<PAGE>
================================================================================


                                  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 December 31, 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 900
          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 December 31, 2001: Common Stock:   75,160,281
                                                      Preferred Stock:         0


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

<PAGE>

                              STARBASE CORPORATION

                                TABLE OF CONTENTS



<TABLE>
<S>                                                                                            <C>
PART I.    FINANCIAL INFORMATION

   ITEM 1. Financial Statements

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

           Consolidated Statements of Operations (Unaudited) for the three and nine month
           periods ended December 31, 2001 and 2000                                             4

           Consolidated Statements of Comprehensive Operations (Unaudited) for the three
           and nine month periods ended December 31, 2001 and 2000                              5

           Consolidated Statements of Cash Flows (Unaudited) for the three and nine month
           periods ended December 31, 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                                                           14

   ITEM 3. Quantitative and Qualitative Disclosures about Market Risk                          26

PART II.   OTHER INFORMATION

   ITEM 6. Exhibits and Reports on Form 8-K                                                    27

Signatures                                                                                     28
</TABLE>




                                       2
<PAGE>

                                  PART I ITEM 1
                              FINANCIAL STATEMENTS

                              STARBASE CORPORATION
                           CONSOLIDATED BALANCE SHEETS
                        (in thousands, except share data)


<TABLE>
<CAPTION>
                                                                      December 31,    March 31,
                                                                          2001           2001
                                                                      ------------    ---------
                                                                      (Unaudited)
<S>                                                                    <C>            <C>
ASSETS
Current Assets:
  Cash and cash equivalents                                            $   2,955      $  14,075
  Restricted cash                                                             62            257
  Marketable securities                                                        7              3
  Accounts receivable, net of allowances of $2,180 at
    December 31, 2001 and $2,166 at March 31, 2001                         9,530         16,148
  Notes and other receivables, net of allowances of
    $760 at March 31, 2001                                                   162            200
  Prepaid expenses and other assets                                          999          1,183
                                                                       ---------      ---------
    Total current assets                                                  13,715         31,866

Property and equipment, net                                                6,748          7,953
Intangible assets, net                                                    53,641        107,628
Note receivable from officer                                                 108            104
Other non-current assets                                                     906          1,487
                                                                       ---------      ---------
Total assets                                                           $  75,118      $ 149,038
                                                                       =========      =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Accounts payable                                                     $   5,492      $  11,104
  Accrued compensation                                                     3,101          3,381
  Other accrued liabilities                                                4,467          6,706
  Deferred revenue                                                         7,806          8,950
  Current portion of long-term obligations                                   295            344
                                                                       ---------      ---------
    Total current liabilities                                             21,161         30,485

Long-term liabilities:
  Long-term obligations, less current portion                                 62            238
  Convertible debentures                                                   2,400             --
  Long-term deferred revenue                                                  --            121
                                                                       ---------      ---------
    Total long-term liabilities                                            2,462            359
                                                                       ---------      ---------
    Total liabilities                                                     23,623         30,844

Commitments and contingencies

Stockholders' equity:
  Preferred stock, $.01 par value; 10,000,000 shares
    authorized, none issued and outstanding at
    December 31, 2001 and March 31, 2001                                      --             --
  Common stock, $.01 par value; 150,000,000 authorized; 75,160,281
    and 69,386,443 shares issued and outstanding at December 31,
    2001 and March 31, 2001                                                  752            694
  Additional paid-in capital                                             199,023        193,321
  Notes receivable                                                           (36)          (219)
  Deferred non-cash compensation                                            (463)          (662)
  Accumulated deficit                                                   (147,665)       (74,857)
  Accumulated other comprehensive loss                                      (116)           (83)
                                                                       ---------      ---------
    Net stockholders' equity                                              51,495        118,194
                                                                       ---------      ---------
Total liabilities and stockholders' equity                             $  75,118      $ 149,038
                                                                       =========      =========
</TABLE>


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




                                       3
<PAGE>

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


<TABLE>
<CAPTION>
                                                                      Three months ended      Nine months ended
                                                                          December 31,           December 31,
                                                                     --------------------    --------------------
                                                                       2001        2000        2001        2000
                                                                     --------    --------    --------    --------
                                                                          (Unaudited)             (Unaudited)
<S>                                                                  <C>         <C>         <C>         <C>
Revenues:
  License                                                            $  6,477    $  7,124    $ 19,983    $ 18,650
  Service                                                               4,411       2,416      13,487       6,376
                                                                     --------    --------    --------    --------
    Total revenues                                                     10,888       9,540      33,470      25,026

Cost of Revenues:
  License                                                               1,657         279       3,744         579
  Service                                                               1,324       1,067       4,841       3,037
  Amortization and write-down of intangibles                            1,290         503       7,553       1,412
                                                                     --------    --------    --------    --------
    Total cost of revenues                                              4,271       1,849      16,138       5,028
                                                                     --------    --------    --------    --------
Gross margin                                                            6,617       7,691      17,332      19,998

Operating Expenses:
  Research and development                                              3,451       2,400      11,767       6,419
  Sales and marketing                                                   5,948       5,440      22,294      13,983
  General and administrative                                            1,829       1,689       6,413       5,210
  Non-cash equity based compensation                                      841         101       1,179       1,385
  Amortization and write-down of intangibles                            3,320       1,316      46,828       3,872
                                                                     --------    --------    --------    --------
    Total operating expenses                                           15,389      10,946      88,481      30,869
                                                                     --------    --------    --------    --------
  Operating loss                                                       (8,772)     (3,255)    (71,149)    (10,871)
  Interest and other income (expense)                                  (1,670)        372      (1,564)        715
                                                                     --------    --------    --------    --------
Loss before income taxes                                              (10,442)     (2,883)    (72,713)    (10,156)
  Provision for income taxes                                                8          21          95          22
                                                                     --------    --------    --------    --------
Net loss                                                             $(10,450)   $ (2,904)   $(72,808)   $(10,178)
                                                                     ========    ========    ========    ========
Per share data:
  Basic and diluted net loss per common share                        $  (0.15)   $  (0.06)   $  (1.06)   $  (0.22)
                                                                     ========    ========    ========    ========

  Basic and diluted weighted average common shares outstanding         69,534      48,913      68,663      46,500
                                                                     ========    ========    ========    ========
</TABLE>


