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

                                   FORM 10-K
                             ---------------------

<Table>
<C>          <S>
      [X]    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
             OF THE SECURITIES EXCHANGE ACT OF 1934
             FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2001
                                   OR
      [ ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
             OF THE SECURITIES AND EXCHANGE ACT OF 1934
</Table>

                        COMMISSION FILE NUMBER 000-31011

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

<Table>
<S>                                            <C>
                   DELAWARE                                      33-0323810
       (State or other jurisdiction of                        (I.R.S. Employer
        incorporation or organization)                      Identification No.)
</Table>

                               333 DISTEL CIRCLE
                          LOS ALTOS, CALIFORNIA 94022
                                 (650) 965-8050
  (Address, including zip code, and telephone number, including area code, of
                   Registrant's principal executive offices)

          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
                                      NONE

          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                    COMMON STOCK, $0.001 PAR VALUE PER SHARE
                             ---------------------
     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) has been subject to such
filing requirements for the past 90 days.  Yes [X]     No [ ]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.  [X]

     As of November 30, 2001, the aggregate market value of voting stock held by
non-affiliates of the Registrant (based upon the closing sale price of such
shares on the Nasdaq National Market on such date) was approximately
$28,010,320.

     As of November 30, 2001, there were 19,303,203 shares of the Registrant's
$0.001 par value Common Stock outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

     Certain sections of the Registrant's definitive Proxy Statement for the
Registrant's March 2002 Annual Meeting of Stockholders, to be filed with the
Securities and Exchange Commission pursuant to Registration 14A, are
incorporated by reference into Part III of this annual report on Form 10-K.

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                              TALARIAN CORPORATION

                           ANNUAL REPORT ON FORM 10-K
                     FOR THE YEAR ENDED SEPTEMBER 30, 2001

                               TABLE OF CONTENTS

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<Caption>
                                                                         PAGE
                                                                         ----
<S>       <C>                                                            <C>
                                   PART I
Item 1.   Business....................................................
Item 2.   Properties..................................................
Item 3.   Legal Proceedings...........................................
Item 4.   Submission of Matters to a Vote of Security Holders.........

                                   PART II
Item 5.   Market For Registrant's Common Equity and Related
          Stockholder Matters.........................................
Item 6.   Selected Consolidated Financial Data........................
Item 7.   Management's Discussion and Analysis of Financial Condition
          and Results of Operations...................................
Item 7A.  Quantitative and Qualitative Disclosures About Market
          Risk........................................................
Item 8.   Financial Statements and Supplementary Data.................
Item 9.   Changes in and Disagreements With Accountants On Accounting
          and Financial Disclosure....................................

                                  PART III
Item 10.  Directors and Executive Officers of the Registrant..........
Item 11.  Executive Compensation......................................
Item 12.  Security Ownership of Certain Beneficial Owners and
          Management..................................................
Item 13.  Certain Relationships and Related Transactions..............

                                   PART IV
Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form
          8-K.........................................................
          Signatures..................................................
</Table>

                             ---------------------

     SmartSockets(R) is our registered trademark, and Talarian(TM), SmartSockets
SSL(TM), SmartSockets Gateway(TM), SmartSockets MQ(TM), SmartSockets LiveDB(TM),
SmartSockets Monitor(TM), SmartSockets for JMS(TM), RTie(TM), RTarchive(TM),
SmartPGM FX(TM), Propagator(TM), SmartPGM(TM) , RTserver(TM), MQadmin(TM),
RTdaq(TM), RThci(TM), RTplayback(TM), The world works in real-time(TM), exchange
instantly, distribute globally(TM), GlobalCast(TM) and WhiteBarn(TM) are our
trademarks. All other trademarks or trade names appearing elsewhere in this
annual report are the property of their respective owners.

                                        1
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                                     PART I

     This annual report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These forward-looking statements can generally
be identified by the use of words such as "may," "might," "will," "should,"
"could," "expects," "intends," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential" or "continue," the negative of these terms, and other
comparable terminology. These forward-looking statements may include, among
other things, anticipated trends in our revenue and expenditures, expectations
regarding our products and customers, our anticipated growth strategies, and
anticipated trends in our business. Actual results could differ materially from
those anticipated in these forward-looking statements as a result of various
risks and uncertainties, including those we discuss in "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Factors
Affecting Future Results" and elsewhere in this annual report. You should
specifically consider the risks and uncertainties outlined here and in other
reports we file with the SEC. We do not assume any obligation to update any such
forward-looking statements.

ITEM 1.  BUSINESS

OVERVIEW

     We develop and market infrastructure software that enables businesses to
exchange information reliably and securely in real time, both internally and
with their partners, suppliers and customers. Our products and services allow
software applications to communicate across local or wide area networks,
including private networks and the Internet. Our flagship product, SmartSockets,
facilitates the real-time distribution of information across virtually any type
of network. SmartSockets also enables real-time, two-way communications between
distributed computer networks and mobile information devices such as hand-held
computers. SmartSockets uses both a publish-subscribe model of communication to
deliver information to those applications that need it automatically as it
becomes available, and a queuing model of communication to store information and
deliver it at a later time if the application cannot currently be reached.
Additionally, using our SmartSockets Multicast product, SmartSockets can now use
multicast protocols to deliver data from a few senders to large groups of
simultaneous recipients. This capability, termed "adaptive multicast" gives
SmartSockets built-in intelligence in order to use whichever data delivery
mechanism is more efficient based upon the type of data, the intended
recipients, and the sender's and user's network topology.

     Our products use Transmission Control Protocol/Internet Protocol, or
TCP/IP, the standard Internet protocol for one-to-one communication, or unicast,
and reliable multicast protocols for one-to-many communication. Multicast allows
information requested by multiple applications to be sent only once, rather than
as multiple separate messages to each application. As a result, multicast can
provide information simultaneously to multiple applications and use the existing
capacity, or bandwidth, of the network more efficiently. In addition to the
foregoing products, we also provide connectivity products that facilitate the
exchange of information with external sources, security products that enhance
the security of an application, and monitoring and management tools that monitor
system and application parameters in local or wide area networks. Our products
based upon multicast protocols include SmartPGM, SmartPGM FX, SmartPGM
Propagator, SmartSockets for JMS, and SmartSockets Multicast. Our products
provide businesses with a robust and easy-to-use method of distributing
relevant, time-critical information that continues to operate efficiently, or
"scale," with networks as they grow. We also offer professional services that
assist our customers in systems planning, architecture and design, custom
development and systems integration for the rapid deployment of our products.

     Our products are designed for and implemented in demanding,
mission-critical environments with high volumes of users and data. Our products
have been deployed by over 300 companies in a variety of markets such as
financial services, networking, satellite communications, securities and energy
exchanges, telecommunications and transportation, as well as embedded in the
products of independent software vendors. Our end-user customers include 3Com,
American Stock Exchange, Credit Suisse First Boston, D.E. Shaw, Lockheed Martin,
MCI WorldCom, Raytheon Systems, and SIAC (the New York Stock Exchange). We have
also entered into agreements with Aspect Telecommunications, BMC Software,
Double Click,

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Micromuse, Nortel Networks, and Novell that allow them to embed our
infrastructure software in their product offerings.

INDUSTRY BACKGROUND

     Today's business environment, fueled by the growth of organization-wide
networks and the Internet, allows organizations to communicate and conduct
business more rapidly than ever before. In order to function and compete
effectively, organizations must exchange increasing volumes of information
continuously in real time, in an efficient and reliable manner. Real-time
communication among multiple producers and consumers of information occurs both
internally throughout an organization and externally between the organization
and its partners, suppliers and customers. The increased exchange of real-time
information enables organizations to accelerate their business cycles, improve
internal processes, create operational efficiencies, and facilitate closer
integration with partners. To provide real-time connectivity, organizations must
be able to distribute information residing in disparate sets of applications,
platforms, and networks. As businesses increasingly trust critical business
processes to these networks, a reliable and robust infrastructure is essential.

     Historically, organizations stored data on mainframe computers and accessed
this information through dumb terminals. The next wave of computing involved
storing information on centralized servers and in databases hosted on
centralized servers, and accessing this information through PCs and other
intelligent remote devices. More recently, organizations have begun to utilize
extensive internal and external networks, including the Internet, to access and
exchange information. Rather than keeping information only on centralized
servers or mainframes, organizations are now distributing information throughout
their organizations as well as with partners, suppliers, and customers.

     This new computing paradigm is leading to global installation of the
networking equipment necessary to facilitate connectivity within and across
organizations. We believe the infrastructure software needed to support this
computing shift has not been developed rapidly enough to meet market needs.
Infrastructure software has traditionally been developed in-house and is often
inadequate for the performance and scalability demands of today's business
environment. This problem is exacerbated by rapidly growing numbers of users and
volumes of data; the proliferation of diverse computing devices, such as
mainframes, UNIX and NT servers, PCs, and handheld and wireless devices; and
increasingly stringent performance and reliability requirements. A real-time
infrastructure must connect applications running across a variety of private and
public networks, including the Internet. Most existing systems were designed
assuming a local area network or other small, well-controlled, homogenous
network. Today's applications need to operate in unpredictable and heterogeneous
wide area networks, including the Internet.

     We believe that a market has developed for robust, comprehensive software
infrastructure products that interconnect disparate applications, platforms and
networks, so that they can distribute and share information in today's
real-time, Internet-driven business environment. We believe that this market is
demanding products and systems that address the following limitations:

     - Poor Performance.  Many existing systems do not adequately support the
       required volume of "packets" of data, or messages, and the transmission
       time for these messages is too long. For example, systems using a
       request-reply model, which requires that specific requests be made before
       information can be distributed, are slow because they must poll regularly
       for new data, and must block the receipt of incoming data and wait for a
       reply even if other data are arriving. In addition, most products in the
       marketplace use a point-to-point communication model and do not perform
       well in one-to-many or many-to-many communications.

     - Limited Scalability.  Many existing systems do not adequately scale in
       terms of transaction volumes, numbers of users and geographic diversity,
       often because they are based on either:

      - A "brute force" method, in which information is "broadcast" to all
        machines, whether or not they have requested the information, often
        resulting in a flooding of information on the network; or

      - An oversimplified "hub and spoke" model, in which all transactions are
        forced through one central server.
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     - Difficult to Implement.  Existing products are often difficult to
       implement and configure. In addition, they frequently require significant
       customization and system integration in order to meet customer needs.

     - Inefficient Network Utilization.  Many products require a separate copy
       of a given message to be sent to each recipient, resulting in increased
       network utilization.

     - Lack of Robustness and Reliability.  Existing systems were generally not
       designed to run in environments that operate 24 hours a day, seven days a
       week. Most systems can be shut down by the failure of a single network or
       computer. In addition, changes or upgrades to a system often require it
       to be restarted.

     - A Passive Model of Information Distribution.  Traditional systems employ
       a request-reply model of information dissemination. This means an
       application cannot ask for the information unless it knows that the
       information exists and where it is located.

     We believe that traditional database, queuing and middleware vendors, as
well as application integration vendors and business-to-business suppliers, have
failed to address these limitations adequately. We believe that there is a
significant market opportunity for infrastructure products that addresses all
these limitations and enable companies to distribute and share information in
today's real-time, Internet-driven business environment.

OUR SOLUTION

     We deliver infrastructure software products that allow our customers to
distribute and share information in real time within and across organizations.
Our products enable distributed computer applications to communicate quickly,
reliably, and securely across virtually any type of network, including the
Internet. Our flagship product, SmartSockets, is able to run on a wide variety
of platforms and systems including Windows, UNIX, Linux, OpenVMS, IBM mainframes
(MVS), and real-time operating systems (VxWorks). SmartSockets also offers
programming interfaces for most major programming models, including C+, C++,
Java, JMS, and COM (Microsoft). Our SmartMQ product integrates queuing
capability with SmartSockets real-time middleware solutions. SmartPGM and its
add-on products, are an effective way to transmit large amounts of data to a
group of receivers simultaneously from a single point of origin. They provide a
simplified application program interface, or API, for multicast applications and
provides file transfer over Internet Protocol multicast capable networks. The
SmartPGM products permit the distribution of rich content including XML, video,
audio, software executables, and graphics files to multiple sites in a highly
efficient manner. Our products provide our customers with all the following
benefits:

     - High Performance.  We believe that we offer one of the highest performing
       infrastructure software products available, as measured by the volume of
       messages, or packets of data, delivered and the time taken to distribute
       each message. For example, SmartSockets is capable of delivering over
       20,000 200-byte messages per second and is currently deployed in
       environments where the distribution of thousands of messages per second
       is essential.

     - High Scalability.  Our infrastructure products are scalable in terms of
       transaction volumes, numbers of users and geographic locations of users
       and applications. They enable businesses to add new clients, servers, and
       applications easily without having to rewrite software. By using many of
       the techniques that have made the Internet scalable, including the
       development of reliable multicast, we provide our customers with a
       software infrastructure that allows them to take advantage of the rapid
       expansion of distributed networks.

     - Ease of Use and Implementation.  Our product family is relatively easy to
       use and can be quickly deployed by businesses without extensive use of
       system integrators. We believe that our products' ease of use reduces the
       overall cost to our customers of implementing their software
       infrastructure. Furthermore, we offer modular products that can be
       deployed on a limited basis and expanded in the future. This enables our
       customers to benefit from our products without a large up-front
       investment and without requiring them to overhaul their existing
       information technology systems.
                                        4
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     - Efficient Network Utilization.  Our technology allows our products to
       make efficient use of available network bandwidth while growing with the
       expanding capabilities of the network. Our products achieve greater
       bandwidth efficiency through an efficient implementation of
       publish-subscribe architecture and are capable of even greater efficiency
       using multicast technology. This enables multiple subscribers to receive
       the content they need simultaneously with a single message, reducing the
       complexity and cost of distributing information across the network.

     - Reliability and Fault Tolerance.  Our SmartSockets software is built upon
       technology that we initially developed for use in demanding high
       performance environments that place a premium upon reliability and fault
       tolerance. Examples include satellite operations, launch control systems
       and other command and control applications in the aerospace industry. Our
       infrastructure software has now also been deployed by large e-commerce
       sites, financial exchanges, telecommunications companies, large-scale
       transportation systems, and energy companies.

     - An Active Model of Information Distribution.  SmartSockets uses a
       publish-subscribe model of communication to deliver data automatically as
       it becomes available only to "subscribers," those applications that have
       previously expressed an interest in receiving that information when it is
       "published."

PRODUCTS AND SERVICES

     Our messaging technology was originally created more than a decade ago and
has been further developed over the past ten years. It originally served as the
real-time infrastructure for a number of demanding, high-performance aerospace
applications, including network management, satellite operations, launch control
systems, large-scale integration and test, and other command and control
applications. Almost all of these systems were mission- or life-critical,
requiring the highest levels of performance and reliability. Today, our
technology is used in a variety of demanding, high-performance environments,
including financial exchanges, telecommunications, and aerospace applications.

     Our infrastructure software enables organizations to communicate and
deliver mission-critical information reliably across extended computer networks
in real time. Using software "engines," or small, efficient software processes
that can be embedded on computers, our infrastructure software can be used to
create what is known in the industry as a "virtual cloud," or network of
computers embedded with our software engines. Any application operating within a
virtual cloud is able to deliver information quickly, reliably, and efficiently
to any other application within this cloud. Our software engines are designed to
route and deliver information automatically to any application within a cloud
that has subscribed to this information, even if the application, or subscriber,
requesting the information uses a different platform or protocol than the
application sending the information. In the event of a system or network
failure, our software engines are designed to route information dynamically
around failures or blocked paths, minimizing service interruptions or delays. If
an application is unable to receive requested information when it is initially
delivered, our engines are able to store the requested information and deliver
it at a later time. Furthermore, our infrastructure software is highly scalable
because it is built upon an architecture and global naming scheme similar to
that used by the Internet. Our software automatically partitions workload among
the various engines that are present in a cloud and allows organizations to
expand an existing cloud simply by adding additional engines. In addition, our
software can be used to connect multiple clouds and form larger clouds,
facilitating reliable, real-time information exchange across local area networks
and wide area networks, including the Internet.

     Our products fall into the following categories:

     Data Delivery.  Our data delivery, or messaging, category of products, form
the core of our product lines and provide a variety of message delivery
paradigms, including reliable, real-time, and queued delivery of information
between applications on a network. It enables organizations to integrate diverse
computer applications by connecting each application to a network through a
single interface, instead of directly linking each application to all other
applications. Applications operating within a network of that type communicate
by exchanging messages, or "packets" of data, which can contain many different
forms of information, including audio, video, file, HTML, XML, database records,
text, numbers and structures. Our messaging
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technology also supports a wide range of communication models used in
organizations for delivery of messages, including:

     - Publish-subscribe, where information is automatically delivered to
       applications that have previously expressed an interest in that type of
       information when it becomes available;

     - Multicast, where information requested by several applications can be
       sent only once, rather than as separate messages to each application,
       reducing the complexity and cost of information distribution within an
       organization;

     - Queuing, where information is placed in persistent storage until an
       application, or another queue, is ready to accept the information;

     - Peer-to-peer, where a message is passed directly between two
       applications; and

     - Request-reply, where information is requested and a result is returned.

     Connectivity.  This category of products is used to connect external
sources of information to our core products. They include:

     - Data base adapters, which integrate databases such as those from Oracle,
       IBM, and others;

     - Web integration, which provides a way to integrate with the world-wide
       web, including critical coexistence capabilities such as HTTP-tunneling
       required to securely pass through corporate firewalls and proxy servers;

     - Data feed handlers, which integrate financial data feeds with
       SmartSockets.

     Security.  This category covers products that enhance the security of the
overall system via encryption, authentication, and entitlement mechanisms.

     Monitoring and Management.  Our technology can be configured to monitor
system and application parameters in local or wide area networks, including the
Internet, using intuitive graphical user interfaces and SNMP-based
implementations. This technology enables users to monitor, configure,
administer, and operate large-scale systems built upon our infrastructure
software and ensure reliable operation.

     Our current products are as follows:

  DATA DELIVERY PRODUCTS

     We currently offer the following data delivery, or messaging
infrastructure, products.

     - SmartSockets facilitates selective information delivery by enabling
       messages to be delivered automatically only to interested applications,
       also called "subscribers." SmartSockets supports publish-subscribe,
       request-reply, and peer-to-peer messaging. SmartSockets uses both the
       networking protocols of the Internet and reliable multicast to provide
       highly efficient one-to-one, one-to-many, and many-to-many
       communications. SmartSockets can operate over virtually any network type,
       including the Internet and wireless networks. This product also offers a
       variety of services that complement the messaging function, such as fault
       tolerance, guaranteed message delivery, data encryption, authentication,
       load balancing, and data translation. SmartSockets provides efficient
       networking and high scalability, and can be embedded in the products of
       independent software vendors as well as an organization's existing
       information system. We also offer the following optional add-on modules
       to SmartSockets that extend its functionality:

      - SmartSockets for JMS is our implementation of Sun Microsystems'
        JavaMessage Service (JMS) specification. SmartSockets for JMS offers
        real-time, enterprise messaging using an industry-standard API.
        SmartSockets for JMS runs on top of our SmartSockets high performance,
        real-time messaging infrastructure.

      - SmartMQ is a message queuing product that provides complementary
        functionality to SmartSockets. SmartMQ enables a system to store
        messages and facilitates backup and audit capabilities. This
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        product is designed for use in applications where transactions, in
        addition to being processed in real time, must be available to be
        processed if a system fails, and be subject to verification and audit.
        SmartMQ is tightly integrated with SmartSockets and thus facilitates a
        seamless integration of the queuing and publish-subscribe communication
        models. It can also interoperate with IBM's MQSeries message queuing
        product, allowing companies to leverage their investment in legacy
        systems.

      - SmartPGM is our implementation of a real-time, reliable multicast
        protocol known as Pragmatic General Multicast, or PGM, that was
        originally specified by Cisco Systems. A network protocol determines how
        applications communicate with each other across a computer network. The
        performance of a computer network depends in part upon the protocols
        used by the network. We use TCP/IP, the standard Internet protocol for
        one-to-one, or unicast, communication in our SmartSockets product
        family. We also provide reliable multicast protocols that enable
        networks to manage and use existing bandwidth more efficiently. SmartPGM
        reliably and efficiently sends data from a few senders to large groups
        of simultaneous recipients. It can be deployed in a wide range of
        network types, including satellite, wireless, and Internet and
        enterprise networks. SmartPGM is an automatically configuring protocol
        that provides flexibility in changing recipient group members. SmartPGM
        can also support networks that aren't PGM enabled through its SmartPGM
        network elements. SmartPGM is designed as a service, or daemon, that
        communicates using a simplified API with applications requiring reliable
        multicast service. SmartPGM is supported by multiple vendors.

      - SmartSockets Multicast provides more advanced, scalable and efficient
        one-to-many communications via local and wide area networks, Internet
        and satellite connections. SmartSockets Multicast integrates PGM APIs
        from our SmartPGM product. From video and audio conferencing to live
        transmissions of multimedia training courses to stock tickers,
        SmartSockets Multicast enables new applications not possible with
        unicast (i.e. applications that require reliable, scalable and efficient
        one-to-many transmission of rich multimedia content.

