credits (expire 2002 - 2013)...........     3,000,000       2,800,000
In process research and development.....................     1,400,000       1,100,000
Other...................................................       400,000       1,100,000
                                                          ------------    ------------
Total deferred tax assets...............................    21,900,000      19,100,000
  Valuation allowance for deferred tax assets...........   (21,900,000)    (19,100,000)
                                                          ------------    ------------
Net deferred tax assets.................................  $         --    $         --
                                                          ============    ============
</TABLE>

     Due to the Company's lack of earnings history, the net deferred tax asset
has been fully offset by a valuation allowance. Approximately $450,000 of the
valuation allowance for deferred tax assets relates to benefits of stock option
deductions which, when recognized, will be allocated directly to contributed
capital.

     At June 30, 1999, the Company had net operating loss carryforwards of
approximately $35,000,000 for federal income tax purposes, which will expire in
fiscal years 2002 through 2019. The Company also had net

                                       32
<PAGE>   33
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

operating loss carryforwards of approximately $16,000,000 for state income tax
purposes and $10,500,000 for foreign income tax purposes. The state net
operating loss carryforwards will expire in fiscal years 1998 through 2003. The
foreign net operating loss carryforwards have an indefinite carryforward period.

     Utilization of the federal and state net operating losses and credits may
be subject to a substantial annual limitation due to the "change in ownership"
provisions of the Internal Revenue Code of 1986 and similar state provisions.
The annual limitation may result in the expiration of net operating losses and
credits before utilization.

 5. LEASE COMMITMENTS

     The Company leases its present facilities under noncancelable operating
lease agreements through fiscal year 2004. The Company has commitments under
noncancelable operating leases as of June 30, 1999 as follows: $1,535,000 in
fiscal 2000, $1,535,000 in fiscal 2001, $1,535,000 in fiscal 2002, $1,419,000 in
fiscal 2003, and $206,000 thereafter.

     Rent expense was $1,568,000 in fiscal 1999, $915,000 in fiscal 1998 and
$793,000 in fiscal 1997.

 6. BANK LOAN

     In March 1999, the Company secured a $3,000,000 credit facility from a
bank, bearing annual interest at the bank's prime rate plus 2% (9.75 % as of
June 30, 1999). The credit line is an asset-based facility, and the amount that
can be borrowed under the loan is the lesser of $3,000,000 or 80% of the
eligible accounts receivable balances at any point in time. The amounts
collected from outstanding, eligible accounts receivable balances are remitted
to the bank as loan payments when such amounts are received. The initial term of
this facility is two years. The credit facility is secured by essentially all of
the assets of the Company.

 7. CONVERTIBLE NOTES

     In April 1996, the Company issued $3,400,000 of seven-year unsecured senior
convertible notes. Interest only is payable semi-annually in October and April
at 10% per annum. Interest payments for the first two years were payable, at the
Company's option, in cash or in common stock valued at 90% of the 20 day average
bid price preceding the payment due date. On June 27, 1996, the noteholders
agreed to exchange debt totaling $1,800,000 for preferred stock and warrants
(see Note 8).

     The remaining $1,600,000 of debt is due and payable on April 30, 2003 and
is convertible at any time, at the option of the noteholders, into the Company's
common stock at a conversion price of $1.55 per share. The Company has reserved
1,032,258 shares of common stock for issuance upon conversion of these notes.
The Company has the right to prepay all or a portion of the principal amount
outstanding at any time following April 30, 1999. The notes have been issued in
a private placement, and the Company registered the common stock that is
issuable upon conversion of the notes.

 8. STOCKHOLDERS' EQUITY

     SERIES A PREFERRED STOCK AND WARRANTS. On June 27, 1996, the Company agreed
to issue 580,645 shares of Series A Preferred Stock and warrants to purchase
720,000 shares of common stock at $3.50 per share in exchange for the conversion
of $1,800,000 of the convertible debt. Such preferred shares and warrants were
valued at $2,932,000, net of issue costs. Each share of the preferred stock is
convertible into two common shares, subject to adjustments for dilutive events,
and carries 10% mandatory cumulative dividends payable semi-annually in April
and October. The dividends for the first two years were payable, at the
Company's option, in cash or in common stock valued at 90% of the 20 day average
bid price preceding the payment due date. Preferred stockholders have no voting
rights unless dividend payments are more than two years in arrears, at which
time the preferred stockholders shall have the right to vote with common
stockholders as one class with the number of votes equal to the number of shares
of common stock into which the preferred stock is convertible.