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




                                       4
<PAGE>

                              STARBASE CORPORATION
               CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
                                 (in thousands)



<TABLE>
<CAPTION>
                                                             Three months ended      Nine months ended
                                                                 December 31,           December 31,
                                                            --------------------    --------------------
                                                              2001        2000        2001        2000
                                                            --------    --------    --------    --------
                                                                 (Unaudited)            (Unaudited)
<S>                                                         <C>         <C>         <C>         <C>
Net loss                                                    $(10,450)   $ (2,904)   $(72,808)   $(10,178)
Other comprehensive loss:
  Foreign currency translation adjustments                         1          --         (34)         --
  Unrealized gain (loss) on available for sale securities          3          (8)          3         (10)
                                                            --------    --------    --------    --------
Total comprehensive loss                                    $(10,446)   $ (2,912)   $(72,839)   $(10,188)
                                                            ========    ========    ========    ========
</TABLE>



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




                                       5
<PAGE>

                              STARBASE CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)


<TABLE>
<CAPTION>
                                                                                       Nine months ended
                                                                                          December 31,
                                                                                     ----------------------
                                                                                       2001          2000
                                                                                     --------      --------
                                                                                          (Unaudited)
<S>                                                                                  <C>           <C>
Cash Flows from Operating Activities:
  Net loss                                                                           $(72,808)     $(10,178)
  Adjustments to reconcile net loss to net cash used in operating activities:
    Depreciation and amortization                                                      20,402         5,837
    Write-down of intangibles                                                          36,300            --
    Provision for doubtful accounts                                                       753           365
    Non-cash equity based compensation                                                    (69)        1,385
    Non-cash equity based compensation related to warrant issuances                     1,248            --
    Non-cash interest expense                                                           1,647            --
    Changes in operating assets and liabilities, net of effects of acquisitions:
      Accounts receivable                                                               5,865          (957)
      Notes and other receivables                                                          38        (1,017)
      Prepaid expenses and other assets                                                   438          (244)
      Other non-current assets                                                             63             2
      Accounts payable and accrued liabilities                                         (6,930)          280
      Deferred revenue                                                                 (1,265)          479
                                                                                     --------      --------
Net cash used in operations                                                           (14,318)       (4,048)

Cash Flows from Investing Activities:
  Cash paid for acquisitions, net of cash acquired                                         --            30
  Decrease in restricted cash                                                           1,164            39
  Capital expenditures                                                                 (1,040)       (2,313)
                                                                                     --------      --------
Net cash provided by (used in) investing activities                                       124        (2,244)

Cash Flows from Financing Activities:
  Payment of line of credit                                                            (1,500)           --
  Proceeds from issuance of common stock:
    From private placements                                                                --        17,500
    Exercise of options                                                                   700           773
    Exercise of warrants                                                                   --         1,961
  Proceeds from sale of convertible debentures                                          3,000            --
  Proceeds from debt financing                                                          1,500            --
  Payment of financing related costs                                                     (190)       (1,542)
  Payments on capitalized lease obligations                                              (400)         (254)
                                                                                     --------      --------
Net cash provided by financing activities                                               3,110        18,438
Effect of exchange rate changes on cash and cash equivalents                              (36)           --
                                                                                     --------      --------
Net increase (decrease) in cash and cash equivalents                                  (11,120)       12,146
Cash and cash equivalents, beginning of period                                         14,075        11,448
                                                                                     --------      --------
Cash and cash equivalents, end of period                                             $  2,955      $ 23,594
                                                                                     ========      ========
Supplemental Cash Flow Information:
  Interest paid                                                                      $     58      $     30
                                                                                     ========      ========
  Income taxes paid                                                                  $     99      $     22
                                                                                     ========      ========
Non-cash investing and financing transactions:
  Capitalized lease and insurance financing                                          $    254      $    171
                                                                                     ========      ========
  Common stock issued in satisfaction of liabilities                                 $  1,767      $     --
                                                                                     ========      ========
  Convertible debentures and interest converted to common stock                      $    754      $     --
                                                                                     ========      ========
  Convertible debentures issued for financing related costs                          $    150      $     --
                                                                                     ========      ========
  Change in unrealized gain (loss) on securities available for sale                  $      3      $    (10)
                                                                                     ========      ========
</TABLE>


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




                                       6
<PAGE>

                              STARBASE CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1.  NATURE OF OPERATIONS AND BASIS OF PRESENTATION

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.

The unaudited interim consolidated financial statements as of December 31, 2001
and for the three and nine months ended December 31, 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 periods presented. The results of operations
for the three and nine months ended December 31, 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.

During the quarter ended September 30, 2001, the Company's operating losses,
negative cash flows and negative working capital raised issues as to the
Company's ability to continue as a going concern for a reasonable amount of
time. Subsequently, we raised $3.0 million through the issuance of convertible
debentures in November and December 2001 and reduced our headcount by 11% in
October 2001 and 12% in January 2002. On January 2, 2002, we announced the
appointment of James Harrer as our President and Chief Operating Officer.
Management believes that these actions together with anticipated revenues from
the sale of the Company's products will enable the Company to continue as a
going concern for at least the next twelve months. However, if the Company is
unable to achieve its forecasted operating results, additional financing may be
needed. If additional financing is needed, there can be no assurance that such
financing will be available to us on commercially reasonable terms or at all.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

REVENUE RECOGNITION

Revenues from sales of software licenses, which generally do not contain
multiple elements, are recognized upon shipment of related products, if the
requirements of Statement of Position (SOP) 97-2, Software Revenue Recognition,
as amended, are met. If the requirements of SOP 97-2, including evidence of an
arrangement, delivery, fixed or determinable fee, collectibility, or
vendor-specific objective evidence about the value of an element are not met at
the date of shipment, revenue recognition is deferred until such elements are
known or resolved. Software maintenance revenue is deferred and recognized
ratably over the contractual maintenance period, generally one year. Maintenance
contracts greater than one year are recorded as long-term deferred revenue.
Revenue from training and consulting is recognized when the related services
have been performed.

IMPAIRMENT OF LONG-LIVED ASSETS

The Company accounts for impairment and disposition of long-lived assets in
accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of. In accordance with SFAS No. 121,
long-lived assets to be held are reviewed for events or changes in circumstances
which indicate that their carrying value may not be recoverable. The Company
periodically reviews the carrying value of long-lived assets to determine
whether or not an impairment to such value has occurred, and has determined,
based on its most recent assessment, that there was an impairment during the
quarter ended September 30, 2001 as discussed in Note 9 but no further
impairment during the quarter ended December 31, 2001.