      - SmartPGM FX (formerly SmartTransfer) provides a simple, easy to use
        command line interface and graphical user interface as well as a
        powerful set of utilities to simplify the setup and management of file
        transfers from a single sender to multiple receivers over an IP
        multicast and PGM capable network. It permits the distribution of any
        data files including: HTML, video, audio, graphic and data files to
        multiple sites in a highly efficient manner. SmartTransfer is built on
        top of SmartPGM, and accordingly allows a file to be efficiently
        delivered to a large number of recipients.

     These products also include development functionality that our customers
use to permit our products to interface with their software applications.

     Our data delivery, or messaging infrastructure, products use both unicast
and multicast protocols. Our messaging products can be accessed through a
variety of platforms, programming interfaces such as C, C++, Java and ActiveX,
and operating systems such as Windows, UNIX, Linux, MVS, OpenVMS, VxWorks and
IBM mainframes. This cross platform support allows for intercommunication among
all of these platforms, programming interfaces and operating systems. For
example, the following three processes would be able to communicate directly: a
Java process on Linux, an ActiveX process on Windows NT, and an MVS process
written in C.

  CONNECTIVITY PRODUCTS

     We currently offer the following connectivity products:

     - SmartSockets LiveDB provides a seamless, cost-effective, high
       performance, off-the-shelf database adapter for large distributed
       systems. LiveDB extends the capabilities of SmartSockets and is a
       platform-independent add-on product that enables business-critical
       information stored in multiple enterprise systems and databases to be
       accessed, exchanged and distributed in real-time via SmartSockets without
       rewriting any code, modifying any applications, or learning any new APIs.

     - SmartSockets Gateway (formerly RTgateway) extends the messaging
       functionality of SmartSockets in several key areas. Using SmartSockets
       Gateway, organizations can connect diverse message sources
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       and systems, enhance the scalability of their overall messaging
       infrastructure, implement content-based message routing and filtering
       schemes, and enjoy greater message routing flexibility with a choice of
       publish-subscribe or request-reply models.

     - SmartPGM Propagator for Oracle provides a multicast content transport
       solution for efficient database propagation through an integrated,
       interoperable addition to the Oracle Advanced Queueing (AQ) interface.
       SmartPGM Propagator eliminates redundant point-to-point transmissions,
       decreasing the bandwidth used for propagation and the amount of CPU used.
       SmartPGM Propagator for Oracle has been built around our PGM technology
       and Oracle's advanced queuing technology, and allows Oracle database
       customers requiring efficient and reliable content distribution to
       propagate business-critical information in a more cost-effective manner.

  SECURITY

     We currently offer the following security product:

     - SmartSockets SSL provides private, secure connections between
       SmartSockets processes. Using the industry-standard Secure Sockets Layer
       (SSL) protocol, SmartSockets SSL enables the highly secure transfer and
       exchange of information over intranets, extranets and the
       Internet -- without any reprogramming of existing SmartSockets
       applications.

  MONITORING AND MANAGEMENT TOOLS

     We offer the following product to monitor and manage networked applications
utilizing our data delivery products:

     - SmartSockets Monitor (formerly RTmonitor) facilitates the monitoring and
       management of applications utilizing SmartSockets. Through an easy-to-use
       graphical interface, SmartSockets Monitor can be configured to monitor
       system and application parameters across both local and wide area
       networks. System events are viewed through a display application that can
       operate anywhere on the network and in multiple locations simultaneously
       without any change in system configuration.

MAINTENANCE AND SUPPORT

     We offer an array of software maintenance and support services to our
customers. Our support organization provides services 24 hours a day, seven days
a week. We have a worldwide support organization with key operations centers in
Los Altos, California, Warrenville, Illinois and London, England. These centers
provide the infrastructure for our around-the-clock call centers and hotline
support. As of November 30, 2001, we had ten employees involved in our
maintenance and support services.

     We offer a range of maintenance support packages that allow our customers
to choose the level of support that fits their needs and budgets. Our
maintenance programs entitle our customers to receive updates and new versions
of our software, as well as to on-site support that is charged on a time and
materials basis. In addition, customers are able to receive support online over
the Internet, including entering and tracking inquiries, downloading new
versions of our software and accessing our online knowledge base.

PROFESSIONAL SERVICES AND TRAINING

     Our professional services organization offers a wide range of consulting
services, including systems planning, architecture and design, custom
development and systems integration for the rapid deployment of our products. We
offer professional services with the initial deployment of our products, as well
as on an ongoing basis to address the continuing needs of our customers. Our
professional services staff is located in several offices in the United States
and an office in London, England, enabling us to perform installations and
respond to customer demands rapidly across the Americas and Europe. As of
November 30, 2001, our professional services group consisted of sixteen
employees. These individuals have expertise in the e-business, financial
services and telecommunications industries. Many of our professional service
employees have

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advanced degrees and/or substantial industry expertise in network architecture
and design, as well as in networking protocols, including TCP/IP and reliable
multicast.

     We provide training for customer personnel at our main office as well as at
customer locations. We also develop custom education programs to address the
specific needs of individual customers and partners.

ACQUISITIONS

     We have made two strategic acquisitions that have augmented our technology
and provided us with additional consulting and development personnel in the
reliable multicast area:

     GlobalCast Communications.  We acquired substantially all of the assets of
GlobalCast Communications, Inc., a Fremont, California-based company, in
September 1999. GlobalCast was a provider of reliable multicast technology, and
prior to our acquisition of GlobalCast, we had licensed a significant portion of
GlobalCast's technology and had embedded it in our SmartSockets product.
GlobalCast's primary product was based on RMTP-II technology. RMTP-II adds
reliability and scalability to multicast. RMTP-II was developed by GlobalCast
over a three-year period in conjunction with Lucent Technologies and academic
experts, and was first sold by GlobalCast in 1998. GlobalCast had licensed some
of the core algorithms of RMTP-II from Lucent, which has a patent on the
technology. The license was assigned to us as a part of the acquisition of
GlobalCast and is non-exclusive. While we draw upon the technology of RMTP-II in
our multicast development, we are currently focusing our multicast protocol
development and sales efforts on the SmartPGM products and are not currently
shipping a commercial version of RMTP-II. During the quarter ended June 30,
2001, we recorded a charge of $1.2 million to reflect the impairment of
intangibles and other assets, related to our goodwill associated with our
acquisition of GlobalCast.

     WhiteBarn.  We acquired WhiteBarn, Inc., a Warrenville, Illinois-based
company, in March 2000. WhiteBarn was a software consulting and development
company focused on reliable multicast and network protocols. The principals of
WhiteBarn had been involved in the design and development of large scale trading
systems and real-time data distribution since 1985. Prior to the acquisition,
WhiteBarn was primarily engaged in consulting activities related to the
implementation of reliable multicast. WhiteBarn had also developed a commercial
implementation of PGM. We maintain WhiteBarn's facility in Illinois, and 13
WhiteBarn employees joined us in connection with the acquisition. We are using
former WhiteBarn personnel primarily in consulting and product development
activities related to reliable multicast, and have embedded an enhanced version
of WhiteBarn's PGM implementation in our SmartSockets product.

SALES AND MARKETING

     We promote and license our software and sell our services primarily through
a direct sales organization, and also indirectly through system integrators,
foreign distributors, original equipment manufacturers and other resellers. As
of November 30, 2001, we employed 33 sales and marketing personnel located in
several U.S. cities and in the United Kingdom. We plan to prudently add
personnel to our direct and indirect sales staff.

     Our sales strategy targets industries, and organizations within those
industries, that require high-speed, highly scalable messaging infrastructure
for internal use or to integrate efficiently with their customers' and business
partners' applications. Our sales team, which typically includes sales people,
technical sales engineers and professional services personnel, works together
with our customers' personnel to understand the needs and goals of the
customer's particular application and its development and deployment
environments. Customers are allowed to use a full working copy of our products
on a limited-time basis in order to evaluate our products in their environment.
The level of customer analysis, both technically and financially, results in a
sales cycle that typically ranges between three and nine months. For larger
opportunities with new customers, these cycles can be longer.

     We focus our marketing efforts on programs intended to attract potential
customers and to increase awareness of and promote Talarian and its products and
the benefits they provide. We use a variety of targeted marketing vehicles
including industry analyst updates and communications, market data research,
print

                                        9
<PAGE>

advertising, trade shows and speaking engagements targeted toward the industries
we serve, press relations, electronic customer newsletters and our Web site. We
have developed collateral material for use by our direct and indirect sales
organizations, including white papers, data sheets, customer case studies, and
press releases and coverage.

RESEARCH AND DEVELOPMENT

     The computer software industry is characterized by rapid technological
change and is highly competitive in regard to timely product innovation.
Accordingly, we believe that our future success depends on our ability to
enhance current products that meet a wide range of customer needs and to develop
new products rapidly to attract new customers and provide additional products to
existing customers. In particular, we believe we must continue to respond
quickly to users' needs for high-speed, scalable, easy-to-implement
infrastructure software to meet the increasing demands of applications being
deployed in business-to-business e-commerce systems.

     We address the needs of current users through regularly scheduled
maintenance and enhancement releases. Our product development organization is
focused on enhancing the scalability, performance and ease-of-use of our
products. The majority of the work performed by our research and development
organization consists of adding new functionality and enhanced performance
capabilities to our existing product line.

     In addition to our internal proprietary research and development, from time
to time we license technologies from third parties to embed into our technology.
Additionally, we are active participants in the IETF standards initiative for
reliable Internet Protocol multicast. We are also contributing members of the
International Middleware Association, Object Management Group, Securities
Industry Middleware Council, Internet Protocol Multicast Initiative, and
Business Quality Messaging Forum.

     We have made, and will continue to make, substantial investments in
research and development. Research and development expenses were $9.8 million,
$5.7 million, and $3.2 million in fiscal 2001, 2000, and 1999. As of November
30, 2001, we had 27 employees divided into five groups: client, server, security
and other service, quality assurance and documentation. We plan to maintain our
investment in research and development for the foreseeable future. All of our
software development costs have been expensed as incurred. While we have
licensed externally developed technology for integration into our products, most
of our products and enhancements to those products have been developed
internally. Additionally, we have in the past augmented our research and
development efforts through the acquisitions of GlobalCast and WhiteBarn.

COMPETITION

     The market for our products is intensely competitive, relatively new,
rapidly evolving, and subject to rapid technological change. We believe that
competition will become more intense in the future and may cause price
reductions, reduced gross margins, and loss of market share, any one of which
could significantly reduce our future revenue. We most often compete against
Tibco Software, a provider of infrastructure software products and services.
Other current and potential competitors also include:

     EAI Vendors.  We currently face competition from various enterprise
application integration, or EAI, vendors, that offer some of the features of our
products in their technology. These EAI vendors include webMethods and Vitria.

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

     Operating System Software Vendors.  Vendors of widely used operating system
software, including Microsoft and Sun Microsystems, may integrate real-time
infrastructure functionality into future versions of their operating system
software or introduce directly competing infrastructure functionality. If
Microsoft or other vendors are able to incorporate infrastructure functionality
successfully into future versions of their
                                        10
<PAGE>

operating system software or introduce competing products, we may not be able to
compete effectively and may not be able to obtain or may lose market share.

     IT Departments.  We currently face competition from the information
technology departments of potential customers, which have developed or may
develop systems that provide for some or all of the functionality of our
SmartSockets software and related products. It is often difficult for us to sell
our product to a potential customer that has already invested heavily in a
system that our products are intended to replace.

     We believe that customers in our industry make purchasing decisions
primarily based on their perception of product performance, perception of the
vendor and product price. We believe, based on discussions with customers and
potential customers, and the results of testing, that the performance of our
product is a significant competitive advantage for us. However, some of our
competitors' products offer some features, such as a greater number of
"adaptors" that facilitate connecting their products with third-party
applications, and "business logic" that facilitates the routing and delivery of
information in a manner different than is used by our products, that provides
them with an advantage with some customers. We also believe that perception of
the vendor is currently often a significant advantage for our competitors, as
they are generally larger with substantially more resources and name
recognition.

INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS

     Our success is highly dependent upon our proprietary software technology,
our trademarks, and brand names, and the goodwill associated them. We rely
primarily on a combination of copyright, trademark, patent and trade secret
laws, contractual provisions, confidentiality agreements with employees and
third parties, and other similar measures to protect our proprietary information
and intellectual property. We have registered "Talarian" and "SmartSockets" as
our trademarks in the United States, and have applied to register "SmartSockets"
in the European Community, Canada, and Japan. We acquired the registered
trademark "Propagator" through our acquisition of GlobalCast. We have applied to
register the Talarian logo in the United Sates, and have applied to register
"Talarian" and the Talarian logo in the European Community, Canada, and Japan.
We claim as common law trademarks the terms "GlobalCast," "WhiteBarn," "the
world works in real time," "exchange instantly, distribute globally," the
Talarian logo, and our product names "SmartPGM," "SmartPGM FX," "SmartSockets
MQ," "SmartSockets Monitor," "SmartSockets Gateway," "SmartSockets for JMS,"
"SmartSockets SSL," "SmartSockets LiveDB," "MQadmin," RTserver," RTdaq,"
"RThci," RTplayback," RTie," and RTarchive." As of the date of this annual
report, we do not own any issued patents, although we have four patent
applications pending before the U.S. Patent and Trademark Office involving
message transfer. We cannot predict when or whether we will receive any patents
with respect to any of these applications.

     We enter into confidentiality agreements with our employees, consultants,
distributors, partners and customers, and limit access to our software,
documentation and other proprietary information. Additionally each customer,
partner and/or distributor enters into a license agreement, in the form of a
signed license agreement or a shrink-wrap form of agreement embedded within our
software, with respect to our software, documentation and other intellectual
property. A small number of our license agreements contain provisions allowing
access to our source code under limited circumstances. Despite our efforts to
protect our intellectual property, unauthorized third parties may attempt to
copy or obtain the use of our technology. The unauthorized reproduction or
misappropriation of our intellectual property could allow third parties to
benefit from our technology without remuneration to us. In addition, as we
intend to expand our operations internationally, effective copyright and trade
secret protection may not be available, or may be limited, in some foreign
countries. If we fail to protect our intellectual property and other proprietary
rights, our business could be adversely affected.

     We do not believe that our products, trademarks, or other proprietary
rights infringe the proprietary rights of third parties. However, from time to
time, we receive notices from third parties asserting that we have infringed
their patents or other intellectual property rights. In addition, we may
initiate claims or litigation against third parties for infringement of our
proprietary rights or to establish the validity of our proprietary rights. Any
claims of these types could be time-consuming, result in costly litigation,
cause product shipment

                                        11
<PAGE>

delays, or lead us to enter into royalty or licensing agreements rather than
disputing the merits of these claims. As the number of software products in the
industry increases and the functionality of these products further overlaps, we
believe that software developers may become increasingly subject to infringement
claims. Any claims of these types, with or without merit, could be
time-consuming and expensive to defend. An adverse outcome in litigation or
similar proceedings could subject us to significant liabilities to third
parties, require expenditure of significant resources to develop non-infringing
technology, require disputed rights to be licensed from others, or require us to
cease the marketing or use of the infringing products, any of which could have a
material adverse effect on our business, operating results and financial
condition.

     In 1989, we licensed technology from Lockheed that serves as the basis for
many of our products. This license is fully paid and irrevocable.

EMPLOYEES

     As of November 30, 2001, we employed 117 people in Los Altos, California,
in several cities across the United States, and in London, England. Of these
employees:

     - 27 were engaged in research and development;

     - 33 in sales and marketing;

     - 36 in professional services and technical support; and

     - 21 in finance and other administrative departments.

     Eight of our employees are located in London, England. None of our
employees is subject to any collective bargaining agreements. We believe our
employee relations are good.

ITEM 2.  PROPERTIES

     We lease approximately 16,000 square feet and 13,000 square feet in two
office buildings located in Los Altos, California under two separate lease
agreements that expire in May 2005 and December 2005, respectively. We lease a
total of approximately 13,000 square feet in a single office building in
Warrenville, Illinois under a lease that expires in December 2005. We also lease
office space in London, England and in various cities in the United States and
internationally to support our sales and marketing personnel worldwide. These
facilities are generally leased on a month-to-month basis or have terms that end
in 12 months or less. As of September 30, 2001, our corporate facilities in
California exceed our current and projected needs and we have recognized a loss
of $1.3 million representing the unused portion of our future lease commitments.
We believe that these facilities are adequate for our current needs and that
suitable additional or alternative space will be available in the future on
commercially reasonable terms as needed.

ITEM 3.  LEGAL PROCEEDINGS

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

                                        12
<PAGE>

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

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

     No matters were submitted to holders of our securities during the quarter
ended September 30, 2001.

                                    PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

PRICE RANGE OF COMMON STOCK

     The Common Stock of our Company began trading on the Nasdaq National Market
on July 21, 2000, under the symbol "TALR." Prior to that, there was no public
market for our stock. The following table sets forth the high and low closing
sales prices for the Company's Common Stock as reported on the Nasdaq National
Market for the periods indicated.

<Table>
<Caption>
                                                               HIGH     LOW
                                                              ------   ------
<S>                                                           <C>      <C>
FISCAL 2001:
Fourth Quarter..............................................    2.34     1.34
Third Quarter...............................................    3.18     1.41
Second Quarter..............................................    5.00     2.25
First Quarter...............................................  $19.00   $ 3.00

FISCAL 2000:
Fourth Quarter (from July 21, 2000).........................  $22.75   $12.00
</Table>

     As of November 30, 2001, there were approximately 255 stockholders of
record of our Company's common stock.

     We have never paid dividends on our capital stock. We currently intend to
retain any future earnings for use in our business and do not anticipate paying
any cash dividends in the foreseeable future.

RECENT SALES OF UNREGISTERED SECURITIES

     In February 2001, we issued 68,888 shares of our Common Stock to an
individual investor upon a net exercise of a warrant to purchase such stock. The
sale and issuance of these securities to the investor was determined to be
exempt from registration under the Securities Act in reliance upon Section 4(2)
of the Securities Act, as a transaction not involving a public offering. The
investor represented that he was an accredited investor and intended to acquire
the securities for investment only and not with a view to or for sale in
connection with any distribution. Appropriate legends were affixed to the share
certificates issued in this transaction. The investor also represented that he
had adequate access to information about the Company in connection with this
transaction.

USE OF PROCEEDS FROM SALES OF REGISTERED SECURITIES

     Our Registration Statement on Form S-1 (File No. 333-34694) related to our
initial public offering was declared effective by the SEC on July 20, 2000. A
total of 4,200,000 shares of our common stock was registered with the SEC with
an aggregate registered offering price of $67.2 million, all of which shares
were registered on our behalf. The offering commenced on July 21, 2000 and all
shares of common stock being offered were sold for the aggregate registered
offering price through a syndicate of underwriters managed by Lehman Brothers,
Inc., SG Cowen Securities Corporation, Wit SoundView Corporation and Fidelity
Capital Markets, a division of National Financial Services Corporation.

                                        13
<PAGE>

     We paid to the underwriters underwriting discounts and commissions totaling
$4.7 million in connection with the offering. In addition, we incurred
additional expenses of approximately $2.5 million in connection with the
offering, which when added to the underwriting discounts and commissions paid by
us amounted to total estimated expenses of $7.2 million. Thus, the net offering
proceeds to us (after deducting underwriting discounts and commissions and
offering expenses) were approximately $60 million. From the effective date of
the registration statement through September 30, 2001, the proceeds from the
offering have been used to fund $15.0 million of working capital and general
corporate needs. In addition, we applied $35 million of the proceeds towards
short-term investments, and $1.9 million of the proceeds towards purchase and
installation of machinery and equipment. The remaining proceeds are held in cash
and cash equivalents. No offering expenses were paid directly or indirectly to
any of our directors or officers (or their associates), or persons owning ten
percent (10%) or more of any class of our equity securities or to any other
affiliates.

ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

     The following tables summarize our consolidated financial data and should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements
and the related notes included elsewhere in this annual report.

     The consolidated statement of operations data for the years ended September
30, 2001, 2000 and 1999 and the consolidated balance sheet data as of September
30, 2001 and 2000 are derived from our consolidated financial statements that
have been audited by KPMG LLP, independent auditors, which are included
elsewhere in this annual report on form 10-K. The consolidated statement of
operations data for the years ended September 30, 1998 and 1997 and the
consolidated balance sheet data as of September 30, 1999, 1998, and 1997 are
derived from audited financial statements that are not included in this annual
report on form 10-K.