                                       33
<PAGE>   34
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The warrants are exercisable immediately, and expire in 2006. The Company
can redeem the warrants at any time after five years, if the common stock trades
at or above $6.00 per share, by paying a redemption price of $0.01 per warrant
share.

     The Series A Preferred Stock and warrants issuable in fiscal 1996
(discussed above) were issued in August 1996. In January and April 1998, one
Series A Preferred stockholder converted 96,774 shares of Series A Preferred
Stock into 193,548 shares of Common Stock. In September 1998, the same
stockholder converted 48,387 shares of Series A Preferred Stock into 96,744
shares of common stock. The Company has reserved 1,590,968 shares of common
stock for issuance upon conversion of the remaining preferred stock and exercise
of these warrants. The common shares issuable in connection with the conversion
of Series A Preferred Stock or exercise of warrants were registered on December
23, 1996. In the event of any liquidation or winding up of the Company, the
holders of Series A Preferred Stock will be entitled to receive in preference to
the holders of common stock an amount equal to $3.10 per share plus any
accumulated and unpaid dividends on the preferred stock. The total liquidation
preference for Series A Preferred Stock would be approximately $1,372,000 at
June 30, 1999.

     SERIES B PREFERRED STOCK. On March 19, 1997, the Company issued 5,000
shares of 8% convertible Series B Preferred Stock at $1,000 per share. Each
share is convertible into 500 shares of common stock, subject to adjustments, at
$2.00 per share and carries 8% mandatory cumulative dividends. The dividends for
the first year were payable at the Company's option in cash or common stock
valued at 90% of the 20 day average bid price preceding the distribution due
date.

     In the event of any liquidation, dissolution or winding up of the Company,
the holders of Series B Preferred Stock will be entitled to receive, junior to
the rights of the holders of Series A Preferred Stock, in preference to the
holders of common stock, an amount equal to $1,000 per share plus all
accumulated and unpaid dividends on the Series B Preferred Stock. The total
liquidation preference for Series B Preferred Stock would be approximately
$5,066,000 at June 30, 1999. The Company has reserved 2,500,000 shares of common
stock for issuance upon conversion of the Series B Preferred. These common
shares were registered on July 30, 1997.

     When preferred stock is convertible to common stock at a conversion rate
that is a discount from the market rate at the date of issuance, the discounted
amount is an assured incremental yield, the "beneficial conversion feature," to
the preferred stockholders and should be accounted for as an embedded dividend
to preferred stockholders. As such, this dividend was recognized in the earnings
per share calculation at June 30, 1997. Based on the conversion terms of the
Series B Preferred Stock, an embedded dividend of $1,720,000, or $0.14 per
share, was added to net loss in the calculation of basic and diluted net loss
per common share.

     COMMON STOCK ARRANGEMENT. In March 1999, the Company completed an equity
arrangement which requires certain investors to purchase, in a private
placement, up to a maximum of $3,000,000 of the Company's common stock, if and
when requested by the Company. The arrangement expires in March 2000. The
purchase price is set at 10% above the fair market value of the common stock on
the date of each purchase with a minimum price of $1.50 per share and a maximum
price of $3.00 per share. As of June 30, 1999, the Company has issued 1,160,000
shares of common stock at $1.50 per share for aggregate proceeds of $1,740,000.

     STOCK OPTION PLANS. In December 1998, the stockholders authorized an
additional 1,500,000 shares for a total of 4,504,778 shares authorized under the
Company's 1991 Stock Option Plan. Incentive stock options may not be granted
with exercise price at less than fair market value; non-qualified options may be
granted with exercise prices at less than fair market value. Both types of
options are exercisable in full immediately upon grant. However, the Company
retains the right to repurchase unvested shares issued upon exercise of an
option at the original exercise price per share. Unless otherwise provided by
the 1991 Stock Option Plan, the repurchase rights typically expire over periods
of up to four years. Most options expire on approximately the tenth anniversary
of the date of grant. At June 30, 1999, options for 1,502,525 shares were
available for future grant, 1,313,334 options were vested, and no shares
outstanding from option exercises were subject to
                                       34
<PAGE>   35
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

repurchase. Options for 294,050 of shares granted under prior plans are
outstanding and exercisable as of June 30, 1999.

