<PAGE>   1
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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549


                                    FORM 10-Q

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

                  For the quarterly period ended June 30, 2001


                                       OR


              [ ] Transition Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934

                  For the transition period from _____ to _____


                         Commission File Number: 0-25612


                              STARBASE CORPORATION
             (Exact name of Registrant as specified in its charter)


           Delaware                                            33-0567363
(State or other jurisdiction of                             (I.R.S. Employer
incorporation or organization)                            Identification Number)


    4 Hutton Centre Drive, Suite 800
          Santa Ana, California                                  92707
(Address of principal executive offices)                       (Zip code)


                                 (714) 445-4400
              (Registrant's telephone number, including area code)


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


Number of shares outstanding as of June 30, 2001:   Common Stock:     69,649,314
                                                    Preferred Stock:           0

================================================================================

<PAGE>   2

                              StarBase Corporation

                                TABLE OF CONTENTS

                                                                           Page
                                                                           ----
PART I. FINANCIAL INFORMATION

    ITEM 1. Financial Statements

            Consolidated Balance Sheets at June 30, 2001 (Unaudited)
            and March 31, 2001                                                3

            Consolidated Statements of Operations (Unaudited) for the
            three month periods ended June 30, 2001 and 2000                  4

            Consolidated Statements of Comprehensive Operations
            (Unaudited) for the three month periods ended June 30,
            2001 and 2000                                                     5

            Consolidated Statements of Cash Flows (Unaudited) for the
            three month periods ended June 30, 2001 and 2000                  6

            Notes to Consolidated Financial Statements (Unaudited)            7

    ITEM 2. Management's Discussion and Analysis of Financial Condition
            and Results of Operations                                        12

    ITEM 3. Qualitative and Quantitative Disclosures about Market Risk       21

PART II. OTHER INFORMATION

    ITEM 6. Exhibits and Reports on Form 8-K                                 22

Signatures                                                                   23


                                       2

<PAGE>   3

                                    PART I

                                    ITEM 1

                              FINANCIAL STATEMENTS

                              STARBASE CORPORATION

                           CONSOLIDATED BALANCE SHEETS
                        (in thousands, except share data)
<TABLE>
<CAPTION>
                                                             June 30,    March 31,
                                                               2001         2001
                                                            ---------    ---------
                                                           (Unaudited)
<S>                                                         <C>          <C>
ASSETS
Current Assets:
  Cash and cash equivalents                                 $   6,656    $  14,075
  Restricted cash                                                 257          257
  Marketable securities                                             3            3
  Accounts receivable, net of allowances of $2,549 at
    June 30, 2001 and $2,166 at March 31, 2001                 12,570       16,148
  Notes and other receivables, net of allowances of
    $760 at June 30, 2001 and $760 at March 31, 2001              196          200
  Prepaid expenses and other assets                               979        1,183
                                                            ---------    ---------
    Total current assets                                       20,661       31,866

Property and equipment, net                                     7,432        7,953
Intangible assets, net                                        100,911      107,628
Note receivable from officer                                      105          104
Other non-current assets                                        1,480        1,487
                                                            ---------    ---------
Total assets                                                $ 130,589    $ 149,038
                                                            =========    =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Line of credit                                            $   1,500    $      --
  Accounts payable                                              7,026       11,104
  Accrued compensation                                          2,405        3,381
  Other accrued liabilities                                     5,847        6,706
  Deferred revenue                                              8,465        8,950
  Current portion of long-term obligations                        330          344
                                                            ---------    ---------
    Total current liabilities                                  25,573       30,485

Long-term liabilities:
  Long-term obligations, less current portion                     139          238
  Long-term deferred revenue                                       17          121
                                                            ---------    ---------
    Total long-term liabilities                                   156          359
                                                            ---------    ---------
    Total liabilities                                          25,729       30,844

Commitments and contingencies

Stockholders' equity:
  Preferred stock, $.01 par value; 10,000,000 shares
    authorized, none issued and outstanding at June 30,
    2001 and March 31, 2001                                        --           --
  Common stock, $.01 par value; 100,000,000 authorized;
    69,649,314 and 69,386,443 shares issued and
    outstanding at June 30, 2001 and March 31, 2001               696          694
  Additional paid-in capital                                  193,706      193,321
  Notes receivable                                               (219)        (219)
  Deferred non-cash compensation                                 (596)        (662)
  Accumulated deficit                                         (88,622)     (74,857)
  Accumulated other comprehensive loss                           (105)         (83)
                                                            ---------    ---------
  Total stockholders' equity                                  104,860      118,194
                                                            ---------    ---------
Total liabilities and stockholders' equity                  $ 130,589    $ 149,038
                                                            =========    =========
</TABLE>

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

                                       3

<PAGE>   4

                              STARBASE CORPORATION

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                    Three months ended
                                                         June 30,
                                                  ----------------------
                                                    2001          2000
                                                  --------      --------
                                                       (Unaudited)
<S>                                               <C>           <C>
Revenues:
  License                                         $  7,387      $  5,114
  Service                                            4,667         1,927
                                                  --------      --------
    Total revenues                                  12,054         7,041

Cost of Revenues:
  License                                            1,577           104
  Service                                            1,824           925
  Amortization of intangibles                        1,753           405
                                                  --------      --------
    Total cost of revenues                           5,154         1,434
                                                  --------      --------
Gross margin                                         6,900         5,607

Operating Expenses:
  Research and development                           4,456         1,827
  Sales and marketing                                8,639         3,922
  General and administrative                         2,444         1,540
  Non-cash stock based compensation                    190         1,122
  Amortization of intangibles                        4,976         1,240
                                                  --------      --------
    Total operating expenses                        20,705         9,651
                                                  --------      --------
  Operating loss                                   (13,805)       (4,044)

  Interest and other income                             97           157
                                                  --------      --------
Loss before income taxes                           (13,708)       (3,887)

  Provision for income taxes                            57             1
                                                  --------      --------
Net loss                                          $(13,765)     $ (3,888)
                                                  ========      ========

Per share data:
  Basic and diluted net loss per common share     $  (0.20)     $  (0.09)
                                                  ========      ========
  Basic and diluted weighted average common
    shares outstanding                              68,036        44,335
                                                  ========      ========
</TABLE>

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

                                       4

<PAGE>   5

                              STARBASE CORPORATION

                CONSOLIDATED STATEMENTS OF COMPRENSIVE OPERATIONS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                         Three months ended
                                                              June 30,
                                                       ---------------------
                                                         2001         2000
                                                       --------      -------
                                                            (Unaudited)
<S>                                                    <C>           <C>
Net loss                                               $(13,765)     $(3,888)
Other comprehensive loss:
  Foreign currency translation adjustments                    5           --
  Unrealized loss on available for sale securities           --           (2)
                                                       --------      -------
Total comprehensive loss                               $(13,760)     $(3,890)
                                                       ========      =======
</TABLE>