                                       7
<PAGE>

                              STARBASE CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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 the 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 in the future.

Potentially dilutive securities, which consist of options to purchase 8,914,054
shares of common stock at prices ranging from $0.47 to $14.63 per share,
warrants to purchase 3,670,862 shares of common stock at prices ranging from
$0.65 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 and nine month periods ended December
31, 2001. Potentially dilutive securities, which consist of options to purchase
4,816,172 shares of common stock at prices ranging from $0.63 to $13.07 per
share, warrants to purchase 906,246 shares of common stock at prices raging 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 and nine month periods ended December
31, 2000.




                                       8
<PAGE>

                              STARBASE CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



3.  COMPOSITION OF CERTAIN BALANCE SHEET CAPTIONS

<TABLE>
<CAPTION>
      (In thousands)                                    December 31,    March 31,
                                                            2001          2001
                                                        ------------    ---------
                                                         (Unaudited)
      <S>                                                <C>            <C>
      Property and equipment:

      Computer hardware                                  $   2,795      $   2,498
      Furniture and fixtures                                 2,107          2,000
      Computer software                                      3,774          3,394
      Motor vehicle                                             32             32
      Leasehold improvements                                 1,770          1,735
                                                         ---------      ---------
                                                            10,478          9,659
      Less accumulated depreciation and amortization        (3,730)        (1,706)
                                                         ---------      ---------
                                                         $   6,748      $   7,953
                                                         =========      =========

      Intangible assets:

      Patents and trademarks                             $      20      $      20
      Manufacturing license                                    385            470
      Developed technology                                  19,489         22,233
      Customer lists                                         1,969          2,761
      Assembled workforce                                    3,171          4,868
      Goodwill                                              55,838         86,904
                                                         ---------      ---------
                                                            80,872        117,256
      Less accumulated amortization                        (27,231)        (9,628)
                                                         ---------      ---------
                                                         $  53,641      $ 107,628
                                                         =========      =========
</TABLE>


4.  EQUITY TRANSACTIONS

During the three months ended December 31, 2001, the Company issued 3,341,914
shares of its common stock to satisfy $1,794,752 of outstanding liabilities
consisting of $1,188,950 of account payable, $526,535 of other current
liabilities and $79,267 of short-term debt. Such settlement was based on the
fair market value of the Company's common stock at the date of exchange.
Therefore, no gain or loss was realized.

WARRANTS

Warrant activity for the nine month period ended December 31, 2001 is as
follows:

<TABLE>
<CAPTION>
                                                             Warrant Price
                                                 Shares        Per Share
                                               ---------     -------------
      <S>                                      <C>           <C>
      Outstanding at March 31, 2001              893,085     $0.73 - $6.81
      Issued (Note 7)                          2,777,777         $0.65
                                               ---------
      Outstanding at December 31, 2001         3,670,862     $0.65 - $6.81
                                               =========
</TABLE>




                                       9
<PAGE>

                              STARBASE CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



5.  STOCK OPTION PLAN

The Company's stock option plans, the 1996 Plan and the 2001 Plan, provide 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 December 31, 2001 was 8.4 years. A total of 2,833,333 shares of common stock
have been authorized under the 1996 Plan, of which 1,380,132 were outstanding at
December 31, 2001. A total of 3,400,000 shares of common stock have been
authorized under the 2001 Plan, of which 2,285,000 were outstanding at December
31, 2001. In addition, the Company has granted non-qualified stock options, of
which 20,640,380 were outstanding at December 31, 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 161,350 were
outstanding at December 31, 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 836,886 were outstanding at December 31, 2001.

Stock option activity for the nine month period ended December 31, 2001 is as
follows:

<TABLE>
<CAPTION>
                                                                           Weighted-
                                                                       Average Exercise
                                                         Shares             Price
                                                       ----------      ----------------
<S>                                                    <C>             <C>
Outstanding at March 31, 2001                          21,734,769          $ 3.94
Granted                                                 9,606,500          $ 0.69
Lapsed or canceled                                     (5,518,384)         $ 4.39
Exercised                                                (519,137)         $ 1.00
                                                       ----------
Outstanding at December 31, 2001                       25,303,748          $ 2.67
                                                       ==========
Exercisable at December 31, 2001                        8,914,054          $ 3.17
                                                       ==========
</TABLE>

Stock option summary information at December 31, 2001 is as follows:

<TABLE>
<CAPTION>
                             Options Outstanding                       Options Exercisable
                 ------------------------------------------         ------------------------
                                Weighted-
                                 Average          Weighted-                        Weighted-
                                Remaining          Average                          Average
Range of                       Contractual        Exercise                         Exercise
Exercise Prices    Shares         Life              Price             Shares         Price
---------------  ---------     -----------        ---------         ---------      ---------
<S>              <C>            <C>                 <C>             <C>            <C>
$0.00 - $0.50    1,130,000      7.7 years           $0.49              96,000         $0.47
$0.51 - $1.00    9,882,663      9.3 years           $0.64           1,774,980         $0.68
$1.01 - $1.50    3,310,805      6.9 years           $1.32           2,252,794         $1.31
$1.51 - $2.00    1,611,122      6.6 years           $1.70           1,211,246         $1.66
$2.01 - $2.50      896,228      7.8 years           $2.12             430,152         $2.08
$2.51 - $3.00      819,177      8.6 years           $2.62             552,598         $2.58
$3.01 - $3.50    1,906,577      9.1 years           $3.35              23,542         $3.09
$3.51 - $4.00    1,929,800      8.6 years           $3.80             929,636         $3.82
$4.01 - $4.50      340,000      8.4 years           $4.14              91,767         $4.13
$4.51 - $16.13   3,477,376      7.8 years           $9.91           1,551,339        $10.11
                ----------                                          ---------
                25,303,748                                          8,914,054
                ==========                                          =========
</TABLE>




                                       10
<PAGE>

                              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 and nine months ended December 31, 2001 and
2000 was as follows:

<TABLE>
<CAPTION>
                                                 Software
                                                 licenses    Services     Total
                                                 --------    --------    -------
<S>                                              <C>         <C>         <C>
(In thousands)