     In December 1997, the stockholders authorized an additional 150,000 shares
for a total of 250,000 shares authorized under the Company's 1991 Nonemployee
Director's Stock Option Plan. Options may be granted at fair market value to
nonemployee directors at set times as provided in the Nonemployee Directors
Plan, and should the Board elect to waive fees paid by the Company to
nonemployee directors, that amount of fees waived can be applied to reduce the
exercise price of options granted, pursuant to the terms of the Plan. Options
are exercisable in full six months after the date of grant. The Company retains
the right to repurchase unvested shares issued upon exercise of an option at the
exercise price per share with the right to repurchase expiring over a two year
period. At June 30, 1999, options for 144,375 shares were available for future
grant, 81,250 options were exercisable and no shares outstanding from option
exercises were subject to repurchase.

     In January 1998, The Board of Directors authorized 267,000 shares to be
granted to employees in connection with the purchase of UPI technology (refer to
Note 3). The options may be granted at the fair market value on the date of
grant with a term of 10 years and vesting over four years. 50% of the fourth
year vesting for certain employees may be accelerated based on the achievement
of certain milestones. The options are exercisable when vested. At June 30,
1999, there were no shares available for future grant and 58,969 options were
vested.

     During fiscal year 1999, the Company granted options for 185,000 common
shares at fair market value outside the Employee and Non-employee Stock Option
Plans. In September 1998 the Company granted options to purchase 25,000 common
shares to a non-employee director at fair market value. These options became
fully vested at the time they were granted. In addition, in October 1998 the
Company granted options for 160,000 shares to an officer at fair market value.
Options for 10,000 shares became fully vested at the time they were granted and
the remaining 150,000 options vest over a four year period. At June 30, 1999
options for 185,000 shares were outstanding.

     The Company has reserved a sufficient number of shares of common stock to
be issued upon exercise of warrants and options outstanding and to be granted.

     A summary of stock option activity under all plans follows:

<TABLE>
<CAPTION>
                                                      1999                1998                1997
                                                -----------------   -----------------   -----------------
                                                         WEIGHTED            WEIGHTED            WEIGHTED
                                                         AVERAGE             AVERAGE             AVERAGE
                                                         EXERCISE            EXERCISE            EXERCISE
            (SHARES IN THOUSANDS)               SHARES    PRICE     SHARES    PRICE     SHARES    PRICE
            ---------------------               ------   --------   ------   --------   ------   --------
<S>                                             <C>      <C>        <C>      <C>        <C>      <C>
Shares:
  Outstanding at beginning of year............  3,027     $2.29     2,737     $1.73     2,100     $1.58
  Granted.....................................    974      1.47       818      3.47       866      2.16
  Exercised...................................    (19)     1.04      (403)     1.06       (65)     2.48
  Canceled....................................   (768)     2.37      (125)     1.68      (164)     2.28
                                                -----     -----     -----     -----     -----     -----
  Outstanding at end of year..................  3,214     $2.03     3,027     $2.29     2,737     $1.73
                                                =====     =====     =====     =====     =====     =====
</TABLE>

     The exercise price of options exercised during fiscal 1999 ranged from
$0.63 to $2.13. The Company granted 20,000 options at less than fair market
value in 1999.

                                       35
<PAGE>   36
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The following table summarizes information about options outstanding and
exercisable at June 30, 1999:

                              OPTIONS OUTSTANDING

<TABLE>
<CAPTION>
                                      WEIGHTED            WEIGHTED
    RANGE OF         NUMBER       AVERAGE REMAINING       AVERAGE
 EXERCISE PRICES   OUTSTANDING    CONTRACTUAL LIFE     EXERCISE PRICE
 ---------------   -----------    -----------------    --------------
<S>                <C>            <C>                  <C>
$0.6250 - $1.6875   1,215,886           7.03years         $0.9800
 1.7500 -  2.0000     594,876           6.52               1.8673
 2.0313 -  2.7500     566,250           6.71               2.4031
 2.8438 -  3.5000     618,250           8.27               3.1647
 3.5625 -  5.1875     218,450           8.43               4.0877
-----------------   ---------           ----              -------
$0.6250 - $5.1875   3,213,712           7.21years         $2.0265
=================   =========           ====              =======
</TABLE>

     The Company has elected to continue to follow APB 25 for accounting for its
employee stock options because, as discussed below, the alternative fair value
method of accounting prescribed by SFAS 123 requires the use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, no compensation expense is recognized because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant.