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


                                       5

<PAGE>   6

                              STARBASE CORPORATION

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                  Three months ended
                                                                       June 30,
                                                                 --------------------
                                                                   2001        2000
                                                                 --------    --------
                                                                      (Unaudited)
<S>                                                              <C>         <C>
Cash Flows from Operating Activities:
  Net loss                                                       $(13,765)   $ (3,888)

  Adjustments to reconcile net loss to net cash
    used in operating activities:
    Depreciation and amortization                                   7,528       1,785
    Provision for doubtful accounts                                   440          34
    Non-cash stock based compensation                                 190       1,122

    Changes in operating assets and liabilities,
      net of effects of acquisitions:
      Accounts receivable                                           3,138         273
      Notes and other receivables                                       4         (91)
      Prepaid expenses and other assets                               204        (247)
      Other non-current assets                                          6         (63)
      Accounts payable and accrued liabilities                     (5,913)       (421)
      Deferred revenue                                               (589)        164
                                                                 --------    --------
Net cash used in operations                                        (8,757)     (1,332)

Cash Flows from Investing Activities:
  Cash paid for acquisitions, net of cash acquired                     --          30
  Capital expenditures                                               (290)       (161)
                                                                 --------    --------
Net cash used in investing activities                                (290)       (131)

Cash Flows from Financing Activities:
  Proceeds from issuance of common stock:
    Exercise of options                                               263         181
    Exercise of warrants                                               --         400
  Proceeds from debt financing                                      1,500          --
  Payment of financing related costs                                   --          (1)
  Payments on debt obligations                                       (113)        (77)
                                                                 --------    --------

Net cash provided by financing activities                           1,650         503

Effect of exchange rate changes on cash and cash equivalents          (22)         --
                                                                 --------    --------
Net decrease in cash                                               (7,419)       (960)

Cash and cash equivalents, beginning of period                     14,075      11,448
                                                                 --------    --------
Cash and cash equivalents, end of period                         $  6,656    $ 10,488

Supplemental Cash Flow Information:

  Interest paid                                                  $     16    $     10
                                                                 ========    ========
  Income taxes paid                                              $     57    $      1
                                                                 ========    ========

Non-cash investing and financing transactions:
  Conversion of preferred stock to common stock                  $     --    $      7
                                                                 ========    ========
  Capitalized lease and insurance financing                      $     --    $    171
                                                                 ========    ========
  Change in unrealized loss on securities available for sale     $     --    $      2
                                                                 ========    ========
</TABLE>

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

                                       6

<PAGE>   7

                              STARBASE CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. DESCRIPTION OF BUSINESS

Starbase Corporation, a Delaware corporation (the Company), provides end-to-end
collaborative products for the development and management of content and code
for eBusiness applications. The Company develops, markets, and supports a
complete family of user-friendly software products that support the continuous
cycle of creating, linking and managing digital assets, which comprise complex
eBusiness applications. The Company's products enable users with differing
technical and functional backgrounds to collaborate on the production of Web
sites and eBusiness initiatives from multiple locations. The Company's
professional services organization provides implementation, consulting and
training expertise.

2. BASIS OF PRESENTATION

The unaudited interim consolidated financial statements as of June 30, 2001 and
for the three months ended June 30, 2001, and 2000, have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission.
Accordingly, certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have not been
presented. The interim consolidated financial statements reflect all normal
recurring adjustments that are, in the opinion of management, necessary for a
fair presentation of the Company's financial position, results of operations and
cash flows for the period presented. The results of operations for the three
months ended June 30, 2001 are not necessarily indicative of the operating
results for the full year. The accompanying unaudited consolidated financial
statements should be read in conjunction with the financial statements and the
notes thereto included in the Starbase Corporation report to the Securities and
Exchange Commission on Form 10-K, for the year ended March 31, 2001.

NET LOSS PER SHARE

Basic and diluted net loss per share applicable to common stockholders is
computed using the weighted average number of common shares outstanding during
the periods presented. Potentially dilutive shares, stock options, warrants, and
Escrow Shares, have not been included where inclusion would be antidilutive.
Escrow Shares (1,418,638) will be released to the founders upon attaining
certain defined cash flow requirements. The release of the Escrow Shares will be
deemed compensatory and, accordingly, will result in charges to earnings equal
to the fair market value of these shares recorded ratably over the period
beginning on the date when management determines that the cash flow requirements
are probable of being met and ending on the date when the goal is attained,
causing the Escrow Shares to be released. At the time a goal is attained,
previously unrecognized compensation expense will be adjusted by a one-time
charge based on the then fair market value of the shares released from escrow.
Such charges could substantially reduce the Company's net income or increase the
Company's loss for financial reporting purposes in the periods such charges are
recorded. Based upon historical results, the attainment of the goal is not
probable at this time. However, this does not preclude the attainment of the
goal with future results.

Potentially dilutive securities, which consist of options to purchase 7,840,105
shares of common stock at prices ranging from $0.625 to $14.63 per share,
warrants to purchase 893,085 shares of common stock at prices ranging from $0.73
to $6.81 per share and 1,418,638 common shares held in escrow were not included
in the computation of diluted loss per share because such inclusion would have
been antidilutive for the three month period ended June 30, 2001. Potentially
dilutive securities, which consist of options to purchase 3,742,198 shares of
common stock at prices ranging from $0.625 to $13.07 per share, warrants to
purchase 172,715 shares of common stock at prices ranging from $0.73 to $3.88
per share and 1,418,638 common shares held in escrow were not included in the
computation of diluted loss per share because such inclusion would have been
antidilutive for the three month period ended June 30, 2000.