<Table>
<Caption>
                                                         YEAR ENDED SEPTEMBER 30,
                                             -------------------------------------------------
                                               2001       2000      1999      1998      1997
                                             --------   --------   -------   -------   -------
<S>                                          <C>        <C>        <C>       <C>       <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
  Licenses.................................  $  8,291   $ 10,553   $ 5,912   $ 5,100   $ 4,209
  Maintenance..............................     4,006      3,094     2,488     1,873     1,426
  Professional services....................     2,566      2,204       640       540       807
                                             --------   --------   -------   -------   -------
     Total revenue.........................    14,863     15,851     9,040     7,513     6,442
Gross profit...............................    10,900     12,447     7,872     6,448     5,230
Loss from operations.......................   (26,517)   (15,999)   (3,522)   (1,718)     (889)
Net loss...................................  $(23,385)  $(15,040)  $(3,539)  $(1,728)  $  (894)
Basic and diluted net loss per share
  attributable to common stockholders......  $  (1.27)  $  (3.08)  $ (1.30)  $ (0.80)  $ (0.57)
Basic and diluted common shares used in
  computation..............................    18,467      7,005     3,099     2,781     2,434
</Table>

<Table>
<Caption>
                                                         YEAR ENDED SEPTEMBER 30,
                                             -------------------------------------------------
                                               2001       2000      1999      1998      1997
                                             --------   --------   -------   -------   -------
<S>                                          <C>        <C>        <C>       <C>       <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term
  investments..............................  $ 39,418   $ 67,738   $ 1,820   $ 3,204   $   901
Working capital............................    37,304     65,056    (1,240)      853       728
Total assets...............................    61,854     78,606     7,994     4,985     3,346
Debt, less current portion.................        --         --        83       225       289
Redeemable convertible preferred stock.....        --         --     8,644     8,146     7,648
Stockholders' equity (deficit).............    53,957     70,639    (8,288)   (8,877)   (6,671)
</Table>

                                        14
<PAGE>

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

     The following discussion should be read in conjunction with our
consolidated financial statements and notes thereto and other financial
information appearing elsewhere in this annual report.

OVERVIEW

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

     We were incorporated in November 1988. From inception through 1996, we
derived a substantial majority of our revenue from a suite of software products
used primarily in connection with mission-critical command and control
operations in industries such as aerospace. In 1997, leveraging our technology
developed for mission-critical command and control operations, we refocused our
business strategy to provide infrastructure software for applications relying
heavily upon the use of real-time, distributed systems. Our operating activities
during 1997 and 1998 related primarily to developing our SmartSockets messaging
infrastructure product line and directing our sales and marketing efforts to
increase market awareness of our SmartSockets product in industries such as
finance, telecommunications and computer hardware and services. In 1999, we
launched SmartMQ, a message queuing product that provides complementary storage,
backup and audit capabilities to SmartSockets. We also added Internet-related
applications and industries, such as business-to-business e-commerce, to our
sales and marketing focus and began a concerted effort to market our product to
third-party partners such as original equipment manufacturers and value-added
resellers. Additionally in 1999, we began incorporating reliable multicast
capabilities into our SmartSockets product line. As part of our overall
multicast initiative, we acquired substantially all of the assets of GlobalCast
Communications, Inc. in September 1999, and acquired WhiteBarn, Inc. in March
2000. Later in 2000, we launched our SmartPGM IP multicast product suite that
included SmartPGM and SmartPGM FX. In 2000, we also launched two products as
add-on products to SmartSockets, SmartSockets SSL and SmartSockets Gateway.

     In 2001, we introduced two new SmartSockets add-on products, SmartSockets
Multicast and SmartSockets LiveDB, and we extended our SmartPGM product line
with SmartPGM Propagator for Oracle. Additionally in 2001, in part as a response
to overall adverse economic conditions, we made a concerted effort to optimize
our organizational structure and applied more aggressive cost containment
programs. As a result, we closed remote offices in areas that were not providing
adequate returns on our investments. Additionally, we began to focus our sales,
marketing, and engineering resources primarily on the finance and aerospace
industries, which we believed had the potential for the greatest, and most
immediate, returns. We also continued our efforts toward third-party partners
such as original equipment manufacturers and value-added resellers, primarily in
the computer hardware and software services markets.

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

     Maintenance and support revenue consists of fees for providing software
updates and technical support for software products. Revenue from maintenance
and support fees is recognized ratably over the period of the maintenance and
support agreement, typically twelve months. Payments for maintenance and support
are typically paid in advance and are nonrefundable.
                                        15
<PAGE>

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

     Payments received in advance of revenue recognition are recorded as
deferred revenue. As of September 30, 2001, we had $3.9 million of deferred
revenue. Of this amount, $792,000 was classified as long-term deferred revenue,
relating primarily to software licenses that require us to deliver software over
an extended period and, to a lesser extent, to maintenance and support
agreements that have a term in excess of one year.

     We market our products primarily through our direct sales force and, to a
lesser extent, through indirect channels. We also derive revenue from indirect
channel relationships with distributors, original equipment manufacturers,
value-added resellers and systems integrators. Our third-party relationships
have typically been with companies that embed our product within their product,
for which we receive a license fee and, in some cases, future royalties based on
our reseller's product revenue. We expanded our international presence by
opening a sales and support office in London, England in 1998, and added sales
offices in Tokyo, Japan and Frankfurt, Germany in 2000. Due to the overall
economic slowdown in 2001, we have focused our direct international efforts
solely in our London offices, augmented through international distributors. We
plan to prudently increase our current sales force, focusing our efforts on
industry verticals and geographies that provide us the highest return on
investment, and continue current campaigns for the market awareness of our
company and our products. As a result, we expect to incur only moderate
increases in expenditures related to programs designed to achieve those goals.

     In September 1999, we acquired substantially all of the assets of
GlobalCast, a provider of reliable multicast technology, for common stock with
an aggregate value of $3.6 million. The acquisition was accounted for using the
purchase method of accounting in accordance with Accounting Principles Board
Opinion No. 16, and $300,000 of the purchase price was allocated to in-process
research and development and expensed at the time of the acquisition. Also, in
connection with the GlobalCast acquisition, we recorded intangible assets of
$2.9 million. During the quarter ended June 30, 2001, we recorded a charge of
$1.2 million to reflect the impairment of intangibles and other assets,
primarily related to our goodwill associated with our acquisition of GlobalCast.

     In March 2000, we acquired WhiteBarn, a professional services and software
development company focused on reliable multicast and network protocols with
cash, stock and options to purchase our common stock that had an aggregate value
of $4.9 million. The transaction was accounted for as a purchase. In this
acquisition, the acquired technology included existing technology, but not
in-process research and development. In connection with the WhiteBarn
acquisition, we recorded intangible assets of $4.4 million and are amortizing
them over a two to three year period.

     We have incurred significant losses recently as we have spent substantial
amounts to develop and enhance our products and have invested heavily in our
sales and marketing organizations. Recent economic conditions have also served
to slow customers' spending decisions. We believe our success is dependent upon
our ability to continue to expand our customer base and enhance our technology.

     In connection with the granting of stock options to our employees through
July 20, 2000, we recorded deferred stock compensation totaling approximately
$22.6 million. This amount represents the difference between the exercise price
and the deemed fair value of our common stock for accounting purposes on the
date these stock options were granted. This amount is included as a component of
stockholders' equity and is being amortized on an accelerated basis by charges
to operations over the vesting period of the options consistent with the method
described in Financial Accounting Standards Board Interpretation No. 28. The
stock options, or restricted stock purchased pursuant to these options,
generally vest at a rate of 12.5% upon the six-month anniversary of the option
grant date and 2.083% each month thereafter for the next 42 months. Amortization
of the September 30, 2001 balance of deferred stock compensation will result in
charges to operations of $2.4 million, $899,000, and $73,000 for the fiscal
years 2002, 2003 and for the nine months ended June 30, 2004, respectively.

                                        16
<PAGE>

     We have recorded a $50,000 provision for state and foreign franchise taxes
for the period ending September 30, 2001. We have not recorded a provision for
federal income taxes for any period since our inception as we have incurred
losses in each period. As of September 30, 2001, we had net operating loss
carryforwards for federal income tax purposes of approximately $21.1 million and
for California income tax purposes of approximately $1.6 million, available to
offset income in future years. The federal net operating loss carryforwards
expire from 2007 through 2021. The California net operating loss carryforwards
expire from 2001 through 2006.

RESULTS OF OPERATIONS

     The following table sets forth statement of operations data, expressed as a
percentage of total revenue, for the periods indicated.

<Table>
<Caption>
                                                               YEAR ENDED SEPTEMBER 30,
                                                              --------------------------
                                                               2001      2000      1999
                                                              ------    ------    ------
<S>                                                           <C>       <C>       <C>
Revenue:
  Licenses..................................................     56%       67%       65%
  Maintenance...............................................     27        19        28
  Professional services.....................................     17        14         7
                                                               ----      ----       ---
     Total revenue..........................................    100       100       100
                                                               ----      ----       ---
Cost of revenue:
  Licenses..................................................      1         2         2
  Maintenance...............................................      9         5         7
  Professional services.....................................     11         7         4
  Amortization of deferred stock compensation...............      6         7        --
                                                               ----      ----       ---
     Total cost of revenue..................................     27        21        13
                                                               ----      ----       ---
Gross profit................................................     73        79        87
                                                               ----      ----       ---
Operating expenses:
  Sales and marketing.......................................     87        58        59
  Research and development..................................     65        36        36
  General and administrative................................     26        15        18
  Amortization of deferred stock compensation:
     Sales and marketing....................................     12        20         4
     Research and development...............................     14        20         3
     General and administrative.............................     10        20         3
  Acquired in-process research and development..............     --        --         3
  Excess facilities cost....................................     14        --        --
  Amortization of goodwill and intangible assets............     23        11        --
                                                               ----      ----       ---
     Total operating expenses...............................    251       180       126
                                                               ----      ----       ---
Loss from operations........................................   (178)     (101)      (39)
Interest income, net........................................     21         6        --
Other.......................................................     --        --        --
                                                               ----      ----       ---
     Net loss...............................................   (157)%     (95)%     (39)%
                                                               ====      ====       ===
</Table>

                                        17
<PAGE>

YEAR ENDED SEPTEMBER 30, 2001 COMPARED TO YEAR ENDED SEPTEMBER 30, 2000

  REVENUE

     Total revenue decreased by $988,000, or 6%, to $14.9 million for the year
ended September 30, 2001, from $15.9 million for the year ended September 30,
2000. Licenses and associated maintenance revenue was 83% and 86% of total
revenue in the years ended September 30, 2001 and 2000, respectively. The
decrease in total revenue was due primarily to a decrease in software license
revenue. The United States and Europe have been experiencing a general decline
in economic conditions, which has led to reduced demand for a variety of goods
and services, including high technology goods and services. During the twelve
months ended September 30, 2001, we saw a significant decrease in the overall
demand for our products and services that resulted in lower than anticipated
license revenue and greater than anticipated net loss. We believe that this
decrease in demand was primarily due to general and industry economic
conditions. During 2001, we saw increased revenue from the financial services
and aerospace vertical markets, which was more than offset by decreased revenue
from the telecommunications and high technology (computer hardware/software
manufacturers, e-commerce) sectors. One customer accounted for 13% of our
revenue during the year ended September 30, 2001. No customer accounted for more
than 10% of our total revenue in the year ended September 30, 2000.
International revenue decreased by $200,000, or 7%, to $2.7 million for the year
ended September 30, 2001, from $2.9 million from the year ended September 30,
2000. International revenue was 18% of our total revenue in the fiscal years
ended September 30, 2001 and 2000, respectively.

     Licenses.  License revenue decreased by $2.3 million, or 21%, to $8.3
million for the year ended September 30, 2001, from $10.6 million for the year
ended September 30, 2000. The decrease in license revenue was due to a decrease
in the number of SmartSockets software licenses sales, partially offset by an
increase in the number of SmartPGM software license sales. As a percentage of
total revenue, license revenue was 56% in the year ended September 30, 2001 and
67% in the year ended September 30, 2000. The decrease in license revenue in
absolute dollars and as a percentage of total revenue for both periods was a
result of a continued softness in the overall customer demand for software
licenses. We have seen a shift from larger initial license transactions to lower
dollar transactions as customers become more cautious in their purchasing
decisions.

     Maintenance.  Maintenance revenue increased by $912,000, or 29%, to $4.0
million in the year ended September 30, 2001, from $3.1 million for the year
ended September 30, 2000. The increase in maintenance revenue was due to a
larger installed base of customers receiving ongoing maintenance services. As a
percentage of total revenue, maintenance revenue was 27% in the year ended
September 30, 2001 and 19% in the year ended September 30, 2000. The increase in
maintenance revenue as a percentage of overall revenue is due to the reduction
in license revenue.

     Professional services.  Professional services revenue increased by
$362,000, or 16%, to $2.6 million for the year ended September 30, 2001, from
$2.2 million for the year ended September 30, 2000. A portion of the increase in
professional services revenue was a result of new customers obtained through our
acquisition of WhiteBarn on March 13, 2000. The remainder of the increase in
professional services revenue was attributable to an increase in training and
architectural services associated with large customer installations. As a
percentage of total revenue, professional services revenue was 17% in the year
ended September 30, 2001 and 14% in the year ended September 30, 2000.

  COST OF REVENUE

     Cost of revenue increased by $559,000, or 16%, to $4.0 million for the year
ended September 30, 2001, from $3.4 million for the year ended September 30,
2000. The increase in cost of revenue was attributable to increased costs during
the first six months of our fiscal year related to our growing maintenance and
professional services departments, some of which resulted from personnel
acquired in connection with our acquisition of WhiteBarn. The increase in cost
of revenue was offset by a decrease of 24% in the amortization of deferred stock
compensation associated with terminated employees. As a percentage of total
revenue, cost of revenue was 27% in the year ended September 30, 2001 and 21% in
the year ended September 30, 2000. Not including amortization of deferred stock
compensation, as a percentage of total revenue, cost of revenue

                                        18
<PAGE>

was 21% in the year ended September 30, 2001 and 15% in the year ended September
30, 2000. The increase in cost of revenue as a percentage of total revenue was
the result of the increase in costs associated with personnel responsible for
delivering additional professional services revenue, which typically has a lower
gross margin than other types of revenue, personnel increases associated with
customer support to provide increased support capabilities across a wider cross
section of product lines, and lower overall software license revenue.

     Licenses.  Cost of license revenue includes royalties due for technology
licensed from third parties, product packaging, manuals and documentation, and
software media. Cost of license revenue decreased by $94,000, or 39%, to
$146,000 for the year ended September 30, 2001, from $240,000 for the year ended
September 30, 2000. The decrease in cost of license revenue was attributable to
a decrease in overall license revenue, particularly lower license revenue from
royalty-bearing products. We anticipate the cost of license revenue to fluctuate
in absolute dollar amount and as a percentage of total license revenue as the
related license revenue, and the mix of license revenue among various products,
fluctuates. As a percentage of license revenue, cost of license revenue was 1%
in the year ended September 30, 2001 and 2% in the year ended September 30 2000.

     Maintenance.  Cost of maintenance revenue consists of compensation and
related expenses for our technical support organization. Cost of maintenance
revenue increased by $440,000, or 51%, to $1.3 million for the year ended
September 30, 2001, from $864,000 for the year ended September 30, 2000. The
increase in cost of maintenance revenue was due to increased personnel and
contractors hired during the first six months of the fiscal year in order to
provide increased support capabilities to our growing installed base of
customers across a broader product line. As a percentage of maintenance revenue,
cost of maintenance revenue was 32% in the year ended September 30, 2001 and 28%
in the year ended September 30, 2000. We anticipate that our cost of maintenance
revenue will remain relatively constant in terms of absolute dollars in the
coming year.

     Professional services.  Cost of professional services revenue consists of
compensation and related overhead expense for personnel and third-party
contractors we use in performing consulting, implementation, and training
services for our customers. Cost of professional services revenue increased by
$471,000, or 38%, to $1.7 million for the year ended September 30, 2001, from
$1.2 million for the year ended September 30, 2000. A portion of the dollar
increase in cost of professional services revenue was a result of consulting
personnel acquired in the acquisition of WhiteBarn that were employed for only a
potion of fiscal year 2000, but all of 2001. The remainder of the increase in
cost of professional services revenue was a result of additional personnel
deployed on our professional services engagements and an increase in management
and other infrastructure associated with delivering services. As a percentage of
professional services revenue, cost of professional services revenue was 66% in
the year ended September 30, 2001 and 56% in the year ended September 30, 2000.
The increase in the cost of professional services revenue as a percentage of
professional services revenue was a result of increasing the management and
other infrastructure associated with delivering our professional services. We
anticipate that the cost of professional services revenue will continue to
increase or decrease in terms of absolute dollars commensurate with professional
services revenue. We anticipate the cost of professional services as a
percentage of professional services revenue will remain relatively constant in
the coming year.

     Amortization of deferred stock compensation.  Amortization of deferred
stock compensation in cost of revenues decreased by $258,000, to $814,000 for
the year ended September 30, 2001, from $1.1 million for the year ended
September 30, 2000.

  OPERATING EXPENSES

     Sales and marketing.  Sales and marketing expenses include costs of sales
and marketing personnel and related overhead, commissions, field office
expenses, advertising and promotion expenses, travel and entertainment expenses
and other selling and marketing costs. Sales and marketing expenses increased by
$3.7 million, or 40%, to $12.9 million for the year ended September 30, 2001,
from $9.2 million for the year ended September 30, 2000. The increase in sales
and marketing expenses was due to expansion of our sales and marketing
department personnel and locations and, to a lesser extent, increased
promotional programs during the first six months of our fiscal year. As a
percentage of total revenue, sales and marketing expenses were 87%

                                        19
<PAGE>

in the year ended September 30, 2001 and 58% in the year ended September 30,
2000. We plan to closely monitor our spending in sales and marketing in the
coming months to better align such spending with anticipated revenue. As a
result, we expect absolute dollars spent on sales and marketing to remain
relatively flat, with perhaps a slight decrease on an annualized basis.

     Research and development.  Research and development expenses consist of
costs of research and development personnel and associated overhead, and costs
of short-term independent contractors required in connection with development of
new products, enhancements to existing products, technical documentation, and
quality assurance. Costs incurred in research and development are expensed as
incurred until technological feasibility is established. We believe under our
current engineering processes that the establishment of technological
feasibility and general release substantially coincide. As a result, no software
development costs have been capitalized to date. Research and development
expenses increased by $4.1 million, or 71%, to $9.8 million for the year ended
September 30, 2001, from $5.7 million for the year ended September 30, 2000. A
portion of the increase in research and development was a result of engineering
personnel acquired in the acquisition of WhiteBarn that were employed for only a
potion of fiscal year 2000, but all of 2001. The remainder of the increase in
research and development expenses was due to an increase in personnel and
consultants in our software development, quality assurance, and documentation
departments, hired primarily during the first six months of the fiscal year. As
a percentage of total revenue, research and development expenses were 65% in the
year ended September 30, 2001 and 36% in the year ended September 30, 2000. We
believe that our product development activities are important to attaining our
strategic objectives. We expect to maintain current levels of investment in
research and development on an absolute basis.

     General and administrative.  General and administrative expenses include
personnel costs for finance, administration, information systems and general
management, as well as professional fees, legal expenses, bad debt expense and
other general corporate expenses. General and administrative expenses increased
by $1.5 million, or 65%, to $3.8 million for the year ended September 30, 2001,
from $2.3 million for the year ended September 30, 2000. The increase in general
and administrative expenses was due to increased personnel expenses incurred
during the first six months of the fiscal year in finance and administration and
in information systems as well as increases in professional fees associated with
the additional requirements of being a public company. As a percentage of total
revenue, general and administrative expenses were 26% in the year ended
September 30, 2001 and 15% in the year ended September 30, 2000. We expect
general and administrative expenses to remain relatively flat, or to a decrease
slightly, on an absolute basis.

     Amortization of deferred stock compensation.  During the year ended
September 30, 2001, we recorded approximately $5.4 million of amortization of
deferred stock compensation in operating expenses, representing $1.8 million of
additional sales and marketing expenses, $2.2 million of additional research and
development expenses and $1.5 million of additional general and administrative
expenses. During the year ended September 30, 2000, we recorded $9.4 million of
amortization of deferred stock compensation.

     Excess facilities cost.  During the year ended September 30, 2001, we
recorded approximately $2.2 million of excess facilities costs in operating
expenses. This amount represents $900,000 of lease payments related to unused
facilities and $1.3 million accrued facility lease costs for these excess
facilities. We had no similar expenses in prior years. Management will continue
to monitor its committed facilities requirements which could result in
additional excess facility cost accruals.

     Amortization of goodwill and intangible assets.  Amortization of goodwill
and intangible assets was $3.4 million for the year ended September 30, 2001.
This amount represents the amortization of goodwill and other intangible assets
acquired in connection with our acquisition of GlobalCast in September 1999 and
WhiteBarn in March 2000. During the year ended September 30, 2000, we recorded
$1.8 million of amortization of goodwill and intangible assets. Included in the
$3.4 million of amortization of goodwill and intangible assets for the twelve
months ended September 30, 2001 was $1.2 million representing a writedown of the
carrying value of the goodwill associated with the acquisition of GlobalCast. As
of June 30, 2001, our stock price had declined significantly since the
respective valuation dates of the shares issued in connection with each
acquisition. Due to these changes, and the changes in the markets in which we
compete in the United States and global economy significantly diminishing the
market for the proprietary technology from

                                        20
<PAGE>

GlobalCast, we began a process to determine whether the respective fair values
of our goodwill and other intangible assets may be less than their respective
carrying values. This process included a detailed analysis of estimated cash
flows that we expect to generate from future operations for purposes of
determining whether an impairment of goodwill and other intangible assets has
occurred. As a result of our detailed analysis and investigation, we determined
in the third quarter that there was an impairment of goodwill associated with
the acquisition of GlobalCast. There was no impairment of goodwill associated
with the acquisition of WhiteBarn.

