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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                   FORM 10-KSB

                   [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                    For the Fiscal Year Ended March 31, 1998


                         Commission File Number: 0-25612


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

                Delaware                                        33-0567363
     (State or Other Jurisdiction of                         (I.R.S. Employer
     Incorporation or Organization)                       Identification Number)

      18872 MacArthur Boulevard
           Irvine, California                                      92612
(Address of principal executive offices)                        (Zip code)


                                 (714) 442-4400
              (Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None.

Securities registered pursuant to Section 12(g) of the Act:

                              Title of each class:
                              --------------------
                          Common Stock, $0.01 par value

Indicate by check mark whether the registrant has (1) filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) been subject to such filing requirements
for the past 90 days.

                               Yes [X]     No [ ]

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 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. [ ]

The registrant's revenues for its most recent fiscal year: $2,139,000.

The aggregate market value of the voting stock held by non-affiliates of the
registrant as of May 31, 1998, based on the closing price as reported by NASDAQ
was $ 37,611,000.

Number of shares outstanding as of May 31, 1998: Common Stock: 18,645,726

Documents Incorporated by Reference: Proxy Statement for 1998 Annual
Shareholders' Meeting; Part III.

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                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
<S>                                                                                  <C>
Part I................................................................................  3
  Item 1. Business....................................................................  3
    Company Formation and Acquisition.................................................  3
    Company and Product History.......................................................  3
    Market Background for ITE Products................................................  5
    The Market Opportunity............................................................  6
    Market Size.......................................................................  9
    Industry Background...............................................................  9
    StarBase Strategy................................................................. 11
    StarBase ITE Products............................................................. 12
    Competition....................................................................... 15
    Marketing and Sales............................................................... 17
    Proprietary Rights................................................................ 19
    Employees......................................................................... 19
    Forward Looking Statements........................................................ 20
    Risk Factors...................................................................... 20
  Item 2. Properties.................................................................. 20
  Item 3. Legal Proceedings........................................................... 21
  Item 4. Submission of Matters to a Vote of Security Holders......................... 21
Part II............................................................................... 22
  Item 5. Market for Registrant's Common Equity....................................... 22
  Item 6. Management's Discussion and Analysis of Financial Condition 
    and Results of Operations......................................................... 22
    Results of Operations............................................................. 24
    Liquidity and Capital Resources................................................... 25
    The Year 2000..................................................................... 26
    New Accounting Standards.......................................................... 26
  Item 7. Financial Statements........................................................ 27
    Report of Independent Accountants................................................. 28
    Balance Sheets.................................................................... 29
    Statements of Operations.......................................................... 30
    Statements of Cash Flows.......................................................... 31
    Statements of Shareholders' Equity................................................ 32
  Item 8. Changes in and Disagreements with Accountants on Accounting 
  and Financial Disclosure............................................................ 43
Part III.............................................................................. 44
  Item 9. Directors and Executive Officers of The Registrant.......................... 44
  Item 10. Executive Compensation..................................................... 44
  Item 11. Security Ownership of Certain Beneficial Owners and Management............. 44
  Item 12. Certain Relationships and Related Transactions............................. 44
Part IV............................................................................... 45
  Item 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........... 45
    (a)   (3) Exhibits With Each Management Contract or Compensatory Plan 
    or Arrangement Required to be Filed Identified.................................... 45
    (b)   Reports on Form 8-K......................................................... 45
    (c)   Exhibits.................................................................... 45

</TABLE>

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                                     PART I

ITEM 1. BUSINESS

COMPANY FORMATION AND ACQUISITION

StarBase Corporation (the "Company" or "StarBase") was incorporated in
California on September 6, 1991 as NeuroStar Corporation ("NeuroStar"). In 1992,
the shareholders of NeuroStar entered into a plan of reorganization and a share
exchange agreement (the "Reorganization") with Pacific National Seafarms Ltd.
("PNA"), a company incorporated in British Columbia and listed on the Vancouver
Stock Exchange ("VSE"). Subsequently PNA merged into a wholly-owned subsidiary
("StarBase Delaware") incorporated in the State of Delaware, with StarBase
Delaware surviving the merger under the name StarBase Corporation.