                                       7


<PAGE>   8

                              STARBASE CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. COMPOSITION OF CERTAIN BALANCE SHEET CAPTIONS

<TABLE>
<CAPTION>

                                                        June 30,     March 31,
                                                          2001          2001
                                                        ---------    ---------
                                                       (Unaudited)
                                                            (In thousands)
<S>                                                     <C>          <C>
     Property and equipment:

     Computer hardware                                  $   2,536    $   2,498
     Furniture and fixtures                                 2,135        2,000
     Computer software                                      3,416        3,394
     Motor vehicle                                             32           32
     Leasehold improvements                                 1,743        1,735
                                                        ---------    ---------
                                                            9,862        9,659
     Less accumulated depreciation and amortization        (2,430)      (1,706)
                                                        ---------    ---------
                                                        $   7,432    $   7,953
                                                        =========    =========

     Intangible assets:

     Patents and trademarks                             $      20    $      20
     Manufacturing license                                    473          470
     Developed technology                                  22,233       22,233
     Customer lists                                         2,761        2,761
     Assembled workforce                                    4,868        4,868
     Goodwill                                              86,904       86,904
                                                        ---------    ---------
                                                          117,259      117,256

     Less accumulated amortization                        (16,348)      (9,628)
                                                        ---------    ---------
                                                        $ 100,911    $ 107,628
                                                        =========    =========
</TABLE>

4. EQUITY TRANSACTIONS

WARRANTS

Warrant activity for the three month period ended June 30, 2001 is as follows:

                                                                   Warrant Price
                                                      Shares         Per Share
                                                      -------      -------------
Outstanding at March 31, 2001 and June 30, 2001       893,085        $0.73-$6.81
                                                      =======


                                       8

<PAGE>   9

                              STARBASE CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. STOCK OPTION PLAN

The Company's stock option plan (the 1996 Plan) provides for the grant of
non-qualified and incentive stock options to directors, officers and employees
of the Company. Options are granted at exercise prices equal to the fair market
value of the common stock on the date of grant. Generally, twenty-five percent
of the options are available for exercise at the end of one year, while the
remainder of the grant is exercisable ratably over the next thirty-six month
period, provided the optionee remains in service to the Company. The
weighted-average remaining contractual life of options outstanding at June 30,
2001 was 5.3 years. A total of 2,833,333 shares of common stock have been
authorized under the 1996 Plan, of which 1,368,435 were outstanding at June 30,
2001. In addition, the Company has granted non-qualified stock options, of which
18,143,194 were outstanding at June 30, 2001. As a result of the acquisition of
Premia Corporation, the Company assumed all of the outstanding options granted
under the Premia ISO stock option plan, of which 196,920 were outstanding at
June 30, 2001. As a result of the acquisition of Technology Builders, Inc., the
Company assumed all of the outstanding options granted under the Technology
Builders, Inc. Amended and Restated Stock Option and Incentive Stock Option
Plan, of which 1,092,665 were outstanding at June 30, 2001.

Stock option activity for the three month period ended June 30, 2001 is as
follows:

<TABLE>
<CAPTION>
                                                             Weighted-Average
                                                 Shares       Exercise Price
                                               ----------    ----------------
<S>                                            <C>           <C>
     Outstanding at March 31, 2001             21,734,769         $3.95
     Granted                                      486,500         $2.14
     Lapsed or canceled                        (1,130,560)        $5.83
     Exercised                                   (262,871)        $1.00
                                               ----------
     Outstanding at June 30, 2001              20,827,838         $3.85
                                               ==========
     Exercisable at June 30, 2001               7,840,105         $3.01
                                               ==========
</TABLE>

Stock option summary information at June 30, 2001 is as follows:

<TABLE>
<CAPTION>
                                     Options Outstanding                            Options Exercisable
                        --------------------------------------------------   --------------------------------
                                        Weighted-Average
Range of                                   Remaining      Weighted-Average                   Weighted-Average
Exercise Prices           Shares        Contractual Life   Exercise Price     Shares          Exercise Price
----------------        ----------      ----------------  ----------------   ----------      ----------------
<S>                     <C>             <C>               <C>                <C>              <C>
$0.50  - $1.00           2,084,356          6.7 years         $ 0.67         1,595,018           $ 0.68
$1.01  - $1.50           3,894,186          6.9 years         $ 1.32         2,255,455           $ 1.31
$1.51  - $2.00           1,719,581          7.0 years         $ 1.70         1,078,816           $ 1.66
$2.01  - $2.50           1,080,113          7.7 years         $ 2.13           366,578           $ 2.07
$2.51  - $3.00           1,022,793          7.6 years         $ 2.63           543,110           $ 2.61
$3.01  - $3.50           2,573,736          8.0 years         $ 3.35            91,041           $ 3.45
$3.51  - $4.00           3,780,195          7.1 years         $ 3.79           470,891           $ 3.88
$4.01  - $4.50             415,000          7.2 years         $ 4.13            88,123           $ 4.05
$4.51  - $10.00            450,000          9.2 years         $ 4.69           228,742           $ 4.66
$10.01 - $20.00          3,807,878          7.4 years         $10.21         1,122,331           $10.69
                        ----------                                           ---------
                        20,827,838                                           7,840,105
                        ==========                                           =========
</TABLE>


                                       9

<PAGE>   10

                              STARBASE CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6. OPERATING SEGMENT INFORMATION

Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
Company's chief operating decision-maker, or decision-making group, in deciding
how to allocate resources and in assessing performance. The operating segments
of the Company are managed separately because each segment represents a
strategic business unit that offers different products or services.

The Company's reportable operating segments include software licenses and
services. The software licenses operating segment develops and markets the
Company's end-to-end collaborative products for the development of integrated
content and code for eBusiness applications. The services segment provides
after-sale support for software products and fee-based training and consulting
services related to the Company products.

The Company does not allocate operating expenses to these segments, nor does it
allocate specific assets to these segments. Therefore, segment information
reported includes only revenues, cost of revenues and gross margin.

Operating segment data for the three month ended June 30, 2001 and 2000 was as
follows:

<TABLE>
<CAPTION>
                                        Software
                                        licenses      Services        Total
                                        --------      --------       -------
                                                   (In thousands)
<S>                                      <C>           <C>           <C>
Three months ended June 30, 2001:
    Revenues                             $7,387        $4,667        $12,054
    Cost of revenues                      3,330         1,824          5,154
                                         ------        ------        -------
        Gross margin                     $4,057        $2,843        $ 6,900
                                         ======        ======        =======

Three months ended June 30, 2000:
    Revenues                             $5,114        $1,927        $ 7,041
    Cost of revenues                        509           925          1,434
                                         ------        ------        -------
        Gross margin                     $4,605        $1,002        $ 5,607
                                         ======        ======        =======
</TABLE>

7. RELATED PARTY TRANSACTIONS

In May 2001, the Board of Directors authorized the Company to loan Mr. Phillip
E. Pearce, a member of the Board of Directors, the sum of $150,000. The loan is
evidenced by a promissory note and bears interest at a rate of 8% per annum,
payable at maturity. The maturity date on the note is February 29, 2002.