  INTEREST INCOME, NET

     Interest income, net consists of interest income net of interest expense.
Interest income, net resulted in income of $3.2 million for the year ended
September 30, 2001, compared to $994,000 for the year ended September 30, 2000.
The resulting change of $2.2 million was attributable to our initial public
offering in July 2000. Our average cash reserves in interest-bearing accounts
were significantly higher as a result of our initial public offering, and our
line of credit continued to remain unused during the year ended September 30,
2001.

  OTHER EXPENSE

     Other expense consists of income tax expenses and losses on foreign
currency transactions. Other expenses resulted in losses of $62,000 for the year
ended September 30, 2001, compared to $35,000 for the year ended September 30,
2000. This increase of $27,000 was attributable to the expansion of our foreign
operations.

YEAR ENDED SEPTEMBER 30, 2000 COMPARED TO YEAR ENDED SEPTEMBER 30, 1999

  REVENUE

     Total revenue increased by $6.8 million, or 75%, to $15.9 million for the
year ended September 30, 2000, from $9.0 million for the year ended September
30, 1999. Licenses and associated maintenance revenue was 86% and 93% of total
revenue in the years ended September 30, 2000 and 1999, respectively. The
increase in total revenue was due primarily to an increase in software licenses
and associated maintenance revenue to new and existing customers and, to a
lesser extent, an increase in professional services revenue. No customer
accounted for more than 10% of our total revenue in the year ended September 30,
2000. One customer accounted for 12% of our revenue during the year ended
September 30, 1999. International revenue increased by $500,000, or 21%, to $2.9
million for the year ended September 30, 2000, from $2.4 million from the year
ended September 30, 1999. International revenue was 18% and 26% of our total
revenue in the fiscal years ended September 30, 2000 and 1999, respectively.

     Licenses.  License revenue increased by $4.6 million, or 79%, to $10.6
million for the year ended September 30, 2000, from $5.9 million for the year
ended September 30, 1999. The increase in license revenue was due to an increase
in the number of software licenses to new and existing customers. This increase
was a result of the expansion of our sales force, a growing acceptance for our
infrastructure product line, and an increase in the average dollar amount of a
software license. As a percentage of total revenue, license revenue was 67% in
the year ended September 30, 2000 and 65% in the year ended September 30, 1999.

     Maintenance.  Maintenance revenue increased by $606,000, or 24%, to $3.1
million for the year ended September 30, 2000, from $2.5 million for the year
ended September 30, 1999. The increase in maintenance revenue was due to growth
associated with license agreements entered into in earlier periods. As a
percentage of total revenue, maintenance revenue was 19% in the year ended
September 30, 2000 and 28% in the year ended September 30, 1999. The decrease in
maintenance revenue as a percentage of total revenue for the year ended
September 30, 2000 when compared to the year ended September 30, 1999, was the
result of license and professional services revenue increasing at a
significantly greater percentage rate than maintenance revenue.

     Professional services.  Professional services revenue increased by $1.6
million, or 244%, to $2.2 million for the year ended September 30, 2000, from
$640,000 for the year ended September 30, 1999. Approximately 44% of the
increase in professional services revenue was a result of new customers obtained
through our

                                        21
<PAGE>

acquisition of WhiteBarn on March 13, 2000. The remainder of the increase in
professional services revenue was attributable to the increased license activity
discussed above and an increase in training and architectural services
associated with an increase in customer installations. In part, the increase in
professional services revenue was attributable to an increase in the average
rate per hour billed for our professional services technicians as they were
increasingly engaged in senior-level architectural design work as opposed to
implementation services and training. As a percentage of total revenue,
professional services revenue was 14% in the year ended September 30, 2000 and
7% in the year ended September 30, 1999.

  COST OF REVENUE

     Cost of revenue increased by $2.2 million, or 191%, to $3.4 million for the
year ended September 30, 2000, from $1.1 million for the year ended September
30, 1999. Approximately 46% of the increase in cost of revenue was a result of
an increase in amortization of deferred stock compensation for service-related
personnel. Approximately 25% of the increase in cost of revenue was a result of
increased professional services costs due to consulting personnel acquired in
our acquisition of WhiteBarn. The remainder of the increase in cost of revenue
was attributable to an increase in royalties to third parties and increased
costs related to our growing maintenance services and other
non-WhiteBarn-related professional services revenue. As a percentage of total
revenue, cost of revenue was 21% in the year ended September 30, 2000 and 13% in
the year ended September 30, 1999. Not including amortization of deferred stock
compensation, as a percentage of total revenue, cost of revenue was 14% in the
year ended September 30, 2000 and 12% in the year ended September 30, 1999. The
increase in cost of revenue as a percentage of total revenue was the result of
the increase in costs associated with personnel responsible for delivering
additional professional services revenue, which typically has a lower gross
margin than other types of revenue.

     Licenses.  Cost of license revenue includes royalties due for technology
licensed from third parties, product packaging, manuals and documentation, and
software media. Cost of license revenue increased by $76,000, or 46%, to
$240,000 for the year ended September 30, 2000, from $164,000 for the year ended
September 30, 1999. The increase in cost of license revenue was attributable to
increased royalties paid to a third party in connection with our licensing of
RMTP-II. As a percentage of license revenue, cost of license revenue was 2% in
the year ended September 30, 2000 and 3% in the year ended September 30 1999.

     Maintenance.  Cost of maintenance revenue consists of compensation and
related expenses for our technical support organization. Cost of maintenance
revenue increased by $269,000, or 45%, to $864,000 for the year ended September
30, 2000, from $595,000 for the year ended September 30, 1999. The increase in
cost of maintenance revenue was due to increased personnel hired in order to
provide support to our growing installed base of customers. As a percentage of
maintenance revenue, cost of maintenance revenue was 28% in the year ended
September 30, 2000 and 24% in the year ended September 30, 1999.

     Professional services.  Cost of professional services revenue consists of
compensation and related overhead expense for personnel and third-party
contractors we use in performing consulting, implementation, and training
services for our customers. Cost of professional services revenue increased by
$870,000, or 243%, to $1.2 million for the year ended September 30, 2000, from
$358,000 for the year ended September 30, 1999. Approximately 45% of the
increase in cost of professional services revenue was a result of consulting
personnel acquired in the acquisition of WhiteBarn. The remainder of the
increase in cost of professional services revenue was a result of additional
personnel deployed on our professional services engagements. The cost of
professional services revenue generally increased at the same rate as
professional services revenue. As a percentage of professional services revenue,
cost of professional services revenue was 56% in both the years ended September
30, 2000 and 1999.

     Amortization of deferred stock compensation.  Amortization of deferred
stock compensation in cost of revenues increased by $1 million, to $1.1 million
for the year ended September 30, 2000, from $51,000 for the year ended September
30, 1999.

                                        22
<PAGE>

  OPERATING EXPENSES

     Sales and marketing.  Sales and marketing expenses include costs of sales
and marketing personnel and related overhead, commissions, field office
expenses, advertising and promotion expenses, travel and entertainment expenses
and other selling and marketing costs. Sales and marketing expenses increased by
$3.9 million, or 73%, to $9.2 million for the year ended September 30, 2000,
from $5.3 million for the year ended September 30, 1999. The increase in sales
and marketing expenses was due to expansion of our sales and marketing
department personnel and locations and, to a lesser extent, increased
promotional programs. As a percentage of total revenue, sales and marketing
expenses were 58% in the year ended September 30, 2000 and 59% in the year ended
September 30, 1999.

     Research and development.  Research and development expenses consist of
costs of research and development personnel and associated overhead, and costs
of short-term independent contractors required in connection with development of
new products, enhancements to existing products, technical documentation, and
quality assurance. Costs incurred in research and development are expensed as
incurred until technological feasibility is established. We believe under our
current engineering processes that the establishment of technological
feasibility and general release substantially coincide. As a result, no software
development costs have been capitalized to date. Research and development
expenses increased by $2.5 million, or 78%, to $5.7 million for the year ended
September 30, 2000, from $3.2 million for the year ended September 30, 1999.
Approximately 32% of the increase in research and development was a result of
engineering personnel acquired in the acquisition of WhiteBarn. The remainder of
the increase in research and development expenses was due to an increase in
personnel and consultants in our software development, quality assurance, and
documentation departments. As a percentage of total revenue, research and
development expenses were 36% in the years ended September 30, 2000 and 1999.

     General and administrative.  General and administrative expenses include
personnel costs for finance, administration, information systems and general
management, as well as professional fees, legal expenses and other general
corporate expenses. General and administrative expenses increased by $686,000,
or 41%, to $2.3 million for the year ended September 30, 2000, from $1.6 million
for the year ended September 30, 1999. The increase in general and
administrative expenses was due to increased personnel expenses in finance and
administration and in information systems. As a percentage of total revenue,
general and administrative expenses were 15% in the year ended September 30,
2000 and 18% in the year ended September 30, 1999.

     Amortization of deferred stock compensation.  During the year ended
September 30, 2000, we recorded approximately $9.4 million of amortization of
deferred stock compensation in operating expenses, representing $3.1 million of
additional sales and marketing expenses, $3.1 million of additional research and
development expenses and $3.2 million of additional general and administrative
expenses. During the year ended September 30, 1999, we recorded $902,000 of
amortization of deferred stock compensation.

     Amortization of goodwill and intangible assets.  Amortization of goodwill
and intangible assets was $1.8 million for the year ended September 30, 2000.
This amount represents the amortization of goodwill and other intangible assets
acquired in connection with our acquisition of GlobalCast in September 1999 and
WhiteBarn in March 2000. We had no similar expenses in any prior period.

  INTEREST INCOME AND OTHER, NET

     Interest income, net consists interest income net of interest expense.
Interest income, net resulted in income of $994,000 for the year ended September
30, 2000, compared to expense of $11,000 for the year ended September 30, 1999.
The resulting change of $1.0 million was attributable to higher interest income
and lower interest expense in the more recent periods following our private
equity funding in February 2000 and our initial public offering in July 2000.
Our average cash reserves in interest-bearing accounts were thus significantly
higher, and the outstanding balance on our line of credit was lower, during the
year ended September 30, 2000 than in the prior year.

                                        23
<PAGE>

  OTHER EXPENSE

     Other expense consists of income tax expenses and losses on foreign
currency transactions. Other expenses resulted in losses of $35,000 for the year
ended September 30, 2000, compared to $6,000 for the year ended September 30,
1999. The resulting change of $29,000 was attributable to our expansion of sales
offices throughout the United States.

LIQUIDITY AND CAPITAL RESOURCES

     Prior to our initial public offering we funded our operations through
private sales of redeemable convertible preferred stock, internal operations,
and, to a lesser extent, through our credit facilities. In February 2000, we
raised $9.9 million through a private sale of redeemable convertible preferred
stock. On July 20, 2000, we completed an initial public offering of 4.2 million
shares of our common stock at $16.00 per share. Net proceeds from this offering
were $60 million, net of underwriters' commissions and offering expenses.

     Net cash used in operating activities was $14.1 million, $1.4 million, and
$2.2 million in fiscal 2001, 2000, and 1999, respectively. For the year ended
September 30, 2001, substantially all of the net cash used in operating
activities was attributable to our net loss of $23.4 million, which included
$10.8 million in non-cash charges. For the year ended September 30, 2000,
substantially all of net cash used in operating activities was attributable to
our net loss of $15.0 million, which included $12.7 million in non-cash charges,
and an increase in accrued but unpaid liabilities of approximately $1.0 million.
For fiscal 1999, net cash used in operating activities was attributable to our
net loss of $3.5 million, which included $1.7 million in non-cash charges, and
an increase in accounts receivable of $1.7 million, offset in part by an
increase in deferred revenue of $1.3 million.

     Net cash provided by investing activities was $3.1 million in the year
ended September 30, 2001. Net cash provided by investing activities in this
period represented net proceeds from the sale of investments of $13.5 million,
the purchase of investments of $8.8 million, and the purchase of $1.6 million of
property and equipment. Net cash used in investing activities was $34.5 million
in the year ended September 30, 2000. Net cash used in investing activities in
this period represented net purchases of $34.2 million of short-term
investments, the acquisition of WhiteBarn, net of cash, for $713,000 in cash,
and the purchase of $1.2 million of property and equipment. Net cash provided by
investing activities was $59,000 in 1999. The cash provided was attributable to
cash acquired in connection with the GlobalCast acquisition, largely offset by
cash used to purchase property and equipment.

     Net cash provided by financing activities was $326,000, $69.2 million, and
$717,000 in fiscal 2001, 2000, and 1999, respectively. For the year ended
September 30, 2001, net cash provided by financing activities was attributable
to approximately $371,000 in net proceeds from the issuance of common stock.
During the year ended September 30, 2000, net cash provided by financing
activities was attributable to approximately $70 million in net proceeds from
our initial public offering and the sale of redeemable convertible preferred
stock. In fiscal 1999, net cash provided by financing activities was
attributable to net proceeds from debt incurred plus small amounts from the sale
of common stock.

     As of September 30, 2001, we had approximately $52.5 million in cash, cash
equivalents, and short term investments, and working capital of $50.4 million.
As of that date, we also had a line of credit under which we could borrow up to
$2.0 million with a revolving maturity date of February 22, 2002, at an interest
rate of prime plus 0.25%. Any borrowing will be collateralized by accounts
receivable and other assets. For further information, please refer to Note 6 in
the Notes to Consolidated Financial Statements. We have no borrowings under this
line of credit and are in compliance with all required financial ratios, net
loss levels, and other financial covenants. Our commitments consist primarily of
amounts due under our operating leases. We have no material commitments for
capital expenditures. For the next twelve months, we expect our capital
expenditures to be approximately $1.5 million. We may use cash resources to fund
acquisitions or investments in complementary businesses or technologies. We
believe that our current cash, cash equivalents, and short-term investments will
be sufficient to meet our working capital and operating resource requirements
for at least the next 12 months.
                                        24
<PAGE>

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations," and Statement of Financial Accounting Standards No. 142, ("SFAS
142"), "Goodwill and Other Intangible Assets." SFAS No. 141 addresses the
accounting for and reporting of business combinations.

     SFAS 141 requires that all business combinations be accounted for using the
purchase method of accounting for acquisitions, and eliminates the use of the
pooling-of-interests method. SFAS 141 is effective for all business combinations
initiated after June 30, 2001. The Company believes SFAS No. 141 will not have a
material effect on its consolidated financial statements.

     SFAS 142 addresses financial accounting and reporting for acquired goodwill
and other intangible assets. SFAS 142 changes the accounting for goodwill from
an amortization method to an impairment-only method. The amortization of
goodwill, including goodwill recorded in past business combinations, will cease
upon adoption of the SFAS 142. For goodwill acquired by June 30, 2001, SFAS 142
is effective for all fiscal years beginning after December 15, 2001. Goodwill
and intangible assets acquired after June 30, 2001, will be subject to immediate
adoption of SFAS 142. As of September 30, 2001, the Company had recorded
goodwill and intangibles of $2.1 million. The Company believes SFAS No. 141 will
not have a material effect on its consolidated financial statements.

     On August 16, 2001, the FASB issued Statement of Financial Accounting
Standards No. 143 ("SFAS 143"), "Accounting for Asset Retirement Obligations."
SFAS 143 addresses financial accounting requirements for retirement obligations
associated with retirement of tangible long-lived assets and for the associated
asset retirement costs. SFAS 143 requires a company to record the fair value of
an asset retirement obligation in the period in which it is incurred. When the
retirement obligation is initially recorded, the company also records a
corresponding increase to the carrying amount of the related tangible long-lived
asset and depreciates that cost over the useful life of the tangible long-lived
asset. The retirement obligation is increased at the end of each period to
reflect the passage of time and changes in the estimated future cash flows
underlying the initial fair value measurement. Upon settlement of the retirement
obligation, the company either settles the retirement obligation for its
recorded amount or incurs a gain or loss upon settlement. SFAS 143 is effective
for fiscal years beginning after June 15, 2002 with earlier application
encouraged. Accordingly, SFAS 143 will be effective for the Company beginning
October 1, 2001. The Company is currently in the process of evaluating the
impact, if any, SFAS 143 will have on its financial position or results of
operations.

     On October 3, 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, ("SFAS 144") Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS 144 supercedes Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and
Assets to be Disposed of", and the accounting and reporting provisions of
Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations -- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS
144 establishes a single accounting model for impairment or disposal by sale of
long-lived assets. The company is currently evaluating the potential impact, if
any, the adoption of SFAS 144 will have on its financial position and results of
operations.

FACTORS AFFECTING FUTURE RESULTS

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

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

     We have a history of losses, we expect future losses, and we do not expect
to achieve profitability in the near future. We incurred net losses of $3.5
million in fiscal 1999, $15.0 million in fiscal 2000, and $23.4 million

                                        25
<PAGE>

in fiscal 2001. As of September 30, 2001, we had an accumulated deficit of
approximately $48.2 million. We cannot assure you that our revenue will grow or
that we will achieve or maintain profitability in the future. While we intend to
maintain controls on expenses at approximately current levels, it may be
necessary to increase our future product development, sales and marketing, and
administrative expenses. In any event, we will need to increase our revenue
substantially to achieve and maintain profitability, which we may not be able to
do.

  ECONOMIC CONDITIONS MAY REDUCE DEMAND FOR OUR PRODUCTS AND SERVICES.

     Our revenue, and our ability to achieve and sustain profitability, depend
on the overall demand for the software products and services we offer. The
general economic slowdown in the world economy has caused many companies to
defer purchases of products and services and otherwise altered their purchasing
patterns. Capital spending in the information technology sector generally has
decreased over the past twelve to eighteen months, and many of our customers and
potential customers have experienced declines in their revenue and operations.
The terrorist acts of September 11, 2001 have increased the uncertainty in the
economic environment, and we cannot predict the impact of these events or
possible similar or related future events on our customers or our business. If
U.S. or global economic conditions worsen, it will likely have a material
adverse impact on our business, operating results, and financial conditions.

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

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

     Our revenue and operating results depend upon the volume and timing of
customer orders and payments and the date of product delivery. Historically, we
have had little backlog and our revenue in any quarter has been substantially
dependent upon orders booked in that quarter. In addition, more than 50% of our
license revenue in a given quarter has often been recorded in the third month of
that quarter, with a concentration of this revenue in the last two weeks of the
third month. Furthermore, more than 50% of our revenue has often been derived
from fewer than 12 customers. For example, in the fourth quarter ended September
30, 2001, 12 customers represented 50% of our revenue. We expect these trends to
continue and, therefore, any failure or delay in the closing of orders could
have a material adverse effect on our quarterly operating results. Additionally,
since our operating expenses are based on anticipated revenue and because a high
percentage of these expenses are relatively fixed, a shortfall in anticipated
revenue could have a significant negative impact on our operating results.

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

     - the uncertainty of current economic conditions and their effect on
       customer purchase decisions;

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

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

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

     - the capital and expense budgeting decisions of our customers;

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

                                        26
<PAGE>

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

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

  COMPETITION IN THE REAL-TIME INFRASTRUCTURE SOFTWARE MARKET IS INTENSE; MANY
  OF OUR COMPETITORS AND POTENTIAL COMPETITORS ARE MUCH LARGER THAN WE ARE AND
  HAVE SIGNIFICANTLY GREATER RESOURCES; WE MAY NOT BE ABLE TO COMPETE
  EFFECTIVELY.

     The market for our products is intensely competitive, relatively new,
rapidly evolving, and subject to rapid technological change. We believe that
competition will become more intense in the future and may cause price
reductions, reduced gross margins, and loss of market share, any one of which
could significantly reduce our future revenue. We most often compete against
Tibco Software, a provider of infrastructure software products and services.
Other current and potential competitors include:

     EAI Vendors.  We currently face competition from various enterprise
application integration, or EAI, vendors that offer some of the features of our
products in their technology. These EAI vendors include webMethods and Vitria
Technology.

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

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

     IT Departments.  We currently face competition from the information
technology departments of potential customers which have developed or may
develop systems that provide for some or all of the functionality of our
SmartSockets software and related products. It is often difficult for us to sell
our products to a potential customer that has already invested heavily in a
system that our products are intended to replace.

     Many of our current and potential competitors have longer operating
histories, significantly greater financial, technical, product development and
marketing resources, greater name recognition and larger customer bases than we
do. Our competitors may be able to develop products comparable or superior to
those we offer, adapt more quickly than we do to new technologies, evolving
industry trends or customer requirements, or devote greater resources to the
development, promotion and sale of their products than we do. Many of our
competitors also have well-established relationships with our existing and
prospective customers as well as companies that have significant influence in
the industry. Negotiating and maintaining favorable customer and strategic
relationships is critical to our business, and our competitors may be able to
negotiate strategic relationships on more favorable terms than we are able to
negotiate.