     Pro forma information regarding net loss and loss per share in fiscal 1999,
1998 and 1997 has been determined as if the Company had accounted for its
employee stock options granted subsequent to June 30, 1995 under the fair value
method prescribed by SFAS 123. The resulting effect on pro forma net loss and
loss per share disclosed for fiscal 1999, 1998 and 1997 is not likely to be
representative of the effects on net income and earnings per share on a pro
forma basis in future years, because fiscal 1999, 1998 and 1997 pro forma
results include the impact of only four years, three years, and two years,
respectively, of grants and related vesting, while subsequent years will include
additional years of grants and vesting. The fair value of options was estimated
at the date of grant using a Black-Scholes option valuation model with the
following assumptions for fiscal 1999, 1998 and 1997: weighted average risk-free
interest rates of 5.0%, 5.7% and 6.3%, respectively; dividend yields of 0% for
all three years; volatility factors of the expected market price of the
Company's common stock of 85%, 68% and 66%, respectively; and a weighted-average
expected life of one year beyond vesting for all these years. The weighted
average fair value of options granted during fiscal 1999, 1998 and 1997 was
$1.17, $1.80 and $1.10, respectively.

     The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

     For purposes of pro forma disclosures, the estimated fair value of options
is amortized to pro forma expense over the options' vesting period. Pro forma
information for the years ending June 30 follows:

<TABLE>
<CAPTION>
                                                                    YEAR ENDED JUNE 30,
                                                              --------------------------------
                                                                1999        1998        1997
                                                              --------    --------    --------
                                                              (IN THOUSANDS, EXCEPT PER SHARE
                                                                          AMOUNTS)
<S>                                                           <C>         <C>         <C>
Net loss applicable to common shareholders-pro forma........   $7,600      $1,514      $2,303
Net loss per common share-pro forma (including preferred
  stock dividends)..........................................   $ 0.50      $ 0.15      $ 0.34
</TABLE>

                                       36
<PAGE>   37
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 9. SEGMENT AND GEOGRAPHIC INFORMATION

     The Company conducts its business within one industry segment. The
breakdown of revenues is as follows:

<TABLE>
<CAPTION>
                                     YEAR ENDED JUNE 30,
                                -----------------------------
                                 1999       1998       1997
                                -------    -------    -------
                                       (IN THOUSANDS)
<S>                             <C>        <C>        <C>
United States.................  $14,675    $17,595    $ 8,154
Europe........................    6,101      5,581      3,100
Pacific Rim/Latin America.....    1,185      1,269      1,432
                                -------    -------    -------
          Total revenues......  $21,961    $24,445    $12,686
                                =======    =======    =======
</TABLE>

     Revenues and operating income recorded by the foreign subsidiaries of the
Company and their corresponding identifiable assets were not material in fiscal
1999, 1998 or 1997.

10. RELATED PARTY TRANSACTIONS

     On August 8, 1996, SAP AG purchased from Informix Corporation 1,736,263
shares of common stock of the Company. This total represents all the Company
shares previously held by Informix Corporation. As of June 30, 1999, SAP AG
holds approximately 11% of the outstanding stock of the Company. The Company
recognized $4,556,000 and $4,685,000 of total revenues from SAP AG during fiscal
1999 and 1998, respectively and had $732,000 and $153,000 included in accounts
receivable at June 30, 1999 and 1998, respectively, from SAP AG.

                                       37
<PAGE>   38

               REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
IntelliCorp, Inc.

     We have audited the accompanying consolidated balance sheets of
IntelliCorp, Inc. as of June 30, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended June 30, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of IntelliCorp,
Inc. at June 30, 1999 and 1998, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended June 30, 1999
in conformity with generally accepted accounting principles.

                                                          /s/  ERNST & YOUNG LLP

Palo Alto, California
August 10, 1999

                                       38
<PAGE>   39

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

     Not applicable.