8. LINE OF CREDIT

On June 29, 2001, the Company entered into a Loan and Security Agreement with
Silicon Valley Bank with a committed revolving line of up to $5.0 million at an
interest rate equal to one-half percentage point above the Prime Rate but never
lower than seven percent. The line of credit requires that the Company maintains
the following financial covenants: on a monthly basis, a ratio of quick assets
to current liabilities less deferred revenue of at least 1.00; and a loss, based
on earnings before interest, taxes, depreciation and other non-cash amortization
expenses (EBITDA) of no greater than $2.0 million for the fiscal quarter ending
June 30, 2001, and of no greater than $500,000 for each fiscal quarter
thereafter, provided that the Company shall attain positive EBITDA for the
fiscal year ending March 31, 2002. As of June 30, 2001, the Company had drawn
$1.5 million against the line of credit. On July 26, 2001, the Company received
notice from Silicon Valley Bank that is was in default of the line of credit due
to failure to maintain an EBITDA loss of no greater then $2.0 million for the
fiscal quarter ended June 30, 2001. As a result of the default, the following
changes in the terms of the line of credit went into effect: the interest rate
will be increased to Prime Rate plus two percent per annum; a monthly collateral
handling fee of $1,000 will be charged; and the borrowing amount will be capped
at $1.5 million. On August 13, 2001, the Company received a waiver from Silicon
Valley Bank for its existing default.


                                       10

<PAGE>   11

                              STARBASE CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9. MANAGEMENT'S PLANS

The Company has incurred operating loses during the first quarter ended June 30,
2001 and as a result has negative working capital of $4.9 million. Management's
plans to address the situation include the following items: 24% reduction in
headcount completed in July 2001, which the Company estimated will reduce
operating expenses by $10.0 million annually; the Company is renegotiating its
line of credit with its bank to allow additional borrowing of $5.0 million with
no covenants; and the Company is evaluating raising additional financing of $15
million through either equity or debt. Ultimately the Company also plans to
achieve profitable operations by increasing revenues and keeping expense
contained.

10. NEW ACCOUNT STANDARDS

In June 2001, the Financial Accounting Standards Board (FASB) issued two new
pronouncements: Statement of Financial Accounting Standards (SFAS) No. 141,
Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets.
SFAS 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. Goodwill and certain
intangible assets will remain on the balance sheet and not be amortized. On an
annual basis, and when there is reason to suspect that their values have been
diminished or impaired, these assets must be tested for impairment, and
write-downs may be necessary. The Company is required to implement SFAS No. 141
on July 1, 2001 and it has not determined the impact, if any, that this
statement will have on its consolidate financial position or results of
operations. SFAS 142 is effective for fiscal years beginning after December 15,
2001 and changes the accounting for goodwill from an amortization method to an
impairment-only approach. Amortization of goodwill, including goodwill recorded
in past business combinations, will cease upon adoption of this statement. The
Company is currently evaluating the provisions of SFAS 142 and it has not
determined the impact, if any, that this statement will have on its consolidate
financial position or results of operations.



                                       11

<PAGE>   12

                                     PART I

                                     ITEM 2

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

The discussion in this Form 10-Q contains forward-looking statements that
involve risks and uncertainties. The statements that are not purely historical
are forward-looking statement within the meaning of the Private Securities
Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as
amended, and Sections 21E of the Securities Exchange Act of 1934, as amended. We
have based these forward-looking statements on currently available information
and our current beliefs, expectation and projections about future events,
including, among other things: successfully implementing our business strategy;
maintaining and expanding market acceptance of the products we offer; and our
ability to successfully compete in our marketplace. All forward-looking
statements included in this document are based on the information available to
the Company on the date hereof, and the Company assumes no obligation to update
any such forward-looking statements. Actual results could differ materially from
the results discussed herein. Factors that might cause or contribute to such
differences include, but are not limited to, those discussed under the caption
"Risk Factors" of this document and in the Company's other filing with the
Securities and Exchange Commission, including the Company's Annual Report for
the year ended March 31, 2001 on Form 10-K.

The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                            Three months ended
                                                 June 30,
                                           --------------------
                                            2001          2000
                                           -----          -----
<S>                                         <C>            <C>
Revenues:
  License                                   61.3%          72.6%
  Service                                   38.7           27.4
                                          ------          -----
    Total revenues                         100.0          100.0

Cost of revenues:
  License                                   13.1            1.5
  Service                                   15.1           13.1
  Amortization of intangibles               14.6            5.8
                                          ------          -----
    Total cost of revenues                  42.8           20.4
                                          ------          -----
Gross profit                                57.2           79.6

Operating expenses:
  Research and development                  36.9           25.9
  Sales and marketing                       71.6           55.7
  General and administrative                20.3           21.9
  Non-cash stock based compensation          1.6           15.9
  Amortization of intangibles               41.3           17.6
                                          ------          -----
    Total operating expenses               171.7          137.0
                                          ------          -----
Loss from operation                       (114.5)         (57.4)

Interest and other income                    0.8            2.2
                                          ------          -----
Loss before income taxes                  (113.7)         (55.2)
Provision for income taxes                   0.5            0.0
                                          ------          -----
Net loss                                  (114.2)%        (55.2)%
                                          ======          =====
</TABLE>


                                       12


<PAGE>   13

THREE MONTHS ENDED JUNE 30, 2001 AND 2000

REVENUES

Revenues were $12.1 million and $7.0 million for the three month periods ended
June 30, 2001 and 2000, respectively, representing an increase of $5.1 million
or 71%. International revenues accounted for less than 10% of total revenue in
the three months ended June 30, 2001 and 2000.

License - License revenues were $7.4 million and $5.1 million for the three
month periods ended June 30, 2001 and 2000, respectively, representing an
increase of $2.3 million or 44%. License revenues represented 61.3% and 72.6% of
total revenues for the three months ended June 30, 2001 and 2000, respectively.
The increase in license revenues was due to an increase in the Company's sales
force along with the new products available through the worldweb.net and
Technology Builders, Inc. acquisitions. The acquired products were eXpressroom,
CaliberRM, CaliberRBT, and CaliberRM Pro.

Service - Service revenues were $4.7 million and $1.9 million for the three
month periods ended June 30, 2001 and 2000, respectively, representing an
increase of $2.8 million or 142%. Service revenues represented 38.7% and 27.4%
of total revenues for the three months ended June 30, 2001 and 2000,
respectively. The increase in service revenues was due to an increase in the
Company's training and consulting organization along with an increase in the
number of software licenses sold with maintenance agreements.

COST OF REVENUES

License - License cost of revenues consists primarily of manufacturing and
related costs such as media, documentation, product assembly and royalties.
License cost of revenues was $1.6 million and $104,000 for the three month
periods ended June 30, 2001 and 2000, respectively, representing an increase of
$1.5 million or 1,416%. License cost of revenues as a percentage of license
revenue was 21.3% and 2.0% for the three months ended June 30, 2001 and 2000,
respectively. The increases were due to royalty expenses relating to the
acquired Caliber product line along with the lower margin on the third party
products (Mercury and Business Objects) which the Company now resells.