In June 1996, the Company began trading on the NASDAQ Over The Counter
Electronic Bulletin Board under the symbol "SBAS". Subsequently, the Company
voluntarily delisted from the VSE and began trading on The NASDAQ SmallCap
Market in September 1996.

The Company's address is 18872 MacArthur Boulevard, Irvine, California 92612.
The Company's registered office is in the City of Wilmington, County of New
Castle, Delaware. Its telephone number is (714) 442-4400. The Company's federal
tax identification number is 33-0567363.

COMPANY AND PRODUCT HISTORY

StarBase was founded to solve a critical business problem that has plagued the
software industry for the past two decades, namely the inability of software
development projects to deliver software products on time and within budget. The
industry solution to this problem has been to improve the development tools for
programmers and, most recently, Integrated Development Environments ("IDE") for
programmers. Although the industry's major software companies have made
significant improvements in IDE product offerings, i.e., Microsoft Visual C++,
Microsoft Visual Basic, Powersoft PowerBuilder, Borland Delphi, etc., the
industry press has continued to report that the majority of software projects
continue to come in late and over budget.

The StarBase business plan was initially based on the proposition that the
software development productivity problem was intrinsic to the architecture of
the industry's IDE product offerings. The solution to this problem and the
Company's operating premise was that proper architecture and additional product
features were required. Thus, the Company started development of a
next-generation, object-oriented IDE that included a database component, a
high-level language, language tools, graphical design tools and a team
development environment. Part of this decision was based on the fact that
competitive IDEs were neither completely object-oriented nor integrated all the
components necessary to build complete applications. By 1993, the Company had
made significant progress toward the creation of the StarBase object-oriented
IDE and had formed a consulting organization that was capable of building
proof-of-concept applications for Fortune 1000 companies.

During 1993 and 1994, however, the Company concluded, based on market research,
that a next generation IDE would not be a lasting solution to the software
development productivity problem. During 1994, marketing feedback on the
Company's initial products, Versions and TSMS, indicated that the critical
problem was no longer code production by programmers, but rather the team
processes of collaboration, work flow and project management. Even though
neither Versions nor TSMS was a complete team-oriented product, they contained
many critical elements of such a product. In addition, industry work flow
research began to indicate that task completion such as programming represented
only 10-30% of the productivity problem and that process cycle time from team
processes represented approximately 70-90% 


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of the problem. The Company concluded that the big productivity payoff was no
longer in IDE improvement, but in developing a complementary Integrated Team
Environment ("ITE") family of products. Thus, the Company decided to transition
from concentrating on the less important problem of code production, to focusing
on the development of ITEs that improve collaboration, work flow and project
management.

The development of StarBase ITE products was, to a large measure, simplified by
the fact that the partially developed StarBase IDE contained many important
elements of the new ITE concept. The Company also concluded that if the ITE
component was separated from the StarBase IDE, it could not only function as a
stand-alone product, but could be used to complement IDEs offered by many of the
largest software companies. Thus, the technology base under development during
the first two years was refocused entirely on the production of a complete ITE
product line, resulting in the shipping of StarTeam 1.0 in January 1996.

In addition, management concluded that the StarBase ITE products would find a
much larger customer base if they could be broadened to encompass
non-programming professionals. The Company's long term marketing plan was
therefore redirected toward enterprise product development teams, including
teams involved in the development of architectural drawings, product design,
complex document creation, software programming, etc. At this time, the Company
is not aware of products that adequately address these needs and believes that
an extended ITE product line based on StarTeam may provide a solution. The
Company recently began the refinement of its ITE products for usage by
non-programming professionals.

The release of StarTeam 1.0 allowed the Company test the premises upon which it
had built the product, and the reception of the product seemed to indicate that
those premises were valid. The Company believes that further findings since the
initial release of the product corroborated the initial product strategy and
contributed additional data points that helped shape the product's evolution:

1.  The typical size of a group deploying IDE's and development tools on the
    desktop has been estimated by existing research to be between 15 and 25
    users, while the number of people involved in developing and/or maintaining
    any individual client/server application was much larger. These numbers
    support the need to provide inter-group and inter-functional collaboration.