                                    PART III

ITEM 9.DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
       WITH SECTION 16(A) OF THE EXCHANGE ACT

     The Company incorporates by reference the information set forth under the
caption "Nomination and Election of Directors" of the Company's Proxy Statement.

EXECUTIVE OFFICERS OF THE REGISTRANT

     As of September 7, 1999, the executive officers and directors of
IntelliCorp are as follows:

<TABLE>
<CAPTION>
                NAME                     AGE                  POSITION
                ----                     ---                  --------
<S>                                      <C>    <C>
Kenneth Haas.........................    48     Director and Chief Executive Officer
Steve Tsui...........................    47     President
Colin Bodell.........................    37     Executive Vice President
Mark Bickerstaffe....................    41     Vice President, North American Sales
Peter Christiansen...................    41     Vice President, Advanced Development
Kenneth Czaja........................    50     Vice President Finance, Secretary and
                                                Chief Financial Officer
David Loeb...........................    38     Vice President and Managing Director,
                                                Consulting and Training
Scott Parcel.........................    42     Vice President, Software Development
Adrian Rayner........................    47     Vice President and Managing Director,
                                                Europe
Martin Snelgrove.....................    36     Vice President, Product Development
Maryanne Stone.......................    34     Vice President and Managing Director,
                                                SAP Consulting and Training
Katharine Branscomb(1)(2)............    43     Director
Norman Wechsler(1),(2)...............    54     Director
Arthur Berry(1),(2)..................    58     Director
Robert Lauridsen(1),(2)..............    51     Director
</TABLE>

---------------
(1) Audit Committee Member

(2) Compensation and Stock Option Committee Member

     Mr. Haas has been a Director of the Company since 1993. Mr. Haas was
appointed President of IntelliCorp in October 1992 and Chief Executive Officer
in August 1999. He joined the Company in 1983 as General Counsel, became Vice
President and Secretary in March 1984 and was appointed Vice President, Finance
and Chief Financial Officer in January 1990. Mr. Haas received his B.A. from
Harvard College in 1972, his J.D. from Harvard Law School in 1976, and attended
the Harvard Business School Advanced Management Program in 1989.

     Mr. Tsui joined IntelliCorp as Executive Vice President of Worldwide sales
in December 1998 and was appointed President in August 1999. Prior to
IntelliCorp, he held the position of SVP/General Manager of North America at
Walker where he was responsible for sales, consulting and customer support for 3
years. From 1991 to 1995, Mr. Tsui was the Vice President of sales at Acer
America. From 1978 to 1991, he held various sales and sales management positions
at IBM. Mr. Tsui received a MBA degree from Stanford University and a B.S.
degree from University of California, Berkeley.

                                       39
<PAGE>   40

     Mr. Bodell joined IntelliCorp as Vice President, Product Development in
December 1995, and was appointed Chief Operating Officer in August, 1998 and
Executive Vice President in August 1999. Previously, Mr. Bodell served as Vice
President, Client Server Development at Micro Focus, Inc. Mr. Bodell received an
Honors Degree in Computer Science from Coventry University in England.

     Mr. Bickerstaffe was appointed Vice President, North American Sales in
August 1998. He joined IntelliCorp in 1993 as Sales Manager for the European
Distribution Channels. Mr. Bickerstaffe moved to the United States in 1996 to
take responsibility for IntelliCorp's relationships with SAP's Implementation
Partners. Prior to joining IntelliCorp he worked in the United Kingdom as a
Sales Manager at Boole and Babbage.

     Mr. Christiansen was appointed Vice President, Advanced Development in
August 1997. He joined IntelliCorp in September 1993 as a Senior Software
Engineer and was promoted to Director of Product Development in November 1995.
Prior to joining IntelliCorp, Mr. Christiansen served in various capacities
within PRO UBIS, a German consulting and software company. Most recently he held
the position of Project Manager.

     Mr. Czaja joined IntelliCorp as Vice President, Finance, Secretary and
Chief Financial Officer in October 1996. Prior to joining IntelliCorp, he served
as Vice President, Finance at Wyse Technology, Inc. where he began as Controller
in 1991. From 1989 to 1991, he was Corporate Controller of Silicon Compiler
Systems and a Group Controller at Mentor Graphics (which acquired Silicon
Compiler Systems). From 1973 to 1989, Mr. Czaja held various financial
management positions at Xerox Corporation.