Service - Service cost of revenues consists of the costs associated with
performing training and consulting services. Service cost of revenues were $1.8
million and $925,000 for the three month periods ended June 30, 2001 and 2000,
respectively, representing and increase of $900,000 or 97%. Service cost of
revenues as a percentage of service revenue was 39.1% and 48.0% for the three
months ended June 30, 2001 and 2000, respectively. The absolute dollar increase
was due to the increases in the training and consulting organization along with
training costs related to the increase in personnel.

Amortization of intangibles - Amortization of intangibles consists of the
amortization of developed technology associated with the Premia, Genitor,
worldweb.net and Technology Builders acquisitions. Amortization of intangibles
was $1.8 million and $405,000 for the three months ended June 30, 2001 and 2000,
respectively, representing an increase of $1.4 million or 333%. Amortization of
Intangibles as a percentage of total revenue was 14.5% and 5.8% for the three
months ended June 30, 2001 and 2000, respectively. In light of current operating
results, the Company will continue to access the recoverability of intangible
assets in future periods.

OPERATING EXPENSES

Research and development expenses - Research and development expenses were $4.5
million and $1.8 million for the three months ended June 30, 2001 and 2000,
respectively, representing an increase of $2.7 million or 144%. The increase was
primarily related to an increase in salaries and related expenses associated
with an increase in software developers and quality assurance personnel as a
result of our acquisitions.

Sales and marketing - Sales and marketing expenses were $8.6 million and $3.9
million for the three months ended June 30, 2001 and 2000, respectively,
representing an increase of $4.7 million or 120%. The increase was primarily
related to the increase in salaries and related expenses incurred in expanding
our sales teams, through acquisitions and new hires from twelve to twenty-seven.

General and administrative - General and administrative expenses were $2.4
million and $1.5 million for the three months ended June 30, 2001 and 2000,
respectively, representing an increase of $900,000 million or 59%. The increase
was primarily due to an increase in salaries and related expenses incurred as a
result of our acquisitions along with the building of our infrastructure.


                                       13


<PAGE>   14

Non-cash stock based compensation - Non-cash stock based compensation was
$190,000 million and $1.1 million for the three months ended June 30, 2001 and
2000, respectively, representing a decrease of $900,000 million. Non-cash stock
based compensation expense represents fair market value of stock options and
warrants granted to non-employees of the Company's common stock at the date of
grant amortized over the vesting period.

Amortization of intangibles - Amortization of intangibles was $5.0 million and
$1.2 million for the three months ended June 30, 2001 and 2000, respectively.
This included amortization of goodwill, customer list and assembled workforce
associated with the SITE, Premia, ObjectShare, worldweb.net and Technology
Builders acquisitions. In light of current operating results, the Company will
continue to access the recoverability of intangible assets in future periods.

Interest and other income - Interest and other income was $97,000 and $157,000
for the three months ended June 30, 2001 and 2000, respectively, representing a
decrease of $60,000. The decrease was due to lower interest income resulting
from less cash being available to invest.

Provision for income taxes - Provision for income taxes was $57,000 and $1,000
for the three months ended June 30, 2001 and 2000, respectively, representing an
increase of $56,000. This represents the minimum amount required for state
taxes. The Company has not recorded a current or deferred provision for deferral
income taxes for any period to date, as a result of losses incurred since its
inception.

INFLATION

Inflation has not had a significant effect on our consolidated results of
operations or financial position for the three month periods ended June 30, 2001
and 2000.

LIQUIDITY AND CAPITAL RESOURCES

We have funded our business, to date, primarily from the issuance of equity
securities. Cash and cash equivalents as of June 30, 2001 were $6,656,000 and
$14,075,000 as of March 31, 2001. At June 30, 2001 the Company had negative
working capital of $4.9 million, compared to positive working capital of $1.4
million at March 31, 2001.

Net cash used in operating activities was $8.7 million and $1.3 million for the
three months ended June 30, 2001 and 2000, respectively. The increase was
primarily due to an increased loss from operations of $9.9 million and a
decrease in accounts payable and accrued liabilities of $5.5 million, offset by
an increase in depreciation and amortization of $5.7 million and a decrease in
accounts receivable of $2.9 million.

Net cash used in investing activities was $290,000 and $131,000 for the three
months ended June 30, 2001 and 2000, respectively. The increase was primarily
due to an increase in capital expenditures.

Net cash provided from financing activities was $1.7 million and $503,000 for
the three months ended June 30, 2001 and 2000, respectively. For the three
months ended June 30, 2001, exercise of options provided $263,000.

The Company has incurred operating loses during the first quarter ended June 30,
2001 and as a result has negative working capital of $4.9 million. Management's
plans to address the situation include the following items: 24% reduction in
headcount completed in July 2001, which the Company estimated will reduce
operating expenses by $10.0 million annually; the Company is renegotiating its
line of credit with its bank to allow additional borrowing of $5.0 million with
no covenants; and the Company is evaluating raising additional financing of $15
million through either equity or debt. Ultimately the Company also plans to
achieve profitable operations by increasing revenues and keeping expense
contained.

The Company believes that our existing cash balances and cash equivalents and
cash from operations will be sufficient to finance our operations through at
least the next twelve months. If additional financing is needed, there can be no
assurance that such financing will be available to us on commercially reasonable
term or at all.

The Company warrants products against defects for 90 days and has a policy
permitting the return of products within 30 days. Warranty costs and returns,
which are not significant, have historically been within management's
expectations. The Company has reserved approximately $2.5 million at June 30,
2001 for future returns and other collection issues, an increase of $400,000
from March 31, 2001.


                                       14

<PAGE>   15
NEW ACCOUNTING STANDARDS

In June 2001, the Financial Accounting Standards Board (FASB) issued two new
pronouncements: Statement of Financial Accounting Standards (SFAS) No. 141,
Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets.
SFAS 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. Goodwill and certain
intangible assets will remain on the balance sheet and not be amortized. On an
annual basis, and when there is reason to suspect that their values have been
diminished or impaired, these assets must be tested for impairment, and
write-downs may be necessary. The Company is required to implement SFAS No. 141
on July 1, 2001 and it has not determined the impact, if any, that this
statement will have on its consolidate financial position or results of
operations. SFAS 142 is effective for fiscal years beginning after December 15,
2001 and changes the accounting for goodwill from an amortization method to an
impairment-only approach. Amortization of goodwill, including goodwill recorded
in past business combinations, will cease upon adoption of this statement. The
Company is currently evaluating the provisions of SFAS 142 and it has not
determined the impact, if any, that this statement will have on its consolidate
financial position or results of operations.

RISK FACTORS

Our business is subject to a variety of risks and special considerations. As a
result, our prospective investors should carefully consider the risks described
below and the other information in this document before deciding to invest in
the shares.