Three months ended December 31, 2001:
    Revenues                                     $ 6,477     $ 4,411     $10,888
    Cost of revenues                               2,947       1,324       4,271
                                                 -------     -------     -------
        Gross margin                             $ 3,530     $ 3,087     $ 6,617
                                                 =======     =======     =======

Three months ended December 31, 2000:
    Revenues                                     $ 7,124     $ 2,416     $ 9,540
    Cost of revenues                                 782       1,067       1,849
                                                 -------     -------     -------
        Gross margin                             $ 6,342     $ 1,349     $ 7,691
                                                 =======     =======     =======
</TABLE>

<TABLE>
<CAPTION>
                                                 Software
                                                 licenses    Services     Total
                                                 --------    --------    -------
<S>                                              <C>         <C>         <C>
(In thousands)

Nine months ended December 31, 2001:
    Revenues                                     $19,983     $13,487     $33,470
    Cost of revenues                              11,297       4,841      16,138
                                                 -------     -------     -------
        Gross margin                             $ 8,686     $ 8,646     $17,332
                                                 =======     =======     =======

Nine months ended December 31, 2000:
    Revenues                                     $18,650     $ 6,376     $25,026
    Cost of revenues                               1,991       3,037       5,028
                                                 -------     -------     -------
        Gross margin                             $16,659     $ 3,339     $19,998
                                                 =======     =======     =======
</TABLE>




                                       11
<PAGE>

                              STARBASE CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



7.  CONVERTIBLE DEBENTURES

During November 2001, the Company entered into agreements to complete a
two-tranche private placement of convertible debentures for $3,000,000. The
first tranche closed on November 21, 2001 and the second tranche closed on
December 18, 2001. The convertible debentures are due three years from the date
of issuance and carry an interest rate of 7%. The convertible debentures are
immediately convertible into the Company's common stock at a conversion rate
equal to the lesser of $0.594 or 80% of the average of the five lowest closing
bid prices of the common stock as traded on the Nasdaq National Market System
for the ten trading days ending on the trading day immediately before the day
the notice of conversion is submitted. Such conversion feature represents a
beneficial conversion as such conversion amounts are less than the fair market
value of the Company's common stock at the date of issuance. The intrinsic value
of the beneficial conversion feature was $1,584,734 based on the relative
beneficial conversion amounts and was immediately expensed as interest expense.
Also in connection with the issuance of the convertible debentures, the Company
paid $190,000 in cash and issued an additional $150,000 of convertible
debentures which included 578,703 warrants to purchase additional shares of
common stock valued at $127,661 and are exercisable through December 17, 2006,
for placement agent fees. These fees are recorded in other non-current assets
and will be amortized over the term of the debentures. The Company also issued
warrants to purchase 2,199,074 shares of common stock which are exercisable at
$0.65 per share and expire on November 20, 2006. The fair value of these
warrants, using the Black-Scholes model at the date of grant, was $1,287,605 and
was recorded as non-cash equity compensation during the three months ended
December 31, 2001. The assumptions used in the Black-Scholes model were as
follows: no dividend yield; 3.97% interest rate; five years expected life; and
volatility of 110%.

During the three months ended December 31, 2001, holders of the convertible
debentures converted $750,000 of convertible debentures and $3,753 of accrued
interest into 1,907,064 and 5,723 shares of common stock, respectively. As of
December 31, 2001, the outstanding balance of the convertible debentures was
$2,400,000.


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 ended
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. During the three months ended December 31,
2001, the Company paid off and terminated the line of credit agreement.


9.  INTANGIBLE ASSETS

As discussed in the Company's Form 10-Q for the quarterly period ended September
30, 2001, the continuing deterioration of the economy, the resulting decrease in
IT spending and the lack of demand for the products obtained in the worldweb.net
acquisition, caused the Company to evaluate the recoverability of the amounts
recorded for developed technology and related goodwill acquired in the
worldweb.net acquisition. The Company compared the carrying amounts of
intangible assets to current cash flow forecasts and the original cash flow
forecasts at the date of acquisition and determined that the amounts recorded
for developed technology were impaired. As a result, during the three months
ended September 30, 2001, the Company wrote-down to fair value using discounted
current cash flow forecasts, the value of developed technology by $2.7 million.
The remaining amount at December 31, 2001, relating to developed technology
acquired in the worldweb.net acquisition is $460,000. The Company will continue
to assess the recoverability of such intangible assets and it is possible that
future impairments will occur.




                                       12
<PAGE>

                              STARBASE CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



As discussed in the Company's Form 10-Q for the quarterly period ended September
30, 2001, the decrease in IT spending, the lack of demand for products obtained
in the worldweb.net acquisition and the significant reduction in headcount has
affected the recoverability of the amounts recorded for goodwill, assembled
workforce and customer lists related to the acquisitions of ObjectShare,
worldweb.net and Technology Builders. The Company compared the carrying amounts
of intangible assets to current cash flow forecasts and the original cash flow
forecasts at the date of acquisition for ObjectShare, worldweb.net, and
Technology Builders, and determined that the amounts recorded for goodwill and
customer lists were impaired. The Company also compared the original headcount
projections to current headcount related to employees for worldweb.net and
Technology Builders and determined that the amounts recorded for assembled
workforce was impaired. As a result, during the three months ended September 30,
2001, the Company wrote-down to fair value using discounted current cash
flow forecasts, the value of goodwill related to worldweb.net by $23.4 million,
and the goodwill related to ObjectShare by $7.7 million.

Additionally, during the quarter ended September 30, 2001, the Company
substantially decreased the services offered related to the ObjectShare
acquisition. The Company reduced the value of customer lists related to
Technology Builders by $792,000. The Company also wrote-down to fair value the
amounts recorded for assembled workforce related to worldweb.net and Technology
Builders by $838,000 and $859,000, respectively, to reflect the substantial
reduction in workforce. The remaining amounts at December 31, 2001, for goodwill
related to worldweb.net is $3.0 million, for goodwill related to ObjectShare is
zero, for customer lists related to Technology Builders is $1.0 million, for
assembled workforce for worldweb.net is $180,000 and for assembled workforce for
Technology Builders is $2.0 million. The Company will continue to assess the
recoverability of such intangible assets and it is possible that future
impairments will occur.