2.  The growing importance of distributed, multi-functional initiatives as a way
    of delivering mission-critical applications faster and more reliably also
    corroborated the importance of integrating technical collaborators (i.e.,
    designers, documentation, outsourcers, management, customers, etc.) into the
    application development routine.

3.  Analysis of the development tools market showed high penetration of two
    leading version control products, Visual SourceSafe (Microsoft) and PVCS
    (Intersolv). Those tools, deployed primarily at the group level, constitute
    a foundation on which technical collaboration can be built, since the
    context that developers and technical collaborators share is based on access
    to elements of the IT application inventory, which must be secured and
    managed.

4.  Finally, the increased acceptance of Microsoft NT as the platform of choice
    for deploying application servers increases the opportunity for vendors that
    can effectively support the Windows development environment in a distributed
    info-structure.

Based on this data and other analysis, the Company adjusted the product
direction towards:

1.  Delivering increased technical collaboration addressing first and foremost
    the needs of the development group, but also bringing together those who are
    not software engineers.


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2.  Supporting distributed, multi-functional teams first and foremost through
    the product's computing architecture, by providing robust, scalable and
    standards-based client-server solutions in order to address issues of
    enterprise-wide scalability.

3.  Implementing native and highly integrated support for a Windows-centric
    development environment, with full access from other platforms from
    industry-standard JAVA-compliant platforms.

4.  Providing transparent support for and interoperation with the leading
    version control products (PVCS and Visual SourceSafe).

5.  Building its technical collaboration products on top of a fully distributed
    architecture, optimized to provide access on the local area network (LAN),
    wide area network (WAN), public Internet backbone (TCP/IP networks) and the
    World Wide WEB (from a standard browser).

6.  Pursuing a high level of integration between common software life cycle
    disciplines (e.g., change request management), collaborative functionality
    (e.g., threaded conversations piece) and other tools, whether from a third
    party or developed in-house, through a highly standardized set of interfaces
    based on industry-leading technologies such as ODBC, COM and JAVA.

As a result, the initial product evolved through its next major releases:
StarTeam 2.0, a group-oriented technical collaboration solution, and StarTeam
3.0, a robust, scalable product built to satisfy the technical collaboration
needs of complete enterprises. As the product matured, so did its architecture,
its highly integrated functionality, its scalability and its support for
distributed environments. StarTeam 3.0 represents a highly sophisticated product
built around industry standards, with a robust and scalable repository and with
a high level of functional integration and ease of use. As a result, StarTeam
has gathered very strong coverage from trade publications, industry awards and
significant coverage from industry research analysts.

MARKET BACKGROUND FOR ITE PRODUCTS

Currently, software development teams have difficulty building quality
application software on time and within budget. Management believes that more
than half of the software development projects initiated by large companies will
cost significantly more than estimated, and will be delivered much later than
originally committed. The software industry has thus far addressed this problem
by offering more programmer development tools that are easier to use.

Programmer development tools are used to create software applications and
include programming languages (traditional and 4GL), database management systems
(relational and object-oriented), computer-aided software engineering ("CASE"),
artificial intelligence ("AI"), expert systems, and other object-oriented
technologies. Microsoft, PowerSoft, Oracle, Sybase, and IBM are leading vendors
within the current market.

Programmer development tools have evolved from single tools, such as a database
or a programming language, to sets of interrelated tools that are designed to
work together in a single work environment. This advanced programmer development
tool, called an IDE, provides significant programmer productivity improvement by
seamlessly combining several inter-related programming tools into a single
productivity enhancing product. Typically, an IDE will combine a programming
language, with an editor, compiler, debugger, graphical user interface design
tool and database access. IDEs such as Microsoft's Visual C++ and Visual Basic,
Borland's Delphi, Borland's C++, Symantec's C++, and PowerSoft's PowerBuilder
are the programmer development tools unit sales leaders. Despite significant
progress in programmer productivity tools in the industry, the majority of
software projects continued to come in late and over budget. Based on focus
group studies and market research conducted by the Company, management concluded
that most delays, cost overruns and required redesigns are related to
inefficiencies in collaboration, work flow and project management rather than to
individual programmer productivity.