     Furthermore, a number of these competitors may merge or form strategic
relationships that would enable them to offer, or bring to market earlier,
products or services that are superior to our own in terms of features, quality,
pricing or other factors. We expect additional competition from other
established and emerging
                                        27
<PAGE>

companies. The industry in which we compete is rapidly evolving. We may not be
able to compete effectively against current and potential competitors,
especially those with significantly greater resources.

  SOME OF OUR COMPETITORS HAVE SIGNIFICANTLY BROADER PRODUCT OFFERINGS, AND WE
  MAY NEED TO PARTNER WITH THIRD PARTIES TO PROVIDE A BROADER RANGE OF PRODUCTS
  AND SERVICES.

     Our customers often purchase our real-time infrastructure software as part
of a large-scale information technology project requiring many products from
many vendors. Many of our competitors offer extended product lines, and some
customers may prefer to purchase products from vendors that are able to offer
broader functionality than can be provided by our products alone as part of the
customers' overall information technology project. For example, some of our
competitors offer a larger number of "adaptors" that facilitate connecting their
products with third-party applications, and some competitors have products that
contain a software feature, known as "business logic," that facilitates the
routing and delivery of information in a different manner than is used by our
products. In order to compete more effectively, we may need to expand the
breadth of our product offerings by partnering with companies offering
complementary products. We may not be able to enter into relationships of this
type, on reasonable terms or at all, and our failure to do so could adversely
affect our ability to sell our products and services.

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

     The market for real-time infrastructure software products is relatively new
and rapidly evolving, and there are a variety of infrastructure methods
available. We do not know if customers in our target markets will widely adopt
and deploy real-time infrastructure software products such as our SmartSockets
software and related products. If real-time infrastructure software products are
not widely adopted by customers in our target markets, our revenue will not
increase substantially, if at all.

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

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

  WE DERIVE MORE THAN 90% OF OUR TOTAL REVENUE FROM OUR SMARTSOCKETS PRODUCT
  LINE AND IF DEMAND FOR SMARTSOCKETS DECREASES OR DOES NOT INCREASE, OUR TOTAL
  REVENUE WILL NOT INCREASE AND MAY DECREASE.

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

                                        28
<PAGE>

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

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

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

     We believe that our success in penetrating our target markets depends in
part upon our ability to develop and maintain strategic relationships with key
original equipment manufacturers, systems integrators, distributors, and
independent software vendors. Relationships with these parties are also
important because they often influence a customer's decision on which
infrastructure software will be used for a project. We believe these
relationships will introduce our products to potential customers and provide us
with insights into new technologies to which we may not otherwise have access.
For example, a system integrator that is responsible for reengineering a network
may be heavily involved in analyzing and ultimately selecting the infrastructure
software to be used in the network. To date, we have informal working
relationships with several system integrators and formal agreements with only a
limited number of system integrators. Some of our competitors have developed
more strategic relationships than we have. We cannot be certain that we will be
able to establish relationships with additional companies on a timely basis, or
at all, or that these companies will devote adequate resources to embedding,
promoting or selling our products. Potential conflicts between our direct sales
force and third-party reselling efforts could also limit our ability to develop
additional key strategic relationships. If we fail to develop these strategic
relationships, or if any of our current relationships with these types of
organizations is terminated, we might lose important revenue opportunities and
our growth might be limited.

  IF WE FAIL TO CONTINUE TO PENETRATE KEY TARGET MARKETS, SUCH AS THE FINANCIAL
  SERVICES MARKET, OR IF THESE MARKETS FAIL TO GROW AS ANTICIPATED, OUR REVENUE
  GROWTH WILL BE IMPAIRED.

     We have recently begun to focus our engineering and sales and marketing
resources to penetrating the financial services, aerospace, and high technology
manufacturing (hardware and software original equipment manufacturers (OEMs) and
independent software vendors ("ISVs")) markets. If we fail to address the needs
of these key markets, our revenue growth will be impaired. In recent years, we
have directed our sales and marketing efforts toward companies in such diverse
industries as financial services, business-to-business e-commerce,
telecommunications, high technology manufacturers (hardware and software
companies), embedded operating systems, cable television, transportation, and
aerospace industries. In fiscal 2001, less than 20% of our revenue was derived
from customers in markets outside the financial services, aerospace, and high
technology manufacturing markets. While we will be focusing on the markets in
which we expect to derive a majority of our revenue, we will be more vulnerable
to economic downturns or other adverse conditions affecting these key markets.
Additionally, these markets are rapidly changing. Customers in these markets may
require us to change our product design or features, sales methods, support
capabilities or pricing policies. The costs of addressing these requirements, as
well as the failure to do so, could be substantial and could adversely affect
our operating results.

                                        29
<PAGE>

  DOING BUSINESS OUTSIDE THE UNITED STATES INVOLVES NUMEROUS RISKS THAT COULD
  NEGATIVELY AFFECT OUR FINANCIAL RESULTS.

     Approximately 18% of our revenue was derived from international sources. To
service the needs of these customers, we must provide worldwide product support
and services. International operations require significant management attention
and financial resources that could adversely affect our operating margins and
earnings. We may not be able to maintain or increase international market demand
for our products. If we do not, our international sales will be limited, and our
business, operating results and financial condition could be materially and
adversely affected. In attempting to conduct and expand business
internationally, we are exposed to various risks that could adversely affect our
international operations and, consequently, our operating results, including:

     - difficulties and costs of staffing and managing international operations;

     - fluctuations in currency exchange rates;

     - unexpected changes in regulatory requirements, including imposition of
       currency exchange controls, applicable to our business or to the
       Internet;

     - difficulties and additional costs of tailoring our products to meet the
       demands of foreign markets;

     - political and economic instability; and

     - potentially reduced protection for intellectual property rights.

  WE HAVE MADE AND MAY CONTINUE TO MAKE ACQUISITIONS, WHICH COULD PUT A STRAIN
  ON OUR RESOURCES, CAUSE DILUTION TO OUR STOCKHOLDERS AND ADVERSELY AFFECT OUR
  FINANCIAL RESULTS; WE MAY NOT BE ABLE TO MAKE STRATEGIC ACQUISITIONS IF OUR
  STOCK PRICE IS LOW.

     We have made and may continue to make acquisitions of other companies in
order to expand our business and services. For example, in September 1999 we
acquired the assets of GlobalCast, a provider of reliable multicast products and
services. In addition, in March 2000, we acquired WhiteBarn, a provider of
reliable multicast-related consulting services and developer of multicast
technology. Integrating newly acquired organizations and technologies into our
company could be expensive and time-consuming and may strain our resources. The
integration of WhiteBarn into our company is complete, however, we continue to
encounter challenges because its headquarters, near Chicago, Illinois, is
geographically distant from our own. We may not be successful in integrating
acquired businesses or technologies and may not achieve anticipated revenue and
cost benefits. In addition, future acquisitions could result in potentially
dilutive issuances of equity securities or the incurrence of debt, contingent
liabilities or amortization expenses related to goodwill and other intangible
assets, any of which could adversely affect our balance sheet or operating
results. For example, in connection with the acquisition of substantially all of
the assets of GlobalCast, we recorded approximately $2.7 million in goodwill and
other intangibles, which we have written off in 2001 and, in connection with the
acquisition of WhiteBarn, we recorded approximately $4.4 million in goodwill and
other intangibles, which are being amortized over a period of two to three
years. Moreover, we cannot make any assurances that we will be able to identify
future suitable acquisition candidates or, if we are able to identify suitable
candidates, that we will be able to make these acquisitions on commercially
reasonable terms or at all. Additionally, even if we identify suitable
acquisition candidates, we may not be able to consummate such acquisitions if
our stock price is low.

  OUR FAILURE TO MANAGE GROWTH COULD ADVERSELY AFFECT OUR ABILITY TO INCREASE
  REVENUE.

     Our ability to successfully offer products and services and implement our
business plan in a rapidly evolving market requires an effective planning and
management process. Our business has evolved significantly in recent years,
placing a strain on our management systems and resources. To manage future
growth, we expect that we will need to continue to improve our financial and
managerial controls, reporting systems and procedures. We will also need to
train, and manage our workforce worldwide. Furthermore, we expect that we will
be required to manage an increasing number of relationships with various
customers and other third

                                        30
<PAGE>

parties. If we do not manage our growth efficiently and effectively, it could
adversely affect our business, operating results and financial condition.

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

     Our success depends heavily upon the continued contributions of our key
management personnel, whose knowledge, leadership, and technical expertise would
be difficult to replace. In particular, we rely upon the leadership of Paul A.
Larson, our President and Chief Executive Officer, and Thomas J. Laffey, our
Chief Technical Officer. If we were to lose the services of any of our key
personnel, the ability to execute our business plan would be adversely affected.
All of our executive officers and key personnel are employees at-will. We have
no employment contracts and maintain no key person insurance other than $500,000
on Thomas J. Laffey and $500,000 on Paul A. Larson.

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

     In order to grow our business successfully and maintain a high level of
quality and service, we will need to recruit, retain, and motivate additional
highly skilled sales, marketing, engineering, and finance personnel. If we are
not able to hire, train, and retain a sufficient number of qualified employees,
our growth will be impaired. In particular, we will need to expand our sales
organization in order to generate increased revenue. In addition, as a company
focused on the development of complex software products, we will need to retain
and hire software developers and engineers, systems architects and project
managers of various experience levels in order to keep pace with technological
change and develop products that meet the needs of rapidly evolving markets.
Competition for skilled employees, particularly in the San Francisco Bay Area,
is intense. Furthermore, new employees require training, take time to achieve
full productivity and, in light of the high rate of turnover for these
employees, may be difficult to retain.

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

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

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

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

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

     As the volume of data transmitted across networks, particularly the
Internet, increases, it may be increasingly important for infrastructure
software to make efficient use of available network bandwidth. One of the
potential competitive advantages of our infrastructure software is that it
enables more efficient use of

                                        31
<PAGE>

available network bandwidth. Our software achieves this benefit through an
efficient implementation of publish-subscribe architecture and is capable of
even greater efficiency using multicast technology. However, our customers will
not be able to realize the full efficiency benefits of our multicast
capabilities over the Internet unless the Internet is enhanced to allow
multicast. There can be no assurance that it will be.

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

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

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

     We rely primarily on a combination of copyrights, trademarks, trade secret
laws, and contractual obligations with employees and third parties to protect
our proprietary rights. We do not currently own any issued patents, and other
protection of our intellectual property will not prevent third parties from
independently developing technology that is similar to or competes with our own.

     Moreover, despite our efforts to protect our proprietary rights,
unauthorized parties may copy aspects of our products and obtain and use
information that we regard as proprietary. In addition, other parties may breach
confidentiality agreements or other protective contracts into which we have
entered, and we may not be able to enforce our rights in the event of these
breaches. Furthermore, we expect that we will increase our international
operations in the future, and the laws of many foreign countries do not protect
our intellectual property rights to the same extent as the laws of the United
States.

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

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

     - variations in our quarterly results;

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

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

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

     - recruitment or departure of key personnel;

     - the gain or loss of significant orders or customers;
                                        32
<PAGE>

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

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

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

     In the past, securities class action litigation has often been brought
against a company following a period of volatility in the market price of its
securities. We have been, and may in the future be, the target of similar
litigation. On August 10, 2001 a stockholder class action complaint was filed in
the United States District Court for the Southern District of New York against
us, certain of our officers and directors, and three underwriters of our initial
public offering. The complaint alleges, among other things, that Talarian and
the individual defendants named in the complaint violated the federal securities
laws by issuing and selling our common stock in our initial public offering
without disclosing to investors that certain of the underwriters in the offering
allegedly solicited and received excessive and undisclosed commissions from
certain investors. We believe that the allegations in this action are without
merit, and we intend to defend against this action vigorously, but we cannot
give any assurance that it will not have a material adverse effect on the
Company. Securities litigation such as this could result in substantial costs
and divert management's attention and resources, which could harm our operating
results and our business.

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

     As of November 30, 2001, our executive officers, directors, entities
affiliated with them and other five percent stockholders, in the aggregate,
beneficially owned approximately 36% of our outstanding common stock. These
stockholders, acting together, would be able to significantly influence all
matters requiring approval by our stockholders, including the election of
directors. These actions might be taken even if they are opposed by other
stockholders. This concentration of ownership may also have the effect of
delaying or preventing a change of control of our company, which could have a
material adverse effect on our stock price.

  OUR CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW CONTAIN PROVISIONS
  THAT COULD DISCOURAGE OR PREVENT A TAKEOVER, EVEN IF AN ACQUISITION WOULD BE
  BENEFICIAL TO OUR STOCKHOLDERS.

     Provisions of our Amended and Restated Certificate of Incorporation and
Bylaws, as well as provisions of Delaware law, could make it more difficult for
a third party to acquire us, even if doing so would be beneficial to our
stockholders. These provisions include:

     - establishing a classified board of directors requiring that not all
       members of the board may be elected at one time;

     - providing that directors may only be removed "for cause" and only with
       the approval of 66 2/3% of our stockholders;

     - authorizing the issuance of "blank check" preferred stock that could be
       issued by our board of directors to increase the number of outstanding
       shares and thwart a takeover attempt;

     - limiting the ability of our stockholders to call special meetings of
       stockholders;

     - prohibiting stockholder action by written consent, which requires all
       stockholder actions to be taken at a meeting of our stockholders;

     - eliminating cumulative voting in the election of directors; and

                                        33
<PAGE>

     - establishing advance notice requirements for nominations, election to the
       board of directors or for proposing matters that can be acted upon by
       stockholders at stockholder meetings.

     In addition, Section 203 of the Delaware General Corporation Law and the
terms of our stock option plans may discourage, delay, or prevent a change in
control.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

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

  FOREIGN CURRENCY EXCHANGE RATE RISK

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

  INTEREST RATE RISK

     As of September 30, 2001, we had cash and highly liquid short-term
investments totaling $52.5 million. Declines of interest rates will reduce our
interest income from our investments. Based upon our balance of cash and
investments at September 30, 2001, a decrease in interest rates of 0.5% would
cause a corresponding decrease in our annual interest income by $262,500. To
date, the Company has not entered into any derivative or hedging activities and
as of September 30, 2001, we did not have any short-term or long-term debt
outstanding.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     Our financial statements and the report of the independent auditors appear
beginning on page F-1 of this annual report.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

     Not applicable.

                                    PART III

     Certain information required by Part III is omitted from this annual
report, in that we will file our Proxy Statement for our Annual Meeting of
Stockholders with the Securities and Exchange Commission pursuant to Regulation
14A not later than 120 days after the end of the fiscal year covered by this
annual report, and certain information included therein is incorporated herein
by reference.

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information required by this Item 10 will be set forth in our Proxy
Statement for our March 2002 Annual Meeting of Stockholders, under the captions
Proposal No. 1 -- Election of Directors," "Executive

                                        34
<PAGE>

Officers" and "Section 16(b) Beneficial Ownership Reporting Compliance," and is
incorporated herein by reference.

ITEM 11.  EXECUTIVE COMPENSATION

     The information required by this Item 11 will be set forth in our Proxy
Statement for our March 2002 Annual Meeting of Stockholders, under the caption
"Executive Compensation," and is incorporated herein by reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by this Item 12 will be set forth in our Proxy
Statement for our March 2002 Annual Meeting of Stockholders, under the caption
"Security Ownership of Certain Beneficial Owners and Management," and is
incorporated herein by reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by this Item 13 will be set forth in our Proxy
Statement for our March 2002 Annual Meeting of Stockholders, under the caption
"Certain Relationships and Related Transactions," and is incorporated herein by
reference.

                                    PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

     (a) The following documents are filed as part of this report:

          (1) Consolidated Financial Statements and Report of KPMG LLP, which
     are set forth in the Index to Consolidated Financial Statements and
     Financial Statement Schedule on page F-1

          (2) Financial Statement Schedule which is set forth in the Index to
     Consolidated Financial Statements and Financial Statement Schedule on page
     F-1

     (b) Reports on Form 8-K.

     No such reports were filed in the quarter ended September 30, 2001.

     (c) Exhibits

     Exhibits submitted with this annual report and those incorporated by
reference to other filings are listed under the Exhibits Index.

                                        35
<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this annual report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Los Altos, State of California, on this 21st day of December,
2001.

                                          TALARIAN CORPORATION

                                          BY:     /s/ MICHAEL A. MORGAN
                                            ------------------------------------
                                                     Michael A. Morgan
                                                Vice President, Finance and
                                                        Administration
                                                and Chief Financial Officer

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

<Table>
<Caption>
                   SIGNATURE                                    TITLE                      DATE
                   ---------                                    -----                      ----
<S>                                               <C>                                <C>
          PRINCIPAL EXECUTIVE OFFICER:

               /s/ PAUL A. LARSON                   President and Chief Executive    December 21, 2001
------------------------------------------------               Officer
                 Paul A. Larson

  PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER:

             /s/ MICHAEL A. MORGAN                         Vice President,           December 21, 2001
------------------------------------------------     Finance and Administration
               Michael A. Morgan                     and Chief Financial Officer

             ADDITIONAL DIRECTORS:

              /s/ PAUL D. CALLAHAN                            Director               December 21, 2001
------------------------------------------------
                Paul D. Callahan

              /s/ DAVID I. CAPLAN                             Director               December 21, 2001
------------------------------------------------
                David I. Caplan

               /s/ DAVID E. GOLD                              Director               December 21, 2001
------------------------------------------------
                 David E. Gold

               /s/ BRIAN T. HOREY                             Director               December 21, 2001
------------------------------------------------
                 Brian T. Horey

              /s/ THOMAS J. LAFFEY                            Director               December 21, 2001
------------------------------------------------
                Thomas J. Laffey

              /s/ RICHARD A. NORTZ                            Director               December 21, 2001
------------------------------------------------
                Richard A. Nortz
</Table>

                                        36
<PAGE>

                      TALARIAN CORPORATION AND SUBSIDIARY

                 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
                          FINANCIAL STATEMENT SCHEDULE

<Table>
<Caption>
                                                               PAGE
                                                               ----
<S>                                                            <C>
Independent Auditors' Report................................    F-
Consolidated Balance Sheets as of September 30, 2001 and
  2000......................................................    F-
Consolidated Statements of Operations for the Fiscal Years
  ended September 30, 2001, 2000 and 1999...................    F-
Consolidated Statements of Stockholders' Equity (Deficit)
  and Comprehensive Loss for the Fiscal Years ended
  September 30, 2001, 2000 and 1999.........................    F-
Consolidated Statements of Cash Flows for the Fiscal Years
  ended September 30, 2001, 2000 and 1999...................    F-
Notes to Consolidated Financial Statements..................    F-
Schedule II -- Valuation and Qualifying Accounts............    S-
</Table>

                                       F-1
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

The Board of Directors
Talarian Corporation:

     We have audited the accompanying consolidated balance sheets of Talarian
Corporation and subsidiary (the Company) as of September 30, 2001 and 2000, and
the related consolidated statements of operations, stockholders' equity
(deficit) and comprehensive loss, and cash flows for each of the years in the
three-year period ended September 30, 2001. In connection with our audits of the
consolidated financial statements, we have also audited the financial statement
schedule as listed in the index on page F-1. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.

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

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Talarian
Corporation and subsidiary as of September 30, 2001 and 2000, and the results of
their operations and their cash flows for each of the years in the three-year
period ended September 30, 2001, in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the
financial statement schedule, when considered in relation to the consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.

                                          /s/ KPMG LLP

Mountain View, California
October 26, 2001

                                       F-2
<PAGE>

                      TALARIAN CORPORATION AND SUBSIDIARY

                          CONSOLIDATED BALANCE SHEETS

<Table>
<Caption>
                                                                    SEPTEMBER 30,
                                                              -------------------------
                                                                 2001          2000
                                                              -----------   -----------
                                                                (IN THOUSANDS, EXCEPT
                                                              SHARE AND PER SHARE DATA)
<S>                                                           <C>           <C>
                                        ASSETS
Current assets:
  Cash and cash equivalents.................................    $ 24,461      $ 35,144
  Short-term investments....................................      28,041        32,594
  Accounts receivable, net of allowance for doubtful
     accounts of $406 and $245 as of September 30, 2001 and
     2000, respectively.....................................       3,380         2,873
  Prepaid expenses and other current assets.................       1,438         1,011
                                                                --------      --------
          Total current assets..............................      57,320        71,622
Property and equipment, net.................................       2,021         1,345
Goodwill and other intangible assets, net...................       2,150         5,577
Other assets................................................         363            62
                                                                --------      --------
          Total assets......................................    $ 61,854      $ 78,606
                                                                ========      ========

                           LIABILITIES STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................         270           730
  Accrued payroll and related expenses......................       1,464         1,287
  Other accrued expenses....................................       2,063         1,471
  Current portion of deferred revenue.......................       3,135         3,078
                                                                --------      --------
     Total current liabilities..............................       6,932         6,566
Deferred rent...............................................         173            --
Deferred revenue, less current portion......................         792         1,401
                                                                --------      --------
          Total liabilities.................................       7,897         7,967
                                                                --------      --------
Commitments and contingencies
Stockholders' equity:
  Preferred stock, $0.001 par value; 5,000,000 shares
     authorized as of September 30, 2001 and 2000,
     respectively; nil issued or outstanding;...............          --            --
  Common stock, $0.001 par value; 50,000,000 shares
     authorized; 19,315,245 and 18,986,596 shares issued and
     outstanding as of September 30, 2001 and 2000,
     respectively...........................................          19            19
  Additional paid-in capital................................     105,619       107,495
  Treasury stock, 179,248 and 108,557 shares as of September
     30, 2001 and 2000, respectively........................        (102)          (57)
  Deferred stock compensation...............................      (3,411)      (11,886)
  Note receivable from stockholders.........................        (100)         (100)
  Accumulated deficit.......................................     (48,217)      (24,832)
  Accumulated other comprehensive income:
     Unrealized gain on investments.........................         149            --
          Total stockholders' equity........................      53,957        70,639
                                                                --------      --------
          Total liabilities and stockholders' equity........    $ 61,854      $ 78,606
                                                                ========      ========
</Table>

          See accompanying notes to consolidated financial statements.