10. 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 implemented SFAS No. 141 on July 1,
2001. Such adoption had no impact on the Company's consolidated financial
position or results of operations though December 31, 2001. 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 consolidated financial
position or results of operations.

In August 2001, FASB issued SFAS No. 144, Accounting for Impairment or Disposal
of Long-Lived Assets. SFAS No. 144 addresses financial accounting and reporting
for the impairment of long-lived assets and for the disposal of long-lived
assets. SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and is effective
for fiscal year beginning after December 15, 2001. The Company is currently
evaluating the provision of SFAS 144 and it has not determined the impact, if
any, that this statement will have on its consolidated financial position or
results of operations.


11. SUBSEQUENT EVENTS

In January 2002, the Company reached a settlement for an early termination of a
lease for office space. The lease had a remaining obligation of $9.8 million
over the next eight years. In consideration for the early termination the
Company agreed to forfeit the deposit of $1.1 million of restricted cash and to
leave excess office furniture.




                                       13
<PAGE>

                                     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 statements 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 filings 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 and nine months ended December 31, 2001 and 2000.

<TABLE>
<CAPTION>
                                                 Three months ended    Nine months ended
                                                     December 31,         December 31,
                                                -------------------- ---------------------
                                                   2001       2000      2001        2000
                                                ---------  --------- ----------  ---------
<S>                                             <C>        <C>       <C>         <C>
Revenues:
  License                                          59.5%      74.7%      59.7%      74.5%
  Service                                          40.5       25.3       40.3       25.5
                                                ---------  --------- ----------  ---------
    Total revenues                                100.0      100.0      100.0      100.0

Cost of revenues:
  License                                          15.2        2.9       11.2        2.3
  Service                                          12.2       11.2       14.4       12.1
  Amortization and write-down of intangibles       11.8        5.3       22.6        5.7
                                                ---------  --------- ----------  ---------
    Total cost of revenues                         39.2       19.4       48.2       20.1
                                                ---------  --------- ----------  ---------
Gross profit                                       60.8       80.6       51.8       79.9

Operating expenses:
  Research and development                         31.7       25.2       35.2       25.6
  Sales and marketing                              54.7       57.0       66.6       55.9
  General and administrative                       16.8       17.7       19.2       20.8
  Non-cash equity based compensation                7.7        1.0        3.5        5.5
  Amortization and write-down of intangibles       30.5       13.8      139.9       15.5
                                                ---------  --------- ----------  ---------
    Total operating expenses                      141.4      114.7      264.4      123.3
                                                ---------  --------- ----------  ---------
Loss from operations                              (80.6)     (34.1)    (212.6)     (43.4)

Interest and other income (expense)               (15.3)       3.9       (4.6)       2.8
                                                ---------  --------- ----------  ---------
Loss before income taxes                          (95.9)     (30.2)    (217.2)     (40.6)
Provision for income taxes                          0.1        0.2        0.3        0.1
                                                ---------  --------- ----------  ---------
Net loss                                          (96.0)%    (30.4)%   (217.5)%    (40.7)%
                                                =========  ========= ==========  =========
</TABLE>




                                       14
<PAGE>

THREE MONTHS ENDED DECEMBER 31, 2001 AND 2000

REVENUES

Revenues were $10.9 million and $9.5 million for the three month periods ended
December 31, 2001 and 2000, respectively, representing an increase of $1.3
million or 14%. International revenues accounted for less than 10% of total
revenue in the three months ended December 31, 2001 and 2000.

License -- License revenues were $6.4 million and $7.1 million for the three
month periods ended December 31, 2001 and 2000, respectively, representing a
decrease of $647,000 or 9%. License revenues represented 59.5% and 74.7% of
total revenues for the three months ended December 31, 2001 and 2000,
respectively. The decrease in license revenues was a result of reduced sales due
primarily to the continuing slowdown in the economy, particularly information
technology (IT) spending.

Service -- Service revenues were $4.4 million and $2.4 million for the three
month periods ended December 31, 2001 and 2000, respectively, representing an
increase of $2.0 million or 83%. Service revenues represented 40.5% and 25.3% of
total revenues for the three months ended December 31, 2001 and 2000,
respectively. The increase in service revenues was due to an increase in the
demand for the Company's training and consulting services from new and existing
customers along with services and maintenance related to products acquired
through acquisition.


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 $1.7 million and $279,000 for the three month
periods ended December 31, 2001 and 2000, respectively, representing an increase
of $1.4 million or 494%. License cost of revenues as a percentage of total
revenue was 15.2% and 2.9% for the three months ended December 31, 2001 and
2000, respectively. The increases were due to royalty expenses relating to the
acquired Caliber product line along with the lower margin on third party
products (Mercury) that the Company now resells.

Service -- Service cost of revenues consists of the costs associated with
performing training and consulting services. Service cost of revenues was $1.3
million and $1.1 million for the three month periods ended December 31, 2001 and
2000, respectively, representing an increase of $257,000 or 24%. Service cost of
revenues as a percentage of total revenue was 12.2% and 11.2% for the three
months ended December 31, 2001 and 2000, respectively. The increases were due to
the increases in the training and consulting organization along with costs
related to the increase in personnel.

Amortization and write-down 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 $1.3 million and $503,000 for the three months ended December
31, 2001 and 2000, respectively, representing and increase of $787,000.
Amortization and write-down of intangibles as a percentage of total revenue was
11.8% and 5.3% for the three months ended December 31, 2001 and 2000,
respectively.


OPERATING EXPENSES

Research and development expenses - Research and development expenses were $3.5
million and $2.4 million for the three months ended December 31, 2001 and 2000,
respectively, representing an increase of $1.1 million or 44%. 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. Current research and development projects include
enhancements and upgrades of the Starteam, Codewright, Caliber and eXpressroom
product lines along with improvements in the integration among these products.

Sales and marketing -- Sales and marketing expenses were $5.9 million and $5.4
million for the three months ended December 31, 2001 and 2000, respectively,
representing an increase of $508,000 or 9%. 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 eighteen.

General and administrative - General and administrative expenses were $1.8
million and $1.7 million for the three months ended December 31, 2001 and 2000,
respectively, representing an increase of $140,000 or 8%. The increase was
primarily due to an increase in salaries and related expenses incurred as a
result of our acquisitions.