     Mr. Loeb was appointed Managing Director, Consulting and Training Services
in July 1995, and was appointed a Vice President in August 1998. He joined
IntelliCorp in 1994 as a Senior Field Consultant and was promoted to Director,
GTE Project. Prior to joining IntelliCorp, Mr. Loeb held consulting, product
development and management positions at IBM's Research Center, AICorp and
Enterprise Software. Mr. Loeb studied Computer Science at the University of
Illinois and is the author of two patents.

     Mr. Parcel was appointed Vice President, Software Development in August
1999, and was appointed Director, LiveModel Software Development in October
1997. He joined IntelliCorp in 1989 as a Senior Systems Software Engineer. Prior
to joining IntelliCorp, Mr. Parcel held positions since 1978 as a Software
Project Lead, Software Developer and Systems Analyst at Motorola New
Enterprises, Unisys and Varian Associates. Mr. Parcel holds a B.S. Degree in
Cybernetics.

     Mr. Rayner was appointed Vice President and Managing Director, Europe in
August 1997. He joined IntelliCorp in November 1993 as European General Manager.
From 1991 to 1993, Mr. Rayner was the United Kingdom Sales Director for Boole &
Babbage and from 1987 to 1991, he served as the National Sales Manager at
Phillips Business Systems. Mr. Rayner holds an Electrical Engineering degree
from the University of London.

     Mr. Snelgrove was appointed Vice President, Product Development in August
1999. He joined IntelliCorp in July 1996 as a consultant, moved to development
in January 1998 and was promoted to Managing Director, Product Development in
March 1999. Prior to joining IntelliCorp, Mr. Snelgrove held a variety of senior
technical and managerial positions at Micro Focus Inc. and IBM UK Ltd. Mr.
Snelgrove received an Honors Degree in Mathematics from Bristol University in
England.

     Ms. Stone joined IntelliCorp as Managing Director, SAP Consulting and
Training in August 1997, and was appointed a Vice President in August 1998.
Prior to joining IntelliCorp, she worked for Deloitte & Touche Consulting
Group/ICS where she served as Manager of Client Services. Ms. Stone has been
involved with SAP implementations for the last nine years and is a previous
employee of SAP AG, Switzerland. She received her Bacheloris of Commerce degree
from the University of Cape Town and completed the Management Advancement
Program in Business Administration at the University of Witwatersrand, South
Africa.

     Ms. Branscomb has been a Director of the Company since 1988. She is
currently a consultant and Senior Business Advisor to Interval Research in Palo
Alto, California and a director of Ariat Corporation. From

                                       40
<PAGE>   41

October 1992 to November 1995, she was Senior Vice President of Business
Development for Lotus Development Corporation and, in that capacity, served a
principal role in the sale of Lotus to IBM in June 1995. From November 1991
until joining Lotus, Ms. Branscomb was the Chief Executive Officer of
IntelliCorp, Inc. She had previously held the position of Chief Operating
Officer since late 1988. Prior to joining IntelliCorp, Ms. Branscomb was Senior
Vice President of Sales and Marketing at Aion Corporation, founding principal
and Vice President of Metaphor Computer Systems and a consultant with the Boston
Consulting Group, Inc.

     Mr. Wechsler has been a Director of the Company since September 1996. He is
Chairman and President of Wechsler & Co., Inc., a broker-dealer and investment
company, which he joined in 1963. The firm is a member of the NASD and SIPC.

     Mr. Berry has been a Director of the Company since August 1997. Since 1990,
he has been Chairman of Pecks Management Partners Ltd. in New York, a
specialized, institutional investment manager focusing on public and privately
placed convertible securities. From 1985 to 1990, Mr. Berry was President of the
Alliance Capital Management, L.P. Convertible Fund. Prior to joining Alliance,
he was with the Harris Bank in Chicago, first as Senior Portfolio Manager in the
bank's individual investment group, then as Vice President and Head of the
Special Funds section and Manager of the Harris Convertible Fund. Mr. Berry, a
Chartered Financial Analyst, is a graduate of Monmouth College and holds an MBA
degree from Washington University. He is a director of Hybridon, Inc.