                                       F-3
<PAGE>

                      TALARIAN CORPORATION AND SUBSIDIARY

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<Table>
<Caption>
                                                                     YEAR ENDED SEPTEMBER 30,
                                                              --------------------------------------
                                                                 2001          2000          1999
                                                              -----------   -----------   ----------
                                                              (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                           <C>           <C>           <C>
Revenue:
  Licenses..................................................   $  8,291      $ 10,553      $ 5,912
  Maintenance...............................................      4,006         3,094        2,488
  Professional services.....................................      2,566         2,204          640
                                                               --------      --------      -------
       Total revenue........................................     14,863        15,851        9,040
                                                               --------      --------      -------
Cost of revenue:
  Licenses..................................................        146           240          164
  Maintenance...............................................      1,304           864          595
  Professional services.....................................      1,699         1,228          358
  Amortization of deferred stock compensation...............        814         1,072           51
                                                               --------      --------      -------
       Total cost of revenue................................      3,963         3,404        1,168
                                                               --------      --------      -------
       Gross profit.........................................     10,900        12,447        7,872
                                                               --------      --------      -------
Operating expenses:
  Sales and marketing.......................................     12,877         9,219        5,321
  Research and development..................................      9,787         5,733        3,214
  General and administrative................................      3,762         2,343        1,657
  Amortization of deferred stock compensation:
     Sales and marketing....................................      1,794         3,136          365
     Research and development...............................      2,161         3,069          303
     General and administrative.............................      1,459         3,177          234
  Acquired in-process research and development..............         --            --          300
  Excess facilities cost....................................      2,150            --           --
  Amortization of goodwill and intangible assets............      3,427         1,769           --
                                                               --------      --------      -------
       Total operating expenses.............................     37,417        28,446       11,394
                                                               --------      --------      -------
       Loss from operations.................................    (26,517)      (15,999)      (3,522)
Interest income (expense), net..............................      3,194           994          (11)
Other expense...............................................         62            35            6
                                                               --------      --------      -------
       Net loss.............................................    (23,385)      (15,040)      (3,539)
Preferred stock dividends...................................         --        (6,536)        (498)
                                                               --------      --------      -------
Net loss attributable to common stockholders................   $(23,385)     $(21,576)     $(4,037)
                                                               ========      ========      =======
Basic and diluted net loss per share attributable to common
  stockholders..............................................   $  (1.27)     $  (3.08)     $ (1.30)
                                                               ========      ========      =======
Shares used in computing basic and diluted net loss per
  share attributable to common stockholders.................     18,467         7,005        3,099
                                                               ========      ========      =======
</Table>

          See accompanying notes to consolidated financial statements.

                                       F-4
<PAGE>

                      TALARIAN CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE LOSS
<Table>
<Caption>
                                                                                                   NOTE
                                      COMMON STOCK       ADDITIONAL                DEFERRED     RECEIVABLE
                                   -------------------    PAID-IN     TREASURY      STOCK          FROM      ACCUMULATED
                                     SHARES     AMOUNT    CAPITAL      STOCK     COMPENSATION    DEFICIT      (DEFICIT)
                                   ----------   ------   ----------   --------   ------------   ----------   -----------
                                                             (IN THOUSANDS, EXCEPT SHARE DATA)
<S>                                <C>          <C>      <C>          <C>        <C>            <C>          <C>
BALANCES, SEPTEMBER 30, 1998.....   2,902,337    $ 3      $    104     $  --       $     --       $  --       $ (8,984)
Issuance of common stock for
 acquisition of GlobalCast.......     605,000      1         3,629        --             --          --             --
Issuance of common stock in
 connection with stock option
 exercises.......................     302,551     --            43        --             --          --             --
Accretion for dividends on
 redeemable preferred stock......          --     --            --        --             --          --           (498)
Deferred stock compensation
 related to stock option
 grants..........................          --     --         4,351        --         (4,351)         --             --
Amortization of deferred stock
 compensation....................          --     --            --        --            915          --             --
Nonemployee stock compensation...          --     --            38        --             --          --             --
Net loss.........................          --     --            --        --             --          --         (3,539)
                                   ----------    ---      --------     -----       --------       -----       --------
BALANCES, SEPTEMBER 30, 1999.....   3,809,888      4         8,165        --         (3,436)         --        (13,021)
Issuance of common stock in
 connection with stock option
 exercises.......................   1,892,953      2           724        --             --        (100)            --
Issuance of common stock in
 connection with cashless
 exercise of warrants............      16,447     --            --        --             --          --             --
Issuance of common stock in
 connection with initial public
 offering, net...................   4,200,000      4        59,990        --             --          --             --
Issuance of common stock in
 connection with conversion of
 preferred stock.................   8,827,650      9        15,337        --             --          --          9,765
Beneficial conversion feature on
 issuance of Series D preferred
 stock...........................          --     --            --        --             --          --         (5,719)
Accretion for dividends on
 redeemable preferred stock to
 date of conversion..............          --     --            --        --             --          --           (817)
Issuance of common stock for
 acquisition of WhiteBarn........     348,215     --         4,179        --           (713)         --             --
Issuance of stock options for
 acquisition of WhiteBarn........          --     --           746        --             --          --             --
Nonemployee stock compensation...          --     --           515        --             --          --             --
Issuance of options in connection
 with office lease...............          --     --           163        --             --          --             --
Deferred stock compensation
 related to stock option
 grants..........................          --     --        17,676        --        (17,676)         --             --
Amortization of deferred stock
 compensation....................          --     --            --        --          9,939          --             --
Repurchase of common stock.......    (108,557)    --            --       (57)            --          --             --
Net loss.........................          --     --            --        --             --          --        (15,040)
                                   ----------    ---      --------     -----       --------       -----       --------
BALANCES, SEPTEMBER 30, 2000.....  18,986,596     19       107,495       (57)       (11,886)       (100)       (24,832)
Issuance of common stock in
 connection with stock option
 exercises.......................     103,438     --            40        --             --          --             --
Issuance of common stock in
 connection with cashless
 exercise of warrants............      68,888     --            --        --             --          --             --
Issuance of common stock in
 connection with ESPP............     227,014     --           331        --             --          --             --
Deferred stock compensation
 related to stock option
 cancellations...................          --     --        (2,247)       --          2,247          --             --
Amortization of deferred stock
 compensation....................          --     --            --        --          6,228          --             --
Repurchase of common stock.......     (70,691)    --            --       (45)            --          --             --
Unrealized gain on Investments...          --     --            --        --             --          --             --
Net loss.........................          --     --            --        --             --          --        (23,385)
                                   ----------    ---      --------     -----       --------       -----       --------
BALANCES, SEPTEMBER 30, 2001.....  19,315,245    $19      $105,619     $(102)      $ (3,411)      $(100)      $(48,217)
                                   ==========    ===      ========     =====       ========       =====       ========

<Caption>
                                    ACCUMULATED        TOTAL
                                       OTHER       STOCKHOLDER'S
                                   COMPREHENSIVE      EQUITY       COMPREHENSIVE
                                      INCOME          DEFICIT          LOSS
                                   -------------   -------------   -------------
                                         (IN THOUSANDS, EXCEPT SHARE DATA)
<S>                                <C>             <C>             <C>
BALANCES, SEPTEMBER 30, 1998.....      $ --          $ (8,877)       $     --
Issuance of common stock for
 acquisition of GlobalCast.......        --             3,630              --
Issuance of common stock in
 connection with stock option
 exercises.......................        --                43              --
Accretion for dividends on
 redeemable preferred stock......        --              (498)             --
Deferred stock compensation
 related to stock option
 grants..........................        --                --              --
Amortization of deferred stock
 compensation....................        --               915              --
Nonemployee stock compensation...        --                38              --
Net loss.........................        --            (3,539)         (3,539)
                                       ----          --------        ========
BALANCES, SEPTEMBER 30, 1999.....        --            (8,288)             --
Issuance of common stock in
 connection with stock option
 exercises.......................        --               626              --
Issuance of common stock in
 connection with cashless
 exercise of warrants............        --                --              --
Issuance of common stock in
 connection with initial public
 offering, net...................        --            59,994              --
Issuance of common stock in
 connection with conversion of
 preferred stock.................        --            25,111              --
Beneficial conversion feature on
 issuance of Series D preferred
 stock...........................        --            (5,719)             --
Accretion for dividends on
 redeemable preferred stock to
 date of conversion..............        --              (817)             --
Issuance of common stock for
 acquisition of WhiteBarn........        --             3,466              --
Issuance of stock options for
 acquisition of WhiteBarn........        --               746              --
Nonemployee stock compensation...        --               515              --
Issuance of options in connection
 with office lease...............        --               163              --
Deferred stock compensation
 related to stock option
 grants..........................        --                --              --
Amortization of deferred stock
 compensation....................        --             9,939              --
Repurchase of common stock.......        --               (57)             --
Net loss.........................        --           (15,040)        (15,040)
                                       ----          --------        ========
BALANCES, SEPTEMBER 30, 2000.....        --            70,639              --
Issuance of common stock in
 connection with stock option
 exercises.......................        --                40              --
Issuance of common stock in
 connection with cashless
 exercise of warrants............        --                --              --
Issuance of common stock in
 connection with ESPP............        --               331              --
Deferred stock compensation
 related to stock option
 cancellations...................        --                --              --
Amortization of deferred stock
 compensation....................        --             6,228              --
Repurchase of common stock.......        --               (45)             --
Unrealized gain on Investments...       149               149             149
Net loss.........................        --           (23,385)        (23,385)
                                       ----          --------        ========
BALANCES, SEPTEMBER 30, 2001.....      $149          $ 53,957
                                       ====          ========
</Table>

          See accompanying notes to consolidated financial statements.
                                       F-5
<PAGE>

                      TALARIAN CORPORATION AND SUBSIDIARY

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<Table>
<Caption>
                                                                YEAR ENDED SEPTEMBER 30,
                                                              -----------------------------
                                                                2001       2000      1999
                                                              --------   --------   -------
                                                                     (IN THOUSANDS)
<S>                                                           <C>        <C>        <C>
Cash flows from operating activities:
  Net loss..................................................  $(23,385)  $(15,040)  $(3,539)
  Adjustments to reconcile net loss to net cash used in
     operating activities:
     Depreciation and amortization..........................       940        467       455
     Acquired in-process research and development...........        --         --       300
     Provision for doubtful accounts........................       161         --        --
     Amortization of goodwill and other intangible assets...     3,427      1,769        --
     Amortization of deferred stock compensation............     6,228      9,939       915
     Non-employee stock compensation........................        --        515        38
     Changes in assets and liabilities:
       Accounts receivable..................................      (668)      (183)   (1,654)
       Prepaid expenses and other assets....................      (728)      (455)       66
       Accounts payable.....................................      (460)       524        97
       Accrued payroll and related expenses.................       177        569        75
       Other accrued expenses...............................       592      1,026      (164)
       Deferred rent........................................       173         --        --
       Deferred revenue.....................................      (552)      (502)    1,251
                                                              --------   --------   -------
          Net cash used in operating activities.............   (14,095)    (1,371)   (2,160)
                                                              --------   --------   -------
Cash flows from investing activities:
  Purchases of investments..................................    (8,772)   (34,244)       --
  Proceeds from sales of investments........................    13,474      1,650        --
  Purchase of property and equipment........................    (1,616)    (1,198)     (341)
  Cash acquired as part of GlobalCast acquisition...........        --         --       400
  Acquisition of WhiteBarn, net of cash.....................        --       (713)       --
                                                              --------   --------   -------
          Net cash provided by (used in) investing
           activities.......................................     3,086    (34,505)       59
                                                              --------   --------   -------
Cash flows from financing activities:
  Proceeds from issuance of common stock....................       371     60,620        43
  Repurchase of common stock................................       (45)       (57)       --
  Proceeds from debt........................................        --         --     1,353
  Proceeds from issuance of preferred stock, net............        --      9,934        --
  Payments on debt..........................................        --     (1,297)     (679)
          Net cash provided by financing activities.........       326     69,200       717
                                                              --------   --------   -------
Net increase (decrease) in cash and cash equivalents........   (10,683)    33,324    (1,384)
Cash and cash equivalents at beginning of year..............    35,144      1,820     3,204
                                                              --------   --------   -------
Cash and cash equivalents at end of year....................  $ 24,461   $ 35,144   $ 1,820
                                                              ========   ========   =======
Supplemental disclosures of cash flow information:
  Cash paid during the year:
     Interest...............................................  $     --   $     87   $   108
                                                              ========   ========   =======
  Noncash financing and investing activities:
     Accretion for dividends on redeemable preferred
      stock.................................................  $     --   $    817   $   498
                                                              ========   ========   =======
     Unrealized gain on investments.........................  $    149   $     --   $    --
                                                              ========   ========   =======
     Common stock and vested options issued for
      acquisition...........................................  $     --   $  4,212   $ 3,630
                                                              ========   ========   =======
     Deferred stock compensation............................  $ (2,247)  $ 18,389   $ 4,351
                                                              ========   ========   =======
     Common stock issued in exchange for notes receivable...  $     --   $    100   $    --
                                                              ========   ========   =======
     Beneficial conversion feature on redeemable preferred
      stock.................................................  $     --   $  5,719   $    --
                                                              ========   ========   =======
     Conversion of redeemable preferred stock...............  $     --   $ 25,111   $    --
                                                              ========   ========   =======
</Table>

          See accompanying notes to consolidated financial statements.
                                       F-6
<PAGE>

                      TALARIAN CORPORATION AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       SEPTEMBER 30, 2001, 2000 AND 1999

(1) NATURE OF OPERATIONS

     Talarian Corporation (the Company) is a supplier of infrastructure software
that enables businesses to exchange information reliably and securely in real
time, both internally and with their partners, suppliers, and customers. The
Company's products and services allow software applications to communicate
across local or wide area networks, including private networks and the Internet.
The benefits of the Company's proprietary product SmartSockets are reduced
development effort, time to market and maintenance costs. The Company markets
and sells its software primarily through its direct sales organization,
value-added resellers (VARs), and original equipment manufacturers (OEMs) in
North America, the United Kingdom and Japan, and through distributors
internationally outside of the United Kingdom and Japan.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  (a) Basis of Consolidation

     The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary, Talarian Limited. All intercompany
transactions and balances have been eliminated in consolidation.

  (b) Use of Estimates

     The preparation of financial statements in conformity with generally
accepted accounting principles in the United States requires management to make
estimates and assumptions. These assumptions affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.

  (c) Cash and Cash Equivalents

     Cash and cash equivalents consist of cash and highly liquid investments
with remaining maturities of less than 90 days at the date of purchase. The
Company is exposed to credit risk in the event of default by the financial
institutions or the issuers of these investments to the extent of the amounts
recorded on the balance sheet in excess of amounts that are insured by the
Federal Deposit Insurance Corporation. As of September 30, 2001, cash
equivalents consisted of money market accounts and auction rate instruments. As
of September 30, 2000, cash equivalents consisted principally of money market
accounts.

  (d) Accounting for Certain Investments in Debt and Equity Securities

     The Company classifies its investments in debt securities as
available-for-sale. Available-for-sale securities are carried at fair market
value. Any unrealized gains or losses are recorded within comprehensive
income/loss as a component of stockholders' equity. As of September 30, 2001,
all investments were considered available-for-sale securities and consisted of
the following (in thousands):

<Table>
<Caption>
                                                                 UNREALIZED    ESTIMATED
                                                        COST     GAIN/(LOSS)   FAIR VALUE
                                                       -------   -----------   ----------
<S>                                                    <C>       <C>           <C>
Cash.................................................  $ 3,090      $ --        $ 3,090
Money market funds...................................    7,821        --          7,821
Market auction instruments...........................   13,550        --         13,550
US government obligations............................   27,892       149         28,041
                                                       -------      ----        -------
                                                       $52,353      $149        $52,502
                                                       =======      ====        =======
</Table>

                                       F-7
<PAGE>
                      TALARIAN CORPORATION AND SUBSIDIARY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     As of September 30, 2001, the investments were classified on the
consolidated balance sheet as follows (in thousands):

<Table>
<S>                                                           <C>
Cash and cash equivalents...................................  $24,461
Short-term investments......................................   28,041
                                                              -------
                                                              $52,502
                                                              =======
</Table>

     As of September 30, 2000, all investments were considered
available-for-sale securities and consisted of the following (in thousands):

<Table>
<Caption>
                                                               COST AND
                                                              ESTIMATED
                                                              FAIR VALUE
                                                              ----------
<S>                                                           <C>
Cash........................................................   $    62
Money market funds..........................................     2,353
Commercial paper............................................    47,282
Municipal bonds.............................................    12,350
US government obligations...................................     5,691
                                                               -------
                                                               $67,738
                                                               =======
</Table>

     As of September 30, 2000, all of these investments had contractual
maturities within one year. These investments were classified on the
consolidated balance sheet as follows (in thousands):

<Table>
<S>                                                           <C>
Cash and cash equivalents...................................  $35,144
Short-term investments......................................   32,594
                                                              -------
                                                              $67,738
                                                              =======
</Table>

  (e) Property and Equipment

     Property and equipment are recorded at cost and depreciated on a
straight-line basis over their estimated useful lives of between three and five
years. Leasehold improvements and assets recorded under capital leases are
amortized on a straight-line basis over the shorter of the lease term or their
estimated useful lives.

  (f) Goodwill and Other Intangible Assets

     Goodwill and other intangible assets, primarily comprising acquired
technology, are being amortized on a straight-line basis over their estimated
useful lives ranging from two to four years.

  (g) Impairment of Long-Lived Assets

     The Company evaluates its long-lived assets, including goodwill and certain
identifiable intangibles, for impairment whenever events or changes in
circumstances indicate that the carrying amount of these assets may not be
recoverable. Recoverability of an asset to be held and used is measured by a
comparison of the carrying amount of the asset to future net cash flows expected
to be generated by the asset. If assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.

                                       F-8
<PAGE>
                      TALARIAN CORPORATION AND SUBSIDIARY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  (h) Derivative investments and Hedging Activities

     The Company has adopted Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities." As amended by SFAS 138, SFAS 133
establishes accounting and reporting standards for derivative financial
instruments and hedging activities and requires the Company to recognize all
derivatives as either assets or liabilities on the balance sheet and measure
them at fair value. Gains and losses resulting from change in fair value would
be accounted for depending on the use of the derivative and whether it is
designated and qualifies for hedge accounting. To date, the Company has not
entered into any investments in derivative instruments and has not engaged in
any hedging activities.

  (i) Revenue Recognition

     The Company has adopted Statement of Position (SOP) 97-2, Software Revenue
Recognition, as amended by SOP 98-9. SOP 97-2, as amended, generally requires
revenue earned on software arrangements involving multiple elements to be
allocated to each element based on the vendor specific objective evidence of the
fair value.

     The Company licenses its products to end-user customers, OEMs and VARs.
Software license revenue is generally recognized upon receipt of a signed
contract or purchase order and delivery of the software, provided the related
fee is fixed and determinable, collectibility of the fee is probable and
vendor-specific objective evidence for all undelivered elements has been
established. The Company has established sufficient vendor-specific objective
evidence to ascribe a value to consulting services and post-contract customer
support based on the price charged when these elements are sold separately.
Accordingly, license revenue is recorded under the residual method described in
SOP 98-9 for arrangements in which licenses are sold with consulting services,
post-contract customer support, or both. However, the entire fee related to
arrangements that require the Company to deliver specified additional features
or upgrades is deferred until delivery of the feature and/or upgrade has
occurred, unless the Company has sufficient vendor-specific objective evidence
of fair value to allocate revenue to the various elements in these arrangements.
Fees related to arrangements that require the Company to deliver unspecified
additional products or in arrangements in which the Company grants a time-based
license, bundled with post contract support, for a period of one year or less
are deferred and recognized ratably over the term of the contract. All of the
contract software revenue related to arrangements involving consulting services
that are essential to the functionality of the software at the customer site is
deferred and recognized as the services are performed. Contract software revenue
related to arrangements to maintain the compatibility of the Company's software
products with the software products or platforms of the customer or other vendor
is recognized ratably over the term of the arrangement. License revenue from OEM
arrangements in which the Company earns a royalty based on a specified
percentage of OEM sales to end users incorporating the Company's software is
recognized upon delivery to the end user. Nonrefundable royalty fees received by
the Company from OEM customers are recognized as long as all other conditions of
SOP 97-2, as amended, have been satisfied.