                                       15
<PAGE>

Non-cash equity based compensation -- Non-cash equity based compensation was
$841,000 and $101,000 for the three months ended December 31, 2001 and 2000,
respectively, representing an increase of $740,000. Non-cash equity based
compensation expense represents the fair value of stock options and warrants
granted to non-employees at the date of the grant amortized over the vesting
period. During the three months ended December 31, 2001 non-cash equity based
compensation of $1.3 million related to the warrants issued with the convertible
debentures was offset by $(445,000) for recovery of previously expensed non-cash
equity based compensation related to cancelled stock options for non-employees.

Amortization and write-down of intangibles -- Amortization and write-down of
intangibles was $3.3 million and $1.3 million for the three months ended
December 31, 2001 and 2000, respectively. This includes amortization of
goodwill, customer list and assembled workforce associated with the SITE,
Premia, ObjectShare, worldweb.net and Technology Builders acquisitions. The
Company will continue to evaluate the recoverability of such intangible assets.

Interest and other income (expense) -- Interest and other income (expense) was
$(1.7 million) and $372,000 for the three months ended December 31, 2001 and
2000, respectively, representing a decrease of $2.0 million. The decrease was
due to a non-cash interest expense of $1.5 million related to the value of the
beneficial conversion feature of the convertible debentures issued during the
quarter ended December 31, 2001.

Provision for income taxes -- Provision for income taxes was $8,000 and $21,000
for the three months ended December 31, 2001 and 2000. This represents the
minimum amount required for state taxes. The Company has not recorded any
deferred taxes because of the losses incurred since its inception.


NINE MONTHS ENDED DECEMBER 31, 2001 AND 2000

REVENUES

Revenues were $33.5 million and $25.0 million for the nine month periods ended
December 31, 2001 and 2000, respectively, representing an increase of $8.4
million or 34%. International revenues accounted for 17% of total revenue for
the nine months ended December 31, 2001 and less than 10% of total revenue in
the nine months ended December 31, 2000.

License -- License revenues were $20.0 million and $18.7 million for the nine
month periods ended December 31, 2001 and 2000, respectively, representing an
increase of $1.3 million or 7%. License revenues represented 59.7% and 74.5% of
total revenues for the nine months ended December 31, 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. acquisition. The acquired products
were eXpressroom, CaliberRM, CaliberRBT, and CaliberRM Pro.

Service -- Service revenues were $13.5 million and $6.4 million for the nine
month periods ended December 31, 2001 and 2000, respectively, representing an
increase of $7.1 million or 112%. Service revenues represented 40.3% and 25.5%
of total revenues for the nine months ended December 31, 2001 and 2000,
respectively. The increase in service revenues was due to an increase in the
demand for the Company's training and consulting services from new and existing
customers along with services and maintenance related to products acquired
through acquisition.


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 $3.7 million and $579,000 for the nine month
periods ended December 31, 2001 and 2000, respectively, representing an increase
of $3.2 million or 547%. License cost of revenues as a percentage of total
revenue was 11.2% and 2.3% for the nine months ended December 31, 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) that 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 $4.8
million and $3.0 million for the nine month periods ended December 31, 2001 and
2000, respectively, representing and increase of $1.8 million or 59%. Service
cost of revenues as a percentage of total




                                       16
<PAGE>

revenue was 14.4% and 12.1% for the nine months ended December 31, 2001 and
2000, respectively. The increases were due to the increases in the training and
consulting organization and the costs related to the increase in personnel.

Amortization and write-down of intangibles -- Amortization and write-down of
intangibles consists of the amortization of developed technology associated with
the Premia, Genitor, worldweb.net and Technology Builders acquisitions.
Amortization of intangibles was $7.6 million and $1.4 million for the nine
months ended December 31, 2001 and 2000, respectively, representing an increase
of $6.1 million. Amortization and write-down of intangibles as a percentage of
total revenue was 22.6% and 5.7% for the nine months ended December 31, 2001 and
2000, respectively. As discussed in the Company's Form 10-Q for the quarterly
period ended September 30, 2001, the continuing deterioration of the economy,
the resulting decrease in IT spending and the lack of demand for the products
obtained in the worldweb.net acquisition, caused the Company to evaluate the
recoverability of the amounts recorded for developed technology acquired in the
worldweb.net acquisition. The Company compared the carrying amounts of
intangible assets to current cash flow forecasts and the original cash flow
forecasts at the date of acquisition and determined that the amounts recorded
for developed technology were impaired. As a result, during the nine months
ended December 31, 2001, the Company wrote-down to fair value using discounted
current cash flow forecasts the value of developed technology by $2.7 million.
The remaining amount at December 31, 2001, relating to developed technology
acquired in the worldweb.net acquisition is $460,000. The Company will continue
to assess the recoverability of such intangible assets and it is possible that
future impairments may occur.


OPERATING EXPENSES

Research and development expenses - Research and development expenses were $11.8
million and $6.4 million for the nine months ended December 31, 2001 and 2000,
respectively, representing an increase of $5.3 million or 83%. 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. Current research and development projects include
enhancements and upgrades of the Starteam, Codewright, Caliber and eXpressroom
product lines along with improvements in the integration among these products.

Sales and marketing -- Sales and marketing expenses were $22.3 million and $14.0
million for the nine months ended December 31, 2001 and 2000, respectively,
representing an increase of $8.3 million or 59%. 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 eighteen.

General and administrative - General and administrative expenses were $6.4
million and $5.2 million for the nine months ended December 31, 2001 and 2000,
respectively, representing an increase of $1.2 million or 23%. The increase was
primarily due to an increase in salaries and related expenses incurred as a
result of our acquisitions.

Non-cash equity based compensation -- Non-cash equity based compensation was
$1.2 million and $1.4 million for the nine months ended December 31, 2001 and
2000, respectively, representing a decrease of $206,000. Non-cash equity based
compensation expense represents the fair value of stock options and warrants
granted to non-employees at the date of grant amortized over the vesting period.
During the nine months ended December 31, 2001, non-cash equity based
compensation of $1.3 million related to the warrants issued with the convertible
debentures was offset by $(108,000) for recovery of previously expensed non-cash
equity based compensation related to cancelled stock options for non-employees.

Amortization and write-down of intangibles -- Amortization and write-down of
intangibles was $46.8 million and $3.9 million for the nine months ended
December 31, 2001 and 2000, respectively. This includes amortization of
goodwill, customer list and assembled workforce associated with the SITE,
Premia, ObjectShare, worldweb.net and Technology Builders acquisitions.