     Mr. Lauridsen has been a Director of the Company since April 1999. He is a
Partner with R.B. Webber & Company in Palo Alto, California, a management
consulting firm focused on working with high technology companies. He has been
with R.B. Webber since 1995. From 1990 to 1995, Mr. Lauridsen was an executive
with Apple Computer; from 1991 as Vice President of Corporate Development. Mr.
Lauridsen's has also been a Partner with The Boston Consulting Group and Booz,
Allen & Hamilton's Technology Practice. He was also founder and CEO of Redwood
Fire and Casualty Insurance Company, a subsidiary of Berkshire Hathaway Company.

ITEM 10. EXECUTIVE COMPENSATION

     The Company incorporates by reference the information set forth under the
caption "Executive Compensation" of the Proxy Statement.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The Company incorporates by reference the information set forth under the
caption "Beneficial Stock Ownership" of the Proxy Statement.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The Company incorporates by reference the information set forth under the
caption "Executive Compensation" of the Proxy Statement.

                                       41
<PAGE>   42

ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K

(a) 2. EXHIBITS

<TABLE>
          <S>      <C>
           3-A     Certificate of Incorporation(1).
           3-B     By-Laws(2).
          10-AA    Office Lease dated as of February 27, 1995 between
                   Registrant and El Camino Office Investments, as amended(3).
          10-FF    Registrant's 1991 Stock Option Plan(2).
          10-GG    Registrant's 1991 Nonemployee Directors Stock Option
                   Plan(2).
          10-JJ    Employment Agreement dated October 30, 1991 between
                   Registrant and Kenneth H. Haas(2).
          10-KK    Employment Agreement dated October 30, 1992 between
                   Registrant and Gary Fine(5).
          10-OO    Seven-Year Senior Convertible Note Purchase Agreement dated
                   April 19, 1996(6).
          10-PP    Form of Senior Convertible Note(6).
          10-QQ    Agreement to exchange convertible debt for preferred stock
                   and warrants(4).
          10-RR    Series B Preferred Stock Purchase Agreement dated March 19,
                   1997(7).
          10-SS    Office Lease dated March 17, 1998(5).
          10-TT    UPI asset purchase dated January 23, 1998(5).
          20       Definitive form of Proxy Statement for the Annual Meeting of
                   Stockholders to be held December 7, 1999(4).
          21       Subsidiaries of Registrant(1).
          23       Consent of Ernst & Young LLP, Independent Auditors.
          25       Power of Attorney -- See page 44 hereof.
          27       Financial Data Schedule.
</TABLE>

(b) REPORTS ON FORM 8-K

     No reports have been filed for the fiscal year ended June 30, 1999.
---------------
(1) Filed as an Exhibit to Registrant's Annual Report on Form 10-K for the
    fiscal year ended June 30, 1990 and incorporated herein by reference.

(2) Filed as an Exhibit to Registrant's Annual Report on Form 10-K for the
    fiscal year ended June 30, 1992 and incorporated herein by reference.

(3) Filed as an Exhibit to Registrant's Annual Report on Form 10-K for the
    fiscal year ended June 30, 1993 and incorporated herein by reference.

(4) The Registrant's definitive Proxy Statement will be filed with the
    Securities and Exchange Commission on or before October 28, 1999.

(5) Filed as an Exhibit to Registrant's Annual Report on Form 10-KSB for the
    fiscal year ended June 30, 1998 and incorporated herein by reference.

(6) Filed as an Exhibit to Registrant's Quarterly Report on Form 10-QSB for the
    quarter ended March 31, 1996 and incorporated herein by reference.

(7) Filed as an Exhibit to Registrant's Quarterly Report on Form 10-QSB for the
    quarter ended March 31, 1997 and incorporated herein by reference.

                                       42
<PAGE>   43

                                   SIGNATURES

     In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

                                          INTELLICORP, INC.