Our business, financial condition and results of operations could be adversely
affected by any of the following risks. If we are adversely affected by such
risks, then the trading price of our common stock could decline, and you could
lose all or part of your investment.

OUR QUARTERLY REVENUES AND OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, WHICH
MAY CAUSE THE PRICE OF OUR COMMON STOCK TO DECLINE

Our revenues and operating results for any quarter are not necessarily
indicative of results to be expected in future periods. We expect our common
stock price to vary with our operating results and, consequently, any adverse
fluctuations in our operating results could have an adverse effect on our stock
price. Our operating results have in the past been, and will continue to be,
subject to quarterly fluctuations as a result of a number of factors. These
factors include:

     o  the size and timing of customer orders and the recognition of revenue
        from those orders;

     o  changes in budgets or purchasing patterns of our customers;

     o  increased pricing pressure from competitors in the software and Internet
        industries;

     o  the introduction and market acceptance of new technologies and
        standards;

     o  the integration of people, operations, and products from acquired
        businesses and technologies;

     o  changes in operating expenses and personnel; and

     o  changes in general and specific economic conditions in the software and
        Internet industries.

WE HAVE A HISTORY OF LOSSES AND EXPECT TO INCUR FUTURE LOSSES

Since our inception, we have had a history of losses and as of June 30, 2001, we
had an accumulated deficit of $88,622,000. Further, our cash requirements to run
our business have been and will continue to be significant. In the past, we have
had negative cash flow from operations. We anticipate incurring additional
losses until we can successfully develop, market and distribute our products.
Developing software products is difficult and time consuming and requires the
coordinated participation of various technical and marketing personnel and, at
times, independent third-party suppliers. This development process often
encounters unanticipated delays and expenses. The likelihood of the success of
our business must be considered in light of the problems, expenses,
difficulties, complications and unforeseen delays frequently encountered in
connection with the development of new software technologies. Further, our
ability to achieve or sustain our revenue or profit goals depends on a number of
factors outside of our control, including the extent to which:

     o  there is market acceptance of commercial services utilizing our
        products;

     o  our competitors announce and develop competing products or significantly
        lower their prices; and

     o  our customers promote our product.

We may not be able to achieve our goals and become profitable.

                                       15

<PAGE>   16

WE RELY HEAVILY ON SALES OF STARTEAM AND IF IT DOES NOT SUSTAIN OR INCREASE
MARKET ACCEPTANCE, WE ARE LIKELY TO EXPERIENCE LARGER LOSSES

For the three months ended June 30, 2001, we generated 50% of our total revenues
and 67% of our licensing revenues from licenses of our StarTeam product line. We
believe that revenues generated from StarTeam will continue to account for a
large percentage of our revenues for the foreseeable future. A decline in the
price of, or demand for, StarTeam would have a material adverse effect on our
business, operating results and financial condition. The following events may
reduce the demand for StarTeam:

     o  competition from other products;

     o  flaws in our software products or incompatibility with third-party
        hardware or software products;

     o  negative publicity or evaluation of our company; or

     o  obsolescence of the hardware platforms or software environments in which
        our systems run.

In addition, our future financial performance will depend upon successfully
developing and selling enhanced versions of StarTeam. If we fail to deliver
product enhancements or new products for our customers it will be difficult for
us to succeed.

WE FACE INTENSE COMPETITION FOR EBUSINESS SOFTWARE, WHICH COULD MAKE IT
DIFFICULT TO ACQUIRE AND RETAIN CUSTOMERS

The eBusiness software market is intensely competitive and rapidly evolving. Our
customer's requirements and the technology available to satisfy those
requirements continually change. We expect competition to intensify in the
future. Our principal competitors include in-house development efforts by
potential customers or partners, vendors of code management software, and
vendors of content management software. Many of these companies have longer
operating histories and significantly greater financial, technical, marketing
and other resources than we do. Many of these companies can also leverage
extensive customer bases and adopt aggressive pricing policies to gain market
share. Potential competitors may bundle their products in a manner that may
discourage users from purchasing our products. In addition, it is possible that
new competitors or alliances among competitors may emerge and rapidly acquire
significant market share.

Competitive pressures may make it difficult for us to acquire and retain
customers and may require us to reduce the price of our software. If we fail to
compete successfully against current or future competitors, we could lose
customers and our business, operating results and financial condition would
suffer.

THE SALES CYCLE FOR OUR PRODUCTS CAN BE LONG AND MAY HARM OUR OPERATING RESULTS

The period of time between initial customer contact and an actual sales order
may span several months. This long sales cycle increases the risk that we will
not forecast our revenue accurately and adjust our expenditures accordingly. The
longer the sales cycle, the more likely a customer is to decide not to purchase
our products or to scale down its order of our products for various reasons,
including changes in our customers' budgets and purchasing priorities and
actions by competitors, including introduction of new products and price
reductions. In addition, we often must provide a significant level of education
to our prospective customers regarding the use and benefit of our products,
which may cause additional delays during the evaluation process.

WE MUST ATTRACT AND RETAIN QUALIFIED PERSONNEL, WHICH IS PARTICULARLY DIFFICULT
FOR US BECAUSE WE COMPETE WITH OTHER SOFTWARE COMPANIES WHERE COMPETITION FOR
PERSONNEL IS EXTREMELY INTENSE

Our success depends on our ability to attract and retain qualified, experienced
employees. We compete in a relatively new market and there are a limited number
of people who have acquired the skills needed to provide the services that our
clients demand. We compete for experienced engineering, sales and consulting
personnel with Internet professional services firms, software vendors,
consulting firms and professional services companies. Since we may issue options
as compensation to recruit employees, the volatility of the market price of our
common stock may make it difficult for us to attract and retain highly qualified
employees.


                                       16

<PAGE>   17

In addition, our customers that license our software generally engage our
professional services organization to assist with support, training, consulting
and implementation of their Web solutions. While we have recently established
relationships with some third-party service providers, we continue to be the
primary provider of these services. Competition for qualified services personnel
with the appropriate Internet specific knowledge is intense. We could also
experience deterioration in service levels or decreased customer satisfaction.
Any of these events could disrupt our business and have a materially adverse
effect on our business, operating results and financial condition.

IF WE DO NOT DEVELOP OUR INDIRECT SALES CHANNEL, OUR REVENUES MAY DECLINE

Domestic and international resellers and original equipment manufacturers may be
able to reach new customers more quickly or more effectively than our direct
sales force. Although we are currently investing and plan to continue to invest
significant resources to develop these indirect sales channels, we may not
succeed in establishing a channel that can market our products effectively and
provide timely and cost-effective customer support and services. In addition, we
may not be able to manage conflicts across our various sales channels, and our
focus on increasing sales through our indirect channel may divert management
resources and attention from our direct sales efforts.