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Many team technologies for personal computers began to appear in the 1980's,
such as software configuration management ("SCM") for the management of team
programming code, collaboration tools that provided electronic discussion
facilities, project management, work flow and defect tracking. It was then
becoming widely recognized that team process tools offered significant
productivity improvements. Workflow studies began to show that team productivity
is primarily dependent on the rapid transfer of information and the sharing of
working context and work between team members. Admittedly, the reduction of task
time in a software project through individual programmer productivity
improvements incrementally reduces the overall process time, but improvements by
orders of magnitude can be attained through team process improvements. Thus, the
Company concluded that team-oriented development tools in general, and ITEs that
reduce the time to transfer information and facilitate workflow between team
members in particular, are an important solution to the software development
productivity problem.

THE MARKET OPPORTUNITY

Windows95,Windows NT and UNIX Software Development.
---------------------------------------------------
Management believes that there is a substantial amount of research indicating
that application development responsibility is increasignly shared by the MIS
organization and other operating divisions of corporations that develop
distributed applications with components running on the de-facto desktop
standard, Microsoft Windows. In response to this trend, software companies are
offering a new generation of object-oriented, client-side development tools to
satisfy these departmental desktop application development needs.

Current trends identified by leading industry research organizations also show
increasing adoption of Windows NT as an application server. This trend, together
with the one described in the paragraph above, seems to corroborate very
sustained demand for tools that are highly integrated with the Windows
environment and which can also be accessed from other platforms.

Moreover, the movement of application development to corporate operating
divisions, in combination with the tools that enable the rapid development and
deployment of applications, has resulted in smaller, multi-disciplinary teams.
These teams not only include programmers and testers, but individuals from the
operating segment who develop the requirements for an application or, in the
end, are the actual users. Corporate initiatives such as e-commerce, WEB
development and others are creating a sustainable model of groups such as
illustrators, content providers, reviewers, clients, outsourcers and even
clients participating intensely in the deployment and maintenance of
applications.

SCM products address one aspect of team productivity focused on the software
developer, the check-in and check-out of software code and documents and the
maintenance of these in a secure repository. SCM products are used to manage and
to maintain the software code and documents during the development of software
applications. However, neither IDE nor SCM tools were designed to address
critical team productivity issues such as technical collaboration between team
members to resolve design issues, determine functional specifications or discuss
software defects, or integration of content providers into the development of
WEB-based applications. Automated workflow between team members to reduce cycle
time is also not addressed by these products. Yet, these are all critical team
productivity issues.

The StarTeam products augment and complement existing IDEs and are built on an
SCM foundation. The SCM component of StarTeam is also a standalone product
called Versions. StarBase is significantly participating in the IDE market
through strategic alliances and OEM license agreements with many of the major
IDE vendors, offering Versions 2.0 as an integral component of their IDE.
StarBase expects the IDE integrated Versions 2.0, offered to such major vendors,
to create upsell and market pull-through for the more complete StarTeam product.
StarTeam also extends SCM and ITE capabilities to other members of the project
team who do not use professional application development tools. A more detailed
description of the OEM strategy and specific contracts can be found in the
Marketing and Sales section of this document.


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Internet Development
--------------------
In the latter half of 1996, StarBase introduced an add-on product, StarTeam Web
Connect, that extended StarTeam 2.0 for use with Internet and intranet servers
(intranet is the use of Internet technology inside a company but not connected
through the Internet). In April 1997 StarTeam Web Connect was combined with
StarTeam Server to create one product named StarTeam VirtualTeam Server.
StarTeam VirtualTeam Server builds on all the integrated capabilities of
StarTeam and adds a set of features aimed specifically at web content developers
and web site managers. Through StarTeam VirtualTeam Server, web content authors,
web masters, graphic artists and other contributors can manage their web page
development files into a StarTeam project and easily control the publishing of
their web pages. Web site visitors are able to directly report problems