                                          By: /s/ KENNETH H. HAAS

                                            ------------------------------------
                                            Kenneth H. Haas
                                            Director and Chief Executive Officer

Date: September 28, 1999

                                       43
<PAGE>   44

                      POWER OF ATTORNEY TO SIGN AMENDMENTS

     KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below does hereby constitute and appoint Kenneth H. Haas and Kenneth A. Czaja,
and each of them, with full power of substitution and full power to act without
the other, his true and lawful attorney-in-fact and agent to act for him in his
name, place and stead, in any and all capacities, to sign any or all amendments
to this Annual Report on Form 10-KSB, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises in order to
effectuate the same as fully, to all intents and purposes, as they or he might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, may lawfully do or cause to be
done by virtue hereof.

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.

<TABLE>
<CAPTION>
                     SIGNATURE                                   TITLE                      DATE
                     ---------                                   -----                      ----
<C>                                                    <S>                           <C>

                /s/ KENNETH H. HAAS                    Director and                  September 28, 1999
---------------------------------------------------    Chief Executive Officer
                  Kenneth H. Haas

               /s/ KENNETH A. CZAJA                    Chief Financial Officer       September 28, 1999
---------------------------------------------------    and Secretary
                 Kenneth A. Czaja

            /s/ KATHARINE C. BRANSCOMB                 Director                      September 28, 1999
---------------------------------------------------
              Katharine C. Branscomb

              /s/ NORMAN J. WECHSLER                   Director                      September 28, 1999
---------------------------------------------------
                Norman J. Wechsler

                /s/ ARTHUR W. BERRY                    Director                      September 28, 1999
---------------------------------------------------
                  Arthur W. Berry

              /s/ ROBERT A. LAURIDSEN                  Director                      September 28, 1999
---------------------------------------------------
                Robert A. Lauridsen
</TABLE>

                                       44
<PAGE>   45

                                 EXHIBIT INDEX

                               INTELLICORP, INC.
                                  FORM 10-KSB

<TABLE>
<CAPTION>
                                                                       SEQUENTIALLY
INDEX                                                                    NUMBERED
 NO.                                                                       PAGE
-----                                                                  ------------
<S>      <C>                                                           <C>
 3-A     Certificate of Incorporation(1).............................
 3-B     By-Laws(2)..................................................
10-AA    Office Lease dated as of August 31, 1993 between Registrant
         and El Camino Office Investments, as amended(3).............
10-FF    Registrant's 1991 Stock Option Plan(2)......................
10-GG    Registrant's 1991 Nonemployee Directors Stock Option
         Plan(2).....................................................
10-JJ    Employment Agreement dated October 30, 1991 between the
         Registrant and Kenneth H. Haas(2)...........................
10-KK    Employment Agreement dated October 30, 1992 between the
         Registrant and Gary Fine(5).................................
10-OO    Seven Year Senior Convertible Note Purchase Agreement dated
         April 19, 1996(6)...........................................
10-PP    Form of Senior Convertible Note(6)..........................
10-QQ    Agreement to exchange convertible debt for preferred stock
         and warrants(4).............................................
10-RR    Series B Preferred Stock Purchase Agreement dated March 19,
         1997(7).....................................................
10-SS    Office Lease dated March 17, 1998(5)........................
10-TT    UPI asset purchase dated January 23, 1998(5).
20       Definitive form of Proxy Statement for the Annual Meeting of
         Stockholders to be held December 8, 1998(4).................
21       Subsidiaries of Registrant(1)...............................
23       Consent of Ernst & Young LLP, Independent Auditors..........       38
25       Power of Attorney...........................................       44
27       Financial Data Schedule.....................................
</TABLE>

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     (1) Filed as an Exhibit to Registrant's Annual Report on Form 10-K for the
         fiscal year ended June 30, 1990 and incorporated herein by reference.

     (2) Filed as an Exhibit to Registrant's Annual Report on Form 10-K for the
         fiscal year ended June 30, 1992 and incorporated herein by reference.

     (3) Filed as an Exhibit to Registrant's Annual Report on Form 10-K for the
         fiscal year ended June 30, 1993 and incorporated herein by reference.

     (4) The Registrant's definitive Proxy Statement will be filed with the
         Securities and Exchange Commission on or before October 28, 1997.

     (5) Filed as an Exhibit to Registrant's Annual Report on Form 10-KSB for
         the fiscal year ended June 30, 1998 and incorporated herein by
         reference.

     (6) Filed as an Exhibit to Registrant's Quarterly Report on Form 10-QSB for
         the quarter ended March 31, 1996 and incorporated herein by reference.