     Professional services revenue consists of fees for services including
integration of software, application development, training and software
installation. The Company bills professional services fees either on a time and
materials basis or on a fixed-price schedule. The Company generally recognizes
professional services fees as the services are performed. The Company's
customers typically purchase maintenance agreements annually, and we price
maintenance based on a percentage of the product license fee. The Company
recognizes revenue from maintenance and support agreements ratably over the term
of the agreements, which is typically one year.

                                       F-9
<PAGE>
                      TALARIAN CORPORATION AND SUBSIDIARY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  (j) Cost of Revenue

     Cost of license revenue includes royalties due to third parties for
integrated technology, the cost of manuals and product documentation, and the
cost of production media used to deliver the Company's products. Cost of
maintenance revenue primarily represents salaries and related expenses for
technical support operations and an allocation of the Company's facilities,
communications and depreciation expenses and attributable stock compensation
cost. Cost of professional services revenue includes salaries and related
expenses for consulting services, implementation and training services, costs of
contracting with third parties to provide consulting services to customers and
an allocation of the Company's facilities, communications and depreciation
expenses and attributable stock compensation cost.

  (k) Software Development Costs

     Costs related to research, design and development of products are charged
to research and development expenses as incurred until technological feasibility
has been established. To date, the establishment of technological feasibility of
the Company's products and general release of these products have coincided. As
a result, the Company has not capitalized any software development costs since
these costs have not been significant.

     The Company has adopted the Emerging Issues Task Force (the "EITF")
published consensus on Issue No. 00-2 "Accounting for Web Site Development
Costs," which requires that costs incurred during the development of web site
applications and infrastructure, involving developing software to operate the
web site, including graphics that affect the "look and feel" of the web page and
all costs relating to software used to operate a web site should be accounted
for under Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." However, if a plan exists or
is being developed to market the software externally, the costs relating to the
software should be accounted for pursuant to FASB Statement No. 86. "Accounting
for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed."

  (l) Income Taxes

     Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be recovered.

  (m) Fair Value of Financial Instruments and Concentration of Credit Risk

     The carrying amounts for cash and cash equivalents, investments, accounts
receivable, and other financial instruments approximate fair value due to their
short maturities.

     Financial instruments that potentially subject the Company to
concentrations of credit risk include cash and cash equivalents, investments and
accounts receivable. At September 30, 2001, cash equivalents consisted of money
market accounts and auction rate instruments. Short-term investments at
September 30, 2001 consisted of government obligations. As of September 30,
2000, the Company's cash and cash equivalents, which consisted of money market
accounts, were on deposit with a commercial bank. The Company sells its software
products to large well-established companies throughout the world, directly and
through distributors, and generally does not require collateral on accounts
receivable.

                                       F-10
<PAGE>
                      TALARIAN CORPORATION AND SUBSIDIARY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  (n)  STOCK-BASED COMPENSATION

     The Company accounts for stock-based awards to employees using the
intrinsic value method. Expense associated with stock-based compensation is
being amortized on an accelerated basis over the vesting period of the
individual awards consistent with the method described in FASB Interpretation
No. 28. Pursuant to SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company discloses the pro forma effect of using the fair value method of
accounting for employee stock-based compensation arrangements. See Note 7(g).

     For nonemployees, the Company computes the fair value of the stock-based
compensation in accordance with SFAS No. 123.

  (o) ADVERTISING EXPENSE

     Advertising costs are expensed as incurred. In fiscal 2001, 2000, and 1999,
advertising expense was $1.3 million, $946,000, and $147,000, respectively.

  (p) FOREIGN CURRENCY TRANSACTIONS

     The functional currency of the Company's foreign subsidiary is the U.S.
dollar. Accordingly, monetary assets and liabilities in this entity are
remeasured at exchange rates in effect as of each reporting date. Nonmonetary
items are remeasured at historical rates. Income and expense accounts are
remeasured at the average rates in effect during each such period. Remeasurement
adjustments and transaction gains and losses are recognized in the statements of
operations in the period of occurrence and have not been significant to date.

  (q) COMPREHENSIVE INCOME

     Total comprehensive loss includes, in addition to net loss, unrealized
gains and losses excluded from the consolidated and combined statements of
operations that are recorded directly into a separate section of stockholders'
equity (deficit) on the consolidated balance sheets. These unrealized gains and
losses are referred to as other comprehensive income (loss). The Company's
accumulated other comprehensive income shown on the consolidated balance sheets
consists of unrealized investment holding gains and losses which are not
adjusted for income taxes. For the years ended September 30, 2001, 2000, and
1999, the Company had $149,000, $ nil, and $ nil of other comprehensive income
(loss) which was recorded as a component of stockholders' equity.

  (r) NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS

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

                                       F-11
<PAGE>
                      TALARIAN CORPORATION AND SUBSIDIARY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
                                                                        YEAR ENDED
                                                                       SEPTEMBER 30,
                                                              -------------------------------
                                                               2001       2000        1999
                                                              -------   ---------   ---------
<S>                                                           <C>       <C>         <C>
Shares issuable under stock options.........................  808,302   2,665,573   1,773,604
Shares of restricted stock subject to repurchase............  425,273     960,760          --
Shares issuable pursuant to warrants to purchase common
  stock.....................................................   17,367      97,367     162,985
Shares of redeemable convertible preferred stock on an
  "as-if-converted" basis...................................       --          --   7,239,827
</Table>

     The weighted-average exercise price of common stock options outstanding was
$3.31, $3.55, and $0.17 for the years ended September 30, 2001, 2000, and 1999,
respectively. The weighted-average exercise price of unvested common stock
subject to repurchase was $0.39 for the year ended September 30, 2001. The
weighted-average exercise price of warrants to purchase common stock was $0.90,
$0.67 and $0.77 for the years ended September 30, 2001, 2000 and 1999,
respectively.

  (s) RECENT ACCOUNTING PRONOUNCEMENTS

     On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations," and Statement of Financial Accounting Standards No. 142, ("SFAS
142"), "Goodwill and Other Intangible Assets." SFAS No. 141 addresses the
accounting for and reporting of business combinations.

     SFAS 141 requires that all business combinations be accounted for using the
purchase method of accounting for acquisitions, and eliminates the use of the
pooling-of-interests method. SFAS 141 is effective for all business combinations
initiated after June 30, 2001. The Company believes SFAS No. 141 will not have a
material effect on its consolidated financial statements.

     SFAS 142 addresses financial accounting and reporting for acquired goodwill
and other intangible assets. SFAS 142 changes the accounting for goodwill from
an amortization method to an impairment-only method. The amortization of
goodwill, including goodwill recorded in past business combinations, will cease
upon adoption of the SFAS 142. For goodwill acquired by June 30, 2001, SFAS 142
is effective for all fiscal years beginning after December 15, 2001. Goodwill
and intangible assets acquired after June 30, 2001, will be subject to immediate
adoption of SFAS 142. As of September 30, 2001, the Company had recorded
goodwill and intangibles of $2.1 million. The Company believes SFAS No. 141 will
not have a material effect on its consolidated financial statements.

     On August 16, 2001, the FASB issued Statement of Financial Accounting
Standards No. 143 ("SFAS 143"), "Accounting for Asset Retirement Obligations."
SFAS 143 addresses financial accounting requirements for retirement obligations
associated with retirement of tangible long-lived assets and for the associated
asset retirement costs. SFAS 143 requires a company to record the fair value of
an asset retirement obligation in the period in which it is incurred. When the
retirement obligation is initially recorded, the company also records a
corresponding increase to the carrying amount of the related tangible long-lived
asset and depreciates that cost over the useful life of the tangible long-lived
asset. The retirement obligation is increased at the end of each period to
reflect the passage of time and changes in the estimated future cash flows
underlying the initial fair value measurement. Upon settlement of the retirement
obligation, the company either settles the retirement obligation for its
recorded amount or incurs a gain or loss upon settlement. SFAS 143 is effective
for fiscal years beginning after June 15, 2002 with earlier application
encouraged. Accordingly, SFAS 143 will be effective for the Company beginning
October 1, 2001. The Company is currently in the process of evaluating the
impact, if any, SFAS 143 will have on its financial position or results of
operations.

                                       F-12
<PAGE>
                      TALARIAN CORPORATION AND SUBSIDIARY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     On October 3, 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, ("SFAS 144") Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS 144 supercedes Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and
Assets to be Disposed of", and the accounting and reporting provisions of
Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations -- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS
144 establishes a single accounting model for impairment or disposal by sale of
long-lived assets. The company is currently evaluating the potential impact, if
any, the adoption of SFAS 144 will have on its financial position and results of
operations

(3) PROPERTY AND EQUIPMENT

     Property and equipment consisted of the following (in thousands):

<Table>
<Caption>
                                                               SEPTEMBER 30,
                                                              ---------------
                                                               2001     2000
                                                              ------   ------
<S>                                                           <C>      <C>
Computer equipment and software.............................  $3,270   $3,206
Furniture and equipment.....................................     493      323
Leasehold improvements......................................     506       34
                                                              ------   ------
                                                               4,269    3,563
Less accumulated depreciation and amortization..............   2,248    2,218
                                                              ------   ------
                                                              $2,021   $1,345
                                                              ======   ======
</Table>

(4) ACQUISITIONS

     In September 1999, we acquired substantially all of the assets of
GlobalCast, a provider of reliable multicast technology, for common stock with
an aggregate value of $3.6 million. The acquisition was accounted for using the
purchase method of accounting in accordance with APB Opinion No. 16, and
$300,000 of the purchase price was allocated to in-process research and
development and expensed at the time of the acquisition. Also, in connection
with the GlobalCast acquisition, we recorded intangible assets of $2.9 million.
During the quarter ended June 30, 2001, we recorded a charge of $1.2 million to
reflect the impairment of intangibles and other assets, primarily related to our
goodwill associated with our acquisition of GlobalCast.

     On March 13, 2000, the Company acquired WhiteBarn, Inc. (WhiteBarn), a
privately held company in Chicago, Illinois. WhiteBarn is a software consulting
and development company. The Company issued 348,215 shares of its common stock
and cash of approximately $581,000 for all outstanding WhiteBarn stock, and
issued 71,783 fully vested stock options for all outstanding options of
WhiteBarn. An escrow has been established for 59,490 of the issued shares, which
will be released contingent upon the continued employment of one of WhiteBarn's
officers. The transaction has been accounted for as a purchase. The purchase
price of approximately $4,940,000 was allocated $515,000 to acquired net
tangible assets and $4,425,000 to intangible assets including goodwill.

(5) COMMITMENTS AND CONTINGENCIES

  (a) LEASE COMMITMENTS

     The Company leases approximately 16,000 square feet and 13,000 square feet
in two office buildings located in Los Altos, California under two separate
lease agreements that expire in May 2005 and December 2005, respectively. The
Company leases a total of approximately 13,000 square feet in a single office
building

                                       F-13
<PAGE>
                      TALARIAN CORPORATION AND SUBSIDIARY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

in Warrenville, Illinois under a lease that expires in December 2005. The
Company also leases office space in London, England and in various cities in the
United States and internationally to support its sales and marketing personnel
worldwide. These facilities are generally leased on a month-to-month basis or
have terms that end in 12 months or less. Rent expense charged to operations was
$3.3 million, $798,000, and $531,000 for the years ended September 30, 2001, and
2000, and 1999, respectively. Included in the $3.3 million expense for the year
ended September 30, 2001 is an accrual of $1.3 million in excess facility lease
costs, of which $907,000 and $392,000 represent future minimum lease commitments
in fiscal years 2002 and 2003 respectively. Future minimum lease payments under
noncancelable operating leases as of September 30, 2001, are as follows (in
thousands):

<Table>
<Caption>

<S>                                                           <C>
Year Ending September 30,
  2002......................................................  $2,416
  2003......................................................   2,241
  2004......................................................   2,220
  2005......................................................   1,943
  2006......................................................     347
                                                              ------
  Total minimum lease payments..............................  $9,167
                                                              ======
</Table>

  (b) LEGAL ACTIONS

     On August 10, 2001 a stockholder class action complaint was filed in the
United States District Court for the Southern District of New York against the
Company, certain of its officers and directors, and three underwriters of the
Company's initial public offering. The complaint was brought on behalf of
purchasers of Common Stock between July 20, 2000 and December 6, 2000. The
complaint has been brought as a purported stockholder class action under
Sections 11 and 15 of the Securities Act and Section 10(b) of the Securities
Exchange Act. The complaint alleges, among other things, that the Company and
the individual defendants named in the complaint violated the federal securities
laws by issuing and selling its Common Stock in its initial public offering
without disclosing to investors that certain of the underwriters in the offering
allegedly solicited and received excessive and undisclosed commissions from
certain investors. Similar complaints have been filed against a number of other
companies that had initial public offerings in 1999 and 2000. The Company has
not yet responded to this lawsuit, and no discovery has been conducted. The
Company believes that the allegations in this action are without merit, and
intends to defend against this action vigorously. Any legal proceeding is
subject to inherent uncertainty, and it is not possible to predict how the court
will rule. Therefore, it is the position of the Company's management based on a
review, including a review by outside counsel, that it is not possible to
estimate the amount of a probable loss, if any, to the Company that might result
from some adverse aspects of a judgment in this complaint. Accordingly, no
provision for this matter has been made in the Company's consolidated financial
statements.

     In addition, from time to time, we may be involved in other litigation
relating to claims arising out of our operations in the normal course of
business. As of the date of this Annual Report on Form 10-K, none of these legal
proceedings are expected, individually or in the aggregate, to have a material
adverse effect on our business, financial condition, operating results or cash
flow.

(6) BORROWINGS AND DEBT

     The Company has a credit facility available from a financial institution
for working capital, collateralized by accounts receivable and other assets of
the Company. Under the facility, the Company may borrow up to the lesser of
$2,000,000 or 75% of eligible accounts receivable. Borrowings would bear
interest at prime rate plus 0.25%. Under the facility, which was renewed on
February 22, 2001 and expires on February 22, 2002, if

                                       F-14
<PAGE>
                      TALARIAN CORPORATION AND SUBSIDIARY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the Company has any amounts outstanding the Company is required to maintain
certain financial ratios, and its losses may not exceed certain quarterly
amounts. As of September 30, 2001 and 2000, the Company had no amounts
outstanding under this facility.

(7) STOCKHOLDERS' EQUITY AND REDEEMABLE CONVERTIBLE PREFERRED STOCK

  (a) INITIAL PUBLIC OFFERING

     On July 20, 2000, the Company completed an IPO of 4,200,000 shares of its
common stock at a price of $16.00 per share and received net proceeds of
approximately $59,994,000.

  (b) REINCORPORATION

     On July 10, 2000, the Company completed its reincorporation in the State of
Delaware. The accompanying financial statements reflect this reincorporation,
and the resulting recognition of par value for all periods presented.

  (c) COMMON STOCK

     The Company has authorized 50,000,000 shares of common stock. Each share of
common stock has voting rights of one vote per share.

  (d) REDEEMABLE CONVERTIBLE PREFERRED STOCK

     Since inception the Company issued 8,920,970 shares of convertible
preferred stock. All outstanding convertible preferred stock automatically
converted into Common Stock upon the completion of the Company's initial public
offering. Conversion of the Series A, C and D preferred stock was on a 1:1
basis; conversion of the Series B preferred stock was on a 1:1.04204 basis.

     In February 2000, the Company issued 1,571,055 shares of Series D preferred
shares on which a beneficial conversion feature arose, due to the difference at
the issuance date between the issuance price for the shares ($6.36 per share)
and their underlying fair value ($10.00 per share). The beneficial conversion
totaling $5,719,000 was recorded in the financial statements as analogous to a
preferred stock dividend and accordingly recognized as a component of net loss
attributable to common stockholders.

     Following the completion of the Company's Initial Public Offering (IPO),
and the automatic conversion of all the Company's preferred shares into common
shares, the amounts relating to the beneficial conversion, together with
cumulative accrued dividends on the preferred shares totaling $9.8 million were
reclassified from retained deficit to additional paid in capital.

  (e) STOCK OPTION PLANS

     The number of shares of common stock reserved for issuance under the 1998
Equity Incentive Plan (the Incentive Plan) is 2,800,000. Under the Incentive
Plan, the Board of Directors may grant options to selected employees, officers,
directors, and consultants of the Company at an exercise price of not less than
100% of the fair market value of the shares on the date of grant, except that
nonqualified options may be granted at 85% of this fair market value and option
grants to a 10% stockholder will not be less than 110% of this fair market
value. Options expire no later than ten years from the date of grant and
generally vest ratably over four years. Unexercised options expire 90 days after
termination of employment from the Company.

     The number of shares of common stock reserved for issuance under the 1991
Stock Option Plan (the Stock Plan) is 2,050,000. Under the Stock Plan, the Board
of Directors may grant either incentive or nonqualified stock options to key
employees, consultants, directors and officers to purchase common stock at an
exercise price of not less than 100% of the fair market value of the shares on
the date of grant, except that
                                       F-15
<PAGE>
                      TALARIAN CORPORATION AND SUBSIDIARY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

nonqualified options may be granted at 85% of this fair market value. Options
expire no later than ten years from the date of grant and generally vest ratably
over four years. Unexercised options expire 90 days after termination of
employment from the Company.

     The Company has the right to repurchase any unvested stock purchased at the
original issuance cost upon the termination of the purchaser's employment. The
Company's repurchase right lapses ratably over four years. Prior to September
30, 2001, the Company issued 1,279,171 shares that are subject to repurchase. As
of September 30, 2001, 179,248 of these shares had been repurchased and 674,605
had vested, leaving 425,318 shares still subject to repurchase at a
weighted-average price of $0.39 per share. Of the restricted shares, 100,000
were issued to an employee of the Company for a full recourse promissory note
with an interest rate of 6.45% and term of 5 years.

     In March 2000, the Company's Board of Directors approved, subject to
stockholder approval, the 2000 Equity Incentive Plan (the 2000 Plan). The
Company has reserved 3,000,000 shares of common stock for issuance under the
2000 Plan. The number of shares reserved under the 2000 Plan will automatically
be increased on January 1 of each year, commencing in 2001, by an amount equal
to 5% of the shares outstanding as of the immediately preceding December 31. The
increase in reserved shares as of January 1, 2001 was 948,822 shares. If not
terminated earlier, the 2000 Plan will terminate in March 2010.

     Under the 2000 Plan, the exercise price of all incentive stock options will
be at least 100% of the stock's fair market value on the date of grant for
employees owning 10% or less of the voting power of all classes of stock and at
least 110% of the fair market value on the date of grant for employees owning
more than 10% of the voting power of all classes of stock.

     Under the 2000 Plan, options generally will expire after ten years.
However, the term of the options must be limited to five years in the case of an
incentive stock option granted to an option holder representing more than 10% of
the voting power of all classes of stock.

     Options granted under the 2000 Plan generally become exercisable at the
rate of 12.5% of the total number of shares subject to the options on the date
six months from the grant date, and 2.083% of the total number of shares subject
to the options each month thereafter.

                                       F-16
<PAGE>
                      TALARIAN CORPORATION AND SUBSIDIARY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     A summary of the status of the Company's options under the Incentive Plan
and the Stock Plan is as follows:

<Table>
<Caption>
                                   YEAR ENDED               YEAR ENDED              YEAR ENDED
                               SEPTEMBER 30, 2001       SEPTEMBER 30, 2000      SEPTEMBER 30, 1999
                              ---------------------   ----------------------   ---------------------
                                          WEIGHTED-                WEIGHTED-               WEIGHTED-
                                           AVERAGE                  AVERAGE                 AVERAGE
                               NUMBER     EXERCISE      NUMBER     EXERCISE     NUMBER     EXERCISE
                              OF SHARES     PRICE     OF SHARES      PRICE     OF SHARES     PRICE
                              ---------   ---------   ----------   ---------   ---------   ---------
<S>                           <C>         <C>         <C>          <C>         <C>         <C>
Outstanding at beginning of
  period....................  2,665,573     $3.55      1,773,604    $ 0.17     1,277,676     $0.14
Granted.....................  1,096,910      4.01      2,994,783      3.41     1,080,500      0.20
Exercised...................   (103,438)     0.38     (1,892,953)     0.38      (302,551)     0.14
Canceled....................   (940,535)     5.13       (209,861)     1.48      (282,021)     0.16
                              ---------               ----------               ---------
Outstanding at end of
  period....................  2,718,510     $3.31      2,665,573    $ 3.55     1,773,604     $0.17
                              =========               ==========               =========
Options exercisable at end
  of period.................    808,302     $3.30        420,932    $ 1.75       554,431     $0.14
                              =========               ==========               =========
  Weighted-average fair
     value of options
     granted during the
     period with exercise
     prices equal to fair
     value at date of
     grant..................  1,096,910     $4.01        186,000    $12.69
  Weighted-average fair
     value of options
     granted during the
     period with exercise
     prices less than fair
     value at date of
     grant..................         --        --      2,808,783    $ 8.51     1,080,500     $4.10
</Table>

     The options outstanding and currently exercisable by exercise price at
September 30, 2001 were as follows:

<Table>
<Caption>
                                                   OPTIONS OUTSTANDING
                                           -----------------------------------
                                                        WEIGHTED-                OPTIONS EXERCISABLE
                                                         AVERAGE                 -------------------
                                                        REMAINING    WEIGHTED-             WEIGHTED-
                                                       CONTRACTUAL    AVERAGE    NUMBER     AVERAGE
                                            NUMBER        LIFE       EXERCISE      OF      EXERCISE
EXERCISE PRICES                            OF SHARES     (YEARS)       PRICE     SHARES      PRICE
---------------                            ---------   -----------   ---------   -------   ---------
<S>                                        <C>         <C>           <C>         <C>       <C>
$ 0.15 to 0.20...........................    153,267      7.69        $ 0.20      44,211    $ 0.20
  1.00 to 1.83...........................  1,025,854      8.68          1.22     315,258      1.01
  2.06 to 3.78...........................  1,014,606      8.84          3.05     284,122      3.16
  4.94 to 5.63...........................    260,783      8.99          5.12      81,469      5.09
  9.00...................................     82,000      8.79          9.00      24,120      9.00
 12.06 to 16.00..........................    182,000      8.94         13.92      59,122     13.68
                                           ---------      ----        ------     -------    ------
                                           2,718,510      8.73        $ 3.31     808,302    $ 3.30
                                           =========      ====        ======     =======    ======
</Table>

     As of September 30, 2001, there were 4,089,664 additional shares available
for grant under the 2000 Plan.