IF WE DO NOT CONTINUE TO RECEIVE REPEAT BUSINESS FROM EXISTING CUSTOMERS, OUR
REVENUE WILL SUFFER

We generate a significant amount of our software license revenues from existing
customers. Most of our current customers initially purchase a limited number of
licenses as they implement and adopt our products. Even if the customer
successfully uses our products, customers may not purchase additional licenses
to expand the use of our products. Purchases of expanded licenses by these
customers will depend on their success in deploying our products, their
satisfaction with our products and support services and their use of competitive
alternatives. A customer's decision to widely deploy our products and purchase
additional licenses may also be affected by factors that are outside of our
control or which are not related to our products or services. In addition, as we
deploy new versions of our products or introduce new products, our current
customers may not require the functionality of our new products and may decide
not to license these products.

OUR PRODUCTS COULD BECOME OBSOLETE IF WE ARE UNABLE TO ADAPT TO THE RAPID
CHANGES IN THE EBUSINESS MARKET

Rapidly changing Internet technology and standards may impede market acceptance
of our products. The continued success of our products will require us to
develop and introduce new technologies and to offer functionality that we do not
currently provide. We may not be able to quickly adapt our products to new
Internet technology. If Internet technologies emerge that are incompatible with
StarTeam or other new Internet products that we develop, our products may become
obsolete and existing and potential new customers may seek alternatives. The
following factors characterize the markets for our products:

     o  rapid technological advances;

     o  evolving industry standards, including operating systems;

     o  changes in end-user requirements; and

     o  frequent new product introductions and enhancements.

To succeed, we will need to enhance our current products and develop new
products on a timely basis to stay current with developments related to Internet
technology and to satisfy the increasingly sophisticated requirements of our
customers. Internet commerce technology, particularly eBusiness software
technology, is complex and new products and product enhancements can require
long development and testing periods. Any delays in developing and releasing
enhanced or new products could cause us to lose market share and have a material
adverse effect on our business, operating results and financial condition.

IF WE FAIL TO ESTABLISH AND MAINTAIN STRATEGIC RELATIONSHIPS, THE MARKET
ACCEPTANCE OF OUR PRODUCTS AND OUR FINANCIAL PERFORMANCE MAY SUFFER

To offer products and services to a larger customer base our direct sales force
depends on strategic partnerships and marketing alliances to obtain customer
leads, referrals and distribution. If we are unable to maintain our existing
strategic relationships or fail to enter into additional strategic
relationships, our ability to increase our sales will be


                                       17

<PAGE>   18

harmed. We would also lose anticipated customer introductions and co-marketing
benefits. In addition, our strategic partners may not regard us as significant
for their own businesses. Therefore, they could reduce their commitment to us or
terminate their relationships with us, pursue other partnerships or
relationships, or attempt to develop or acquire products or services that
compete with our products and services. Even if we succeed in establishing these
relationships, they may not result in additional customers or revenues.

WE MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE OUR RECENT ACQUISITION OF
WORLDWEB.NET, INC.

We acquired worldweb.net, Inc. on February 20, 2001. The success of this
acquisition will depend on our ability to:

     o  successfully integrate and manage worldweb.net's technology and
        operations;

     o  retain worldweb.net's software developers;

     o  develop and market new products and enhance existing products based on
        worldweb.net's technology; and

     o  retain worldweb.net's customer base.

Our failure to successfully address the risks associated with our acquisition of
worldweb.net could hurt our ability to develop and market products based on
worldweb.net's technology.

WE MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE OUR RECENT ACQUISITION OF
TECHNOLOGY BUILDERS, INC.

We acquired Technology Builders, Inc. on February 23, 2001. The success of this
acquisition will depend on our ability to:

     o  successfully integrate and manage Technology Builders' technology and
        operations;

     o  retain Technology Builders' software developers;

     o  develop and market new products and enhance existing products based on
        Technology Builders' technology; and

     o  retain Technology Builders' customer base.

Our failure to successfully address the risks associated with our acquisition of
Technology Builders could hurt our ability to develop and market products based
on Technology Builders' technology.

WE MAY ACQUIRE ADDITIONAL TECHNOLOGIES OR COMPANIES IN THE FUTURE AND THESE
ACQUISITIONS COULD RESULT IN DILUTION TO OUR STOCKHOLDERS AND/OR DISRUPT OUR
BUSINESS

We may acquire additional technologies or companies in the future through a
merger, acquisition, joint venture or other structure. We may not be able to
identify, acquire, profitably manage or successfully integrate any acquired
business without substantial expense, delay or other operational or financial
problems. Entering into an acquisition entails many risks, including:

     o  diversion of management's attention from other business concerns;

     o  failure to integrate and manage the combined company's business;

     o  potential loss of key employees, including software developers and other
        information technology, or IT, professionals, from either our business
        or an acquired business;

     o  dilution to our existing stockholders as a result of issuing common
        stock or other securities; and

     o  assumption of liabilities of an acquired company.

Any of these risks could significantly harm our business, operating results or
financial condition or result in dilution to our stockholders.


                                       18

<PAGE>   19

WE HAVE LIMITED EXPERIENCE CONDUCTING OPERATIONS INTERNATIONALLY, WHICH MAY MAKE
OVERSEAS EXPANSION MORE DIFFICULT AND COSTLY

To date, we have derived most of our revenues from sales to North American
customers. We plan to expand our international operations in the future. There
are many barriers and risks to competing successfully in the international
marketplace, including:

     o  costs of customizing products for foreign countries;

     o  foreign currency risks;

     o  dependence on local vendors;

     o  compliance with multiple, conflicting and changing governmental laws and
        regulations;

     o  longer sales cycles; and

     o  import and export restrictions and tariffs.

As a result of these competitive barriers to entry and risks, we cannot assure
you that we will be able to successfully market, sell and deliver our products
and services in international markets.

WE MAY FAIL TO EFFECTIVELY MANAGE AND SUPPORT OUR ANTICIPATED GROWTH IN
OPERATIONS

To succeed in the implementation of our business strategy, we must rapidly
execute our sales strategy, further develop and enhance products and expand our
service capabilities. To manage anticipated growth resulting from this strategy,
we must:

     o  continue to implement and improve our operational, financial and
        management information systems;

     o  hire, train and retain qualified personnel;

     o  continue to expand and upgrade core technologies; and

     o  effectively manage multiple relationships with our customers,
        applications developers and other third parties.

If we fail to manage and support our growth as planned, our business strategy
and the anticipated growth in revenues and our profitability may not be
achieved.

WE MAY BE UNABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS

Our success depends significantly on our ability to protect our proprietary
technologies. If we are not adequately protected, our competitors could use the
intellectual property that we have developed to enhance their products and
services to our detriment. We rely on a combination of trade secrets,
confidentiality provisions and other contractual provisions to protect our
proprietary rights, but these legal means provide only limited protection.

OUR PRODUCTS USE TECHNOLOGY THAT MAY INFRINGE ON THE PROPRIETARY RIGHTS OF THIRD
PARTIES, WHICH MAY EXPOSE US TO LITIGATION AND OTHER COSTS

As the number of entrants into our market increases, the possibility of a patent
infringement claim against us grows. For example, we inadvertently may be
infringing a patent of which we are unaware. In addition, because patent
applications can take many years to issue, there may be a patent application now
pending of which we are unaware, which will cause us to be infringing such
patent when it issues in the future. To address any patent infringement claims,
we may have to enter into royalty or licensing agreements on commercial terms
that are not favorable to us. A successful claim of product infringement against
us, or our failure to license the infringed or similar technology, may cause us
to delay or cancel shipment of our products or result in significant costs. This
could hurt our revenues and profitability and result in a material adverse
effect on our business, operating results and financial condition. In addition,
any infringement claims, with or without merit, would be time-consuming and
expensive to litigate or settle and could divert management attention from
administering our core business.

OUR FAILURE TO DELIVER DEFECT-FREE SOFTWARE COULD RESULT IN GREATER LOSSES AND
HARMFUL PUBLICITY

Our software products are complex and may contain defects or failures. Moreover,
third parties may develop and spread computer viruses that may damage the
functionality of our software products. Any of these events may result in
delayed or lost revenues, loss of market share, failure to achieve market
acceptance, reduced customer satisfaction, diversion of development resources,
product liability or warranty claims against us, and damage to our reputation.
Although we maintain liability insurance, this insurance coverage may not be
adequate to cover losses from claims against us. Further, defending a product
liability lawsuit, regardless of its merits, could harm our business because it
entails substantial expense and diverts the time and attention of key management
personnel.


                                       19

<PAGE>   20

OUR PERFORMANCE WILL DEPEND ON THE GROWTH OF THE INTERNET FOR EBUSINESS

Our future success depends heavily on the Internet being accepted and widely
used for commerce. If Internet commerce does not continue to grow or grows more
slowly than expected, our business, operating results and financial condition
would be materially adversely affected. Consumers and businesses may reject the
Internet as a viable commercial medium for a number of reasons, including
potentially inadequate network infrastructure, slow development of enabling
technologies or insufficient commercial support. The Internet infrastructure may
not be able to support the demands placed on it by increased Internet usage and
bandwidth requirements. Enterprises that have already invested substantial
resources in other methods of conducting eBusiness may be reluctant or slow to
adopt a new approach that may replace, limit or compete with their existing
systems. Any of these factors could inhibit the growth of eBusiness solutions
and in particular the market's acceptance of our products and services. In
addition, delays in the development or adoption of new standards and protocols
required to handle increased levels of Internet activity, or increased
government regulation, could cause the Internet to lose its viability as a
commercial medium. Even if the required infrastructure, standards, protocols or
complementary products, services or facilities are developed, we may incur
substantial expenses adapting our solutions to changing or emerging
technologies.

THERE IS SUBSTANTIAL RISK THAT FUTURE REGULATIONS COULD BE ENACTED THAT EITHER
DIRECTLY RESTRICT OUR BUSINESS OR INDIRECTLY IMPACT OUR BUSINESS BY LIMITING THE
GROWTH OF INTERNET COMMERCE

As Internet commerce evolves, we expect that federal, state or foreign agencies
will adopt new legislation or regulations covering issues such as user privacy,
pricing, content and quality of products and services. If enacted, these laws,
rules or regulations could directly or indirectly harm us to the extent that
they impact our business, customers and potential customers. We cannot predict
if or how any future legislation or regulations would impact our business.
Although many of these regulations may not apply to our business directly, we
expect that laws regulating or affecting commerce on the Internet could
indirectly harm our business.

WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS

We incurred operating loses during the first quarter ended June 30, 2001 and as
a result has negative working capital of $4.9 million. Management's plans to
address the situation include the following items: 24% reduction in headcount
completed in July 2001, which we estimated will reduce operating expenses by
$10.0 million annually; we are renegotiating our line of credit with our bank to
allow additional borrowing of $5.0 million with no covenants; and we are
evaluating raising additional financing of $15 million through either equity or
debt. Ultimately we also plan to achieve profitable operations by increasing
revenues and keeping expense contained.

We expect cash on hand, cash equivalents, our line of credit and cash from
future operations to meet our current working capital and capital expenditure
needs. We may need to raise additional funds for other purposes and we cannot be
certain that we would be able to obtain additional financing on favorable terms,
if at all. If we cannot raise necessary funds on acceptable terms, we may not be
able to develop or enhance our products, take advantage of future opportunities
or respond to competitive pressures or unanticipated capital requirements, which
could have a material adverse effect on our business, operating results and
financial condition.


                                       20

<PAGE>   21

                                     ITEM 3

           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

It is our current policy to not enter into derivative financial instruments. We
do not currently have any significant foreign currency exposure since we do not
transact business in foreign currencies. Due to this, we do not have any
significant overall currency exposure at June 30, 2001.

We are exposed to a number of market risks in the ordinary course of business.
These risks, which include interest rate risk, foreign currency exchange risk
and commodity price risk, arise in the normal course of business rather than
from trading. We have examined our exposures to these risks and concluded that
none of our exposures in these areas is material to fair values, cash flows or
earnings. We regularly review these risks to determine if we should enter into
active strategies, such as hedging, to help manage the risks. At the present
time, we do not have any hedging programs in place and we are not trading in any
financial or derivative instruments.

We currently do not have any material debt, so we do not have interest rate risk
from a liability perspective. We do have a significant amount of cash and
short-term investments with maturities less than three months. This cash
portfolio exposes us to interest rate risk as short-term investment rates can be
volatile. Given the short-term maturity structure of our investment portfolio,
and the high-grade investment quality of our portfolio, we believe that we are
not subject to principal fluctuations and the effective interest rate of our
portfolio tracks closely to various short-term money market interest rate
benchmarks.


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<PAGE>   22

                                     PART II

                                     ITEM 6

                        EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

  Exhibit                                                               Ref./
  Number                    Description Of Document                     Page
  -------                   -----------------------                     -----

    None


(b) Reports on Form 8-K

    None.



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<PAGE>   23

                                  SIGNATURES


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


                                               STARBASE CORPORATION
                                               (Registrant)

August 14, 2001                                /s/  Douglas S. Norman
----------------------                         ----------------------------
Date                                                Douglas S. Norman
                                                    Chief Financial Officer




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