The Company accounts for impairment and disposition of long-lived assets in
accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of. In accordance with SFAS No. 121,
long-lived assets to be held are reviewed for events or changes in circumstances
which indicate that their carrying value may not be recoverable. The Company
periodically reviews the carrying value of long-lived assets to determine
whether or not an impairment to such value has occurred, and has determined,
that there was an impairment during the quarter ended September 30, 2001 as
discussed below but no further impairment during the quarter ended December 31,
2001 based on its most recent assessment.




                                       17
<PAGE>
 As discussed in the Company's Form 10-Q for the quarterly period ended
September 30, 2001, the continuing deterioration of the economy, the decrease in
IT spending, the lack of demand for products obtained in the worldweb.net
acquisition and the significant reduction in headcount has affected the
recoverability of the amounts recorded for goodwill, assembled workforce and
customer lists related to the acquisitions of ObjectShare, worldweb.net and
Technology Builders. The Company compared the carrying amounts of intangible
assets to current cash flow forecasts and the original cash flow forecasts at
the date of acquisition for ObjectShare, worldweb.net, and Technology Builders,
and determined that the amounts recorded for goodwill and customer lists were
impaired. The Company also compared the original headcount projections to
current headcount related to employees for worldweb.net and Technology Builders
and determined that the amounts recorded for assembled workforce was impaired.
As a result, during the nine months ended December 31, 2001, the Company
wrote-down to fair value using discounted current cash flow forecasts, the value
of goodwill related to worldweb.net by $23.4 million, and the goodwill related
to ObjectShare by $7.7 million.

Additionally, during the nine months ended December 31, 2001, the Company
substantially decreased the services offered related to the ObjectShare
acquisition. The Company reduced the value of customer lists related to
Technology Builders by $792,000. The Company also wrote-down the values recorded
for assembled workforce related to worldweb.net and Technology Builders by
$838,000 and $859,000, respectively, to reflect the substantial reduction in
workforce. The remaining amounts at December 31, 2001, for goodwill related to
worldweb.net is $3.0 million, for goodwill related to ObjectShare is zero, for
customer lists related to Technology Builders is $1.0 million, for assembled
workforce for worldweb.net is $180,000 and for assembled workforce for
Technology Builders is $2.0 million. The Company will continue to assess the
recoverability of such intangible assets and it is possible that future
impairments will occur.

Interest and other income (expense) -- Interest and other income (expense) was
$(1.6 million) and $715,000 for the nine months ended December 31, 2001 and
2000, respectively, representing a decrease of $2.3 million. The decrease was
due to non-cash interest expense related to the issuance of the convertible
debenture.

Provision for income taxes -- Provision for income taxes was $95,000 and $22,000
for the nine months ended December 31, 2001 and 2000. This represents the
minimum amount required for state taxes. The Company has not recorded any
deferred taxes because of the losses incurred since its inception.


INFLATION

Inflation has not had a significant effect on our results of operations of
financial position for the three and nine month periods ended December 31, 2001
and 2000.


LIQUIDITY AND CAPITAL RESOURCES

We have funded our business, to date, primarily from the issuance of equity and
debt securities. Cash and cash equivalents as of December 31, 2001 were $3.0
million and $14.1 million as of March 31, 2001. At December 31, 2001 the Company
had negative working capital of $7.4 million, compared to positive working
capital of $1.4 million at March 31, 2001.

Net cash used in operating activities was $14.3 million and $4.0 million for the
nine months ended December 31, 2001 and 2000, respectively. The increase in cash
used in operating activities was primarily due to an increase in net loss and a
decrease in accounts payable partially offset by an increase in write-down of
intangible, depreciation and amortization expense and decrease in accounts
receivable.

Net cash provided by (used in) investing activities was $124,000 and $(2.2
million) for the nine months ended December 31, 2001 and 2000, respectively. The
increase was primarily due to a decrease in capital expenditures and a decrease
in restricted cash.

Net cash provided from financing activities was $3.1 million and $18.4 million
for the nine months ended December 31, 2001 and 2000, respectively. During the
three months ended December 31, 2001, the Company raised $3.0 million through a
private placement of convertible debentures. In September 2000, the Company
raised $16.0 million, net,




                                       18
<PAGE>

through a private placement of common stock. For the nine months ended December
31, 2001, exercise of options provided $700,000.

During November 2001, the Company entered into agreements to complete a
two-tranche private placement of convertible debentures for $3,000,000. The
first tranche closed on November 21, 2001 and the second tranche closed on
December 18, 2001. The convertible debentures are due three years from the date
of issuance and carry an interest rate of 7%. The convertible debentures are
immediately convertible into the Company's common stock at a conversion rate
equal to the lesser of $0.594 or 80% of the average of the five lowest closing
bid prices of the common stock as traded on the Nasdaq National Market System
for the ten trading days ending on the trading day immediately before the day
the notice of conversion is submitted. Such conversion feature represents a
beneficial conversion as such conversion amounts are less than the fair market
value of the Company's common stock at the date of issuance. The fair market
value of the beneficial conversion feature was $1,584,734 based on the relative
beneficial conversion amounts and was immediately expensed as interest expense.
Also in connection with the issuance of the convertible debentures, the Company
paid $190,000 in cash and issued an additional $150,000 of convertible
debentures which included 578,703 warrants to purchase additional shares of
common stock valued at $127,661 and are exercisable through December 17, 2006,
for placement agent fees. These fees are recorded in other non-current assets
and will be amortized over the term of the debentures. The Company also issued
warrants to purchase 2,199,074 shares of common stock which are exercisable at
$0.65 per share and expire on November 20, 2006. The fair value of these
warrants, using the Black-Scholes model at the date of grant, was $1,287,605 and
was recorded as non-cash equity compensation during the three months ended
December 31, 2001. The assumptions used in the Black-Scholes model were as
follows: no dividend yield; 3.97% interest rate; five years expected life; and
volatility of 110%.

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 ended
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. During the three months ended December 31,
2001, the Company paid off and terminated the line of credit agreement.

In January 2002, the Company reached a settlement for an early termination of a
lease for office space. The lease had a remaining obligation of $9.8 million
over the next eight years. In consideration for the early termination the
Company agreed to forfeit the deposit of $1.1 million of restricted cash and to
leave excess office furniture.