                                       F-17
<PAGE>
                      TALARIAN CORPORATION AND SUBSIDIARY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  (f) 2000 Employee Stock Purchase Plan

     In March 2000, the Company's Board of Directors approved, subject to
stockholder approval, the 2000 Employee Stock Purchase Plan (the Purchase Plan)
and reserved a total of 300,000 shares of common stock for issuance under the
Purchase Plan. The number of shares reserved for issuance under the Purchase
Plan will automatically increase on January 1 of each year commencing in 2001 by
an amount equal to 1% of the total shares outstanding on the immediately
preceding December 31. The increase in reserved shares effective January 1, 2001
was 189,764.

     Generally, each offering period will be 24 months in length. The Purchase
Plan will permit eligible employees to purchase common stock through payroll
deductions, which may not exceed 15% of an employee's base salary, commissions
and bonus. The purchase price will be equal to the lower of 85% of the fair
market value of the common stock (i) at the beginning of the applicable offering
period or (ii) at the end of the applicable purchase period.

     As of September 30, 2001, 227,014 shares have been issued under the
Purchase Plan and 262,750 shares were reserved for future issuances under the
plan.

  (g) Stock-Based Compensation

     The Company uses the intrinsic-value method in accounting for its employee
stock-based compensation plans. Accordingly, no compensation cost has been
recognized for any stock options granted because the exercise price of each
option equaled or exceeded the fair value of the underlying common stock as of
the grant date for each stock option, except for stock options granted from
October 1, 1998 to July 20, 2000. With respect to the stock options granted in
the period from October 1, 1998 to July 20, 2000, the Company recorded deferred
stock compensation of $22.1 million for the difference at the grant or issuance
date between the exercise price of each stock option granted and the fair value
of the underlying common stock. This amount is being amortized on an accelerated
basis over the vesting period, generally four years, consistent with the method
described in FASB Interpretation No. 28. Amortization of the September 30, 2001
balance of deferred stock compensation for the fiscal years ended 2002, 2003,
and the nine months ended June 30, 2004, is expected to approximate $2.439
million, $899,000, and $73,000, respectively.

     Had compensation costs been determined in accordance with SFAS No. 123 for
all of the Company's stock-based compensation plans, net loss attributable to
common stockholders, and basic and diluted net loss per share attributable to
common stockholders would have been as follows (in thousands, except per share
data):

<Table>
<Caption>
                                                          YEAR ENDED SEPTEMBER 30,
                                                        -----------------------------
                                                          2001       2000      1999
                                                        --------   --------   -------
<S>                                                     <C>        <C>        <C>
Net loss attributable to common stockholders (in
  thousands):
  As reported.........................................  $(23,385)  $(21,576)  $(4,037)
  Pro forma...........................................   (27,323)   (22,591)   (4,051)
Basic and diluted net loss per share attributable to
  common stockholders:
  As reported.........................................  $  (1.27)  $  (3.08)  $ (1.30)
  Pro forma...........................................  $  (1.48)  $  (3.22)  $ (1.30)
</Table>

                                       F-18
<PAGE>
                      TALARIAN CORPORATION AND SUBSIDIARY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The fair value of each option grant was estimated on the date of grant
using the minimum value method prior to the IPO and the Black Scholes Option
Pricing model after the IPO with the following assumptions, no dividends and the
following risk-free interest rates, expected lives and volatilities:

<Table>
<Caption>
                                                           YEAR ENDED SEPTEMBER 30,
                                                       ---------------------------------
                                                         2001        2000        1999
                                                       ---------   ---------   ---------
<S>                                                    <C>         <C>         <C>
Risk-free interest rate..............................      4.82%       6.37%       5.56%
Expected life........................................  3.5 years   3.6 years   3.5 years
Volatility...........................................       127%        161%          --
</Table>

     The weighted-average expected life was calculated based on the vesting
period and the expected exercise behavior. Stock options issued generally vest
at a rate of 12.5% upon the six month anniversary of the option grant date and
2.083% each month thereafter for the next 42 months. The risk-free interest rate
was calculated in accordance with the grant date and expected life.

  (h) Warrants

     Prior to 1993, the Company granted warrants to purchase an aggregate of
135,140 and 33,334 shares of Series A and B preferred stock, respectively. The
Series A warrants are exercisable at prices of $0.63 and $0.80 per share and all
of the Series B warrants are exercisable at $0.90 per share. The Series A and B
warrants are immediately exercisable and expire in the years 2000 through 2002.
These warrants were issued to a number of individuals and a bank in
consideration for the provision of cash advances and a line of credit,
respectively, necessary to fund the Company's working capital requirements
during the early years following its formation. At the closing of the Company's
IPO, these warrants became exercisable for common stock. At September 30, 2001,
warrants to purchase an aggregate of 17,367 shares of common stock remained
outstanding with a weighted average exercise price of $0.90 per share. The
Company has reserved 17,367 shares of common stock for issuance upon the
exercise and conversion of these warrants. The value of these warrants, computed
using the Black-Scholes option pricing model, was not significant.

(8) SEGMENT INFORMATION

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

     The Company's chief operating decision maker is considered to be the
Company's Chief Executive Officer (CEO). The CEO reviews financial information
presented on a consolidated basis for purposes of making operating decisions and
assessing financial performance. The consolidated financial information reviewed
by the CEO is identical to the information presented in the accompanying
consolidated statements of operations.

     The Company maintains significant operations in the United States, with
direct sales and marketing offices located in the United Kingdom and other
European cities. The Company does not measure net revenue by geographical area,
and accordingly no analysis has been provided. There were no significant assets
maintained by the Company outside the United States for the years ended
September 30, 2001, 2000 or 1999.

                                       F-19
<PAGE>
                      TALARIAN CORPORATION AND SUBSIDIARY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Therefore, the Company has determined that it operates in a single
operating segment: real-time infrastructure software. Disaggregated information
on its products and services is as follows (in thousands):

<Table>
<Caption>
                                                            YEAR ENDED SEPTEMBER 30,
                                                           --------------------------
                                                            2001      2000      1999
                                                           -------   -------   ------
<S>                                                        <C>       <C>       <C>
Revenue:
  Licenses...............................................  $ 8,291   $10,553   $5,912
  Maintenance............................................    4,006     3,094    2,488
  Professional services..................................    2,566     2,204      640
                                                           -------   -------   ------
     Total revenue.......................................  $14,863   $15,851   $9,040
                                                           =======   =======   ======
</Table>

     Revenue from sales made to customers in Europe aggregated 14%, 15%, and 22%
for the years ended September 30, 2001, 2000 and 1999, respectively, and 10%
represent a combination of export sales made from the United States to European
customers and sales originated by the United Kingdom sales subsidiary to
European customers. The primary geographic location of customers by country were
the United Kingdom, France and Germany. Revenue from sales in the United Kingdom
was 10% in the year ended September 30, 2001.

     One customer accounted for 13%, 6%, and 12% of total revenue for the fiscal
years ended September 30, 2001, 2000 and 1999, and 4% of accounts receivable
outstanding as of September 30, 2001. No other customer accounted for more than
10% of total revenue or accounts receivable for any of the last three fiscal
years.

(9) INCOME TAXES

     Income tax expense for the year ended September 30, 2001, September 30,
2000, and September 30, 1999 consisted of:

<Table>
<Caption>
                                                              2001   2000   1999
                                                              ----   ----   ----
<S>                                                           <C>    <C>    <C>
Current
  Federal tax...............................................  $--    $--    $ --
  State tax.................................................   22      2       2
  Foreign tax...............................................   28     11       4
                                                              ----   ----   ----
  Total current tax expense.................................   50     13       6
Deferred
  Federal tax...............................................   --     --      --
  State tax.................................................   --     --      --
  Foreign tax...............................................   --     --      --
                                                              ----   ----   ----
  Total tax expense.........................................  $50    $13    $  6
                                                              ====   ====   ====
</Table>

                                       F-20
<PAGE>
                      TALARIAN CORPORATION AND SUBSIDIARY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The September 30, 2001, September 30, 2000 and September 30, 1999 income
tax expense differed from the amounts computed by applying the U.S. federal
income tax rate of 34% to pretax income as a result of the following:

<Table>
<Caption>
                                                           2001      2000      1999
                                                          -------   -------   -------
<S>                                                       <C>       <C>       <C>
Federal tax at statutory rate...........................  $(7,934)  $(5,111)  $(1,127)
State income tax, no federal benefit....................       22         2         2
Foreign tax.............................................       28        --        --
Amortization of stock compensation......................    2,118     3,553       253
Amortization of goodwill and intangibles................      935       494        --
Other...................................................       16        18        10
Net operating loss and credits not
  (previously)/currently benefited, net utilized........    4,865     1,057       868
                                                          -------   -------   -------
Total tax provision.....................................  $    50   $    13   $     6
                                                          =======   =======   =======
</Table>

     As of September 30, 2001 and September 30, 2000, the types of temporary
differences that give rise to significant portions of the Company's deferred tax
assets and liabilities are set forth below (in thousands):

<Table>
<Caption>
                                                               2001      2000
                                                              -------   -------
<S>                                                           <C>       <C>
Deferred tax assets:
  Depreciation..............................................  $    --   $   185
  Intangibles...............................................       --        --
  Accrued liabilities.......................................       96       336
  Allowance for doubtful accounts...........................      106        96
  Net operating loss carryforwards..........................    7,331     7,331
  Research and development and other credits................    1,441     2,773
  Deferred revenues.........................................      312       570
                                                              -------   -------
  Gross deferred tax assets.................................    9,340     4,754
  Valuation allowance.......................................   (9,040)   (4,052)
                                                              -------   -------
  Total deferred tax assets.................................      300       702
Deferred tax liabilities:
  Depreciation..............................................      (53)       --
  Intangibles...............................................     (247)     (702)
                                                              -------   -------
  Total deferred tax liabilities............................     (300)     (702)
Net deferred tax asset (liability)..........................  $    --   $    --
                                                              =======   =======
</Table>

     Management has established a valuation allowance for the portion of
deferred tax assets for which realization is uncertain. The change in the
valuation allowance for deferred tax assets for the years ended September 30,
2001 and September 30, 2000 was an increase of $5.0 million and a decrease of
$78,000 respectively.

     As of September 30, 2001, the Company had net operating loss carryforwards
for federal and California income tax purposes of approximately $21.1 million
and $1.6 million, respectively, available to offset income in future years. The
federal net operating loss carryforwards expire from 2007 through 2021. The
California net operating loss carryforwards expire from 2001 through 2006.

                                       F-21
<PAGE>
                      TALARIAN CORPORATION AND SUBSIDIARY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     As of September 30, 2001, the Company had research and experimentation
credit carryforwards for federal and California income tax purposes of
approximately $791,000 and $603,000 available to reduce future income taxes. The
federal research credit carryforwards expire in various years from 2005 through
2021. The California research credit carries forward indefinitely until
utilized. California has a manufacturing investment credit of $16,000. In
addition, the Company had $7,000 and $4,000 of tax credit carryforwards related
to the Alternative Minimum Tax (AMT) for federal and state purposes,
respectively. The federal and state AMT credit carries forward indefinitely
until utilized.

     Federal and California tax laws impose substantial restrictions on the
utilization of net operating loss and credit carryforwards in the event of an
"ownership change" for tax purposes, as defined in Section 382 of the Internal
Revenue Code.

(10) QUARTERLY FINANCIAL DATA (UNAUDITED)

     Summarized quarterly supplemental unaudited consolidated financial
information for the years ended September 30, 2001 and 2000 are as follows (in
thousands, except per share data):

<Table>
<Caption>
                                                                    FISCAL QUARTERS
                                                         -------------------------------------
                                                          FIRST    SECOND     THIRD    FOURTH
                                                         -------   -------   -------   -------
<S>                                                      <C>       <C>       <C>       <C>
FOR THE YEAR ENDED SEPTEMBER 30, 2001
  Net sales............................................  $ 3,417   $ 4,123   $ 2,773   $ 4,550
  Gross Profit.........................................    2,505     3,066     1,793     3,536
  Net Loss.............................................   (6,222)   (5,493)   (6,623)   (5,047)
  Basic and diluted loss per common share..............  $ (0.34)  $ (0.30)  $ (0.36)  $ (0.27)
  Shares used to compute basic and diluted loss per
     common share......................................   18,168    18,391    18,558    18,752
FOR THE YEAR ENDED SEPTEMBER 30, 2000
  Net sales............................................  $ 2,794   $ 3,634   $ 4,442   $ 4,981
  Gross Profit.........................................    2,392     2,930     3,209     3,916
  Net Loss.............................................   (2,157)   (9,622)   (5,321)   (4,476)
  Basic and diluted loss per common share..............  $ (0.57)  $ (2.20)  $ (0.99)  $ (0.30)
  Shares used to compute basic and diluted loss per
     common share......................................    3,813     4,366     5,350    14,949
</Table>

     During the fourth quarter ending September 30, 2001, the Company recorded a
$1.3 million accrual for excess facility lease costs. The amount represents
expenses related to real estate commitments in excess of projected needs. There
were no similar expenses in prior years. The lease accrual covers a period of 19
months out of the remaining lease term of 33 months.

                                       F-22
<PAGE>

                      TALARIAN CORPORATION AND SUBSIDIARY

                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

<Table>
<Caption>
                                                                 YEAR ENDED SEPTEMBER 30,
                                                              ------------------------------
                                                                2001       2000       1999
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
Allowance for doubtful accounts:
Balance, beginning of period................................  $245,000   $245,000   $185,000
Additions charged to expense................................   262,000         --     60,000
Accounts written off........................................   101,000         --         --
Balance, end of period......................................  $406,000   $245,000   $245,000
</Table>

                                       S-1
<PAGE>

                                 EXHIBIT INDEX

<Table>
<Caption>
EXHIBIT
NUMBER                           EXHIBIT TITLE
-------                          -------------
<C>       <S>
 2.01     Agreement and Plan of Merger between Talarian Corporation, a
          California corporation, and Registrant.(1)
 2.02     Asset Purchase Agreement dated September 30, 1999 between
          Registrant and GlobalCast Communications, Inc., a California
          corporation.(1)
 2.03     Agreement and Plan of Merger dated March 7, 2000 between
          Registrant and WhiteBarn, Inc., an Illinois corporation.(1)
 3.01     Registrant's Predecessor's Amended and Restated Articles of
          Incorporation as filed February 4, 2000 with the Secretary
          of State of California.(1)
 3.02     Registrant's Predecessor's Bylaws as adopted March 28,
          1991.(1)
 3.03     Registrant's First Amended and Restated Certificate of
          Incorporation as filed May 26, 2000 with the Secretary of
          State of Delaware.(1)
 3.05     Registrant's Bylaws as adopted April 3, 2000.(1)
 3.06     Registrant's Certificate of Designation of preferred stock
          as filed May 31, 2000 with the Delaware Secretary of
          State.(1)
 3.08     Registrant's Predecessor's Certificate of Amendment of
          Articles of Incorporation as filed May 23, 2000.(1)
 3.09     Registrant's Certificate of Retirement of preferred stock as
          filed with the Delaware Secretary of State on July 26,
          2000.(2)
 3.10     Registrant's Second Amended and Restated Certificate of
          Incorporation, as filed July 26, 2000 with the Delaware
          Secretary of State.(2)
 4.01     Specimen Common Stock Certificate.(1)
 4.02     Amended and Restated Investors Rights Agreement dated
          February 3, 2000, as amended March 10, 2000 between
          Registrant and certain stockholders and warrant holders
          named therein.(1)
10.01     Form of Indemnity Agreement.(1)
10.02     Registrant's 1991 Stock Option Plan and related
          documents.(1)*
10.03     Registrant's 1998 Equity Incentive Plan and related
          documents.(1)*
10.04     Registrant's 2000 Employee Stock Purchase Plan and related
          documents.(1)*
10.05     Registrant's 2000 Equity Incentive Plan and related
          documents.(1)*
10.06     WhiteBarn, Inc. Stock Option Plan and related document.(1)*
10.07     WhiteBarn, Inc. 2000 Equity Incentive Plan and related
          document.(1)*
10.09     Agreement dated March 13, 2000 between Registrant and
          Certain WhiteBarn Shareholders.(1)
10.10     Form of Option Acceleration Agreement between Registrant and
          each executive officer.(1)*
10.13     License Agreement dated July 25, 1997 between Lucent
          Technologies Inc., a Delaware corporation, and Registrant as
          successor to GlobalCast Communications, Inc., a California
          corporation, as amended by Amendment No. 1 effective January
          28, 1998 and letter dated September 3, 1999.(1)+
10.15     Standard Inbound License Agreement (Product Source Code)
          dated September 30, 1999 between Registrant and Novell,
          Inc., a Delaware corporation as amended by Amendment No. 1
          dated June 26, 2000.(1)+
10.18     Commitment Agreement dated March 13, 2000 between the
          Registrant, Mark Mahowald and Wagner & Associates, P.C.(1)
10.19     Agreement dated February 3, 2000 between Registrant and
          Nortel Networks Inc, as amended May 31, 2000.(1)+
10.20     Form of Registrant's Software License and Distribution
          Agreement.(1)
10.21     Form of lock-up agreement with the underwriters.(1)
10.22     Lease dated March 7, 2000 between Registrant and GVE Distel
          Associates.(1)
</Table>
<PAGE>

<Table>
<Caption>
EXHIBIT
NUMBER                           EXHIBIT TITLE
-------                          -------------
<C>       <S>
10.23     Settlement and License Agreement dated February 1, 1989
          between the Registrant and Lockheed Missiles and Space
          Company.(1)
10.24     Amended and Restated Loan and Security Agreement dated
          August 6, 1998 between the Registrant and Silicon Valley
          Bank, as amended February 22, 2000.(1)
10.25     Lease dated April 15, 2000 between Registrant and TJR
          Management Co.(1)
10.26     Value Added Reseller Agreement dated December 17, 1993
          between Registrant and Northern Telecom Limited, as amended
          September 30, 1997.(1)
10.27     Lease dated December 11, 2000 between Registrant and Los
          Altos Wood, LLC(3)
10.28     Amended and Restated Loan and Security Agreement dated
          August 6, 1998 between the Registrant and Silicon Valley
          Bank, as amended February 22, 2001.
10.29     Loan and Security Agreement dated July 15, 2001 by and among
          Talarian Corporation, Paul Larson and Cheryl Larson.*
16.01     Letter from former independent auditors.(1)
21.01     Subsidiaries of the Registrant.(1)
23.01     Consent of KPMG LLP, independent auditors.
24.01     Power of Attorney (see Part IV of this annual report.)
</Table>

---------------

(1) Incorporated by reference to the exhibit with the same number to our
    Registration Statement on Form S-1 (File No. 333-96494), which was declared
    effective by the Securities and Exchange Commission on July 20, 2000.

(2) Incorporated by reference to the exhibit with the same number to our
    Quarterly Report on Form 10-Q (File No. 000-31011) for the period ending
    June 30, 2000, filed with the Securities and Exchange Commission on
    September 1, 2000.

(3) Incorporated by reference to the exhibit with the same number to our
    Quarterly Report on Form 10-Q (File No. 000-31011) for the period ending
    December 31, 2000, filed with the Securities and Exchange Commission on
    February 14, 2001.

 *  Management contracts or compensatory plans required to be filed as an
    exhibit to Form 10-K.

 +  Confidential treatment has been granted for portions of this exhibit. These
    portions have been omitted from this filing and have been filed separately
    with the Securities and Exchange Commission.