During the quarter ended September 30, 2001, the Company's operating losses,
negative cash flows and negative working capital raised issues as to the
Company's ability to continue as a going concern for a reasonable amount of
time. Subsequently, we raised $3.0 million through the issuance of convertible
debentures in November and December 2001 and reduced our headcount by 11% in
October 2001 and 12% in January 2002. On January 2, 2002, we announced the
appointment of James Harrer as our President and Chief Operating Officer.
Management believes that these actions together with anticipated revenues from
the sale of the Company's products will enable the Company to continue as a
going concern for at least the next twelve months. However, if the Company is
unable to achieve its forecasted operating results, additional financing may be
needed. If additional financing is needed, there can be no assurance that such
financing will be available to us on commercially reasonable terms or at all.


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 implemented SFAS No. 141 on July 1,
2001. Such adoption had no impact on the Company's consolidated financial
position or results of operations though December 31, 2001. 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 consolidated financial
position or results of operations.




                                       19
<PAGE>

In August 2001, FASB issued SFAS No. 144, Accounting for Impairment or Disposal
of Long-Lived Assets. SFAS No. 144 addresses financial accounting and reporting
for the impairment of long-lived assets and for the disposal of long-lived
assets. SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and is effective
for fiscal year beginning after December 15, 2001. The Company is currently
evaluating the provision of SFAS 144 and it has not determined the impact, if
any, that this statement will have on its consolidated 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.

IF OUR QUARTERLY REVENUES AND OPERATING RESULTS FLUCTUATE SIGNIFICANTLY, THE
PRICE OF OUR COMMON STOCK MAY 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:

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

    -  changes in budgets or purchasing patterns of our customers;

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

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

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

    -  changes in operating expenses and personnel; and

    -  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 December 31,
2001, we had an accumulated deficit of $147,665,000. 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:

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

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

    -  our customers promote our product.

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




                                       20
<PAGE>

WE HAVE PREVIOUSLY INCURRED AND MAY INCUR FUTURE IMPAIRMENT LOSSES RELATED TO
INTANGIBLE ASSETS FROM PRIOR ACQUISITIONS WHICH COULD NEGATIVELY AFFECT OUR
FUTURE OPERATING RESULTS

During the quarter ended September 30, 2001, we had an impairment write-down of
$36.3 million related to intangible assets from prior acquisitions. If our
operating performance and the overall market environment does not improve, we
may incur additional write-downs of our remaining intangible assets which could
adversely affect our financial position, operating results and our ability to
raise additional financing.

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 December 31, 2001, we generated 47% of our total
revenues and 60% 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:

    -  competition from other products;

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

    -  negative publicity or evaluation of our company; or

    -  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 AND ADVERSELY AFFECT OUR OPERATING
RESULTS

The eBusiness software market is intensely competitive and rapidly evolving. Our
customers' 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.




                                       21
<PAGE>

IF WE ARE UNABLE TO ATTRACT AND RETAIN QUALIFIED PERSONNEL, OUR OPERATING
RESULTS MAY SUFFER

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.

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 FUTURE REVENUES COULD BE AFFECTED IF OUR PRODUCTS COULD BECOME OBSOLETE
BECAUSE 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:

    -  rapid technological advances;

    -  evolving industry standards, including operating systems;

    -  changes in end-user requirements; and

    -  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




                                       22
<PAGE>

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 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.

IF WE ARE UNABLE TO FURTHER INTEGRATE THE OPERATIONS OF TECHNOLOGY BUILDERS,
INC., WE MAY NOT BE ABLE TO SUCCESSFULLY CONTINUE TO DEVELOP AND MARKET
TECHNOLOGY BUILDERS' PRODUCTS AND OUR REVENUES MAY SUFFER

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

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

    -  retain Technology Builders' software developers;

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

    -  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 Builder's technology. Additionally, during second quarter of
fiscal 2002, we had an impairment write-down of intangible assets related to
prior acquisitions. Future impairment write-downs may be necessary.

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:

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

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

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

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

    -  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.




                                       23
<PAGE>

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:

    -  costs of customizing products for foreign countries;

    -  foreign currency risks;

    -  dependence on local vendors;

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

    -  longer sales cycles; and

    -  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.

IF WE FAIL TO EFFECTIVELY MANAGE AND SUPPORT OUR ANTICIPATED GROWTH IN
OPERATIONS, WE MAY NOT ACHIEVE FUTURE REVENUE GROWTH AND PROFITABILITY

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:

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

    -  hire, train and retain qualified personnel;

    -  continue to expand and upgrade core technologies; and

    -  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, WHICH
COULD RESULT IN THE USE OF OUR TECHNOLOGY BY COMPETITORS OR OTHER THIRD-PARTIES

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.




                                       24
<PAGE>

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.

IF INTERNET EBUSINESS DOES NOT CONTINUE TO GROW, WE MAY SUFFER A MATERIAL
ADVERSE EFFECT IN OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION

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 LIMITING THE GROWTH OF
INTERNET COMMERCE COULD BE ENACTED THAT MAY DIRECTLY RESTRICT OUR BUSINESS OR
INDIRECTLY IMPACT OUR BUSINESS

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.

IF WE ARE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS, WE WILL BE UNABLE TO
DEVELOP OUR PRODUCTS, ENGAGE IN FUTURE OPPORTUNITIES OR RESPOND TO COMPETITION
PRESSURES

To meet our current working capital and capital expenditure requirements, we may
need to raise additional funds 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.




                                       25
<PAGE>

                                     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 December 31, 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.





                                       26
<PAGE>

                                     PART II

                                     ITEM 6
                        EXHIBITS AND REPORTS ON FORM 8-K

(a)     Exhibits


<TABLE>
<CAPTION>
 Exhibit                                                                   Ref./
 Number      Description Of Document                                       Page
--------     ---------------------------------------------------------     -----
<S>          <C>                                                           <C>
             None

-------------------------
</TABLE>


(b)     Reports on Form 8-K

In a report filed on Form 8-K, dated February 11, 2002, The Company reported the
settlement for an early termination of an office lease.




                                       27
<PAGE>

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)



February 14, 2002                          /s/  Douglas S. Norman
------------------                      ---------------------------------------
Date                                       Douglas S. Norman
                                           Chief Financial Officer





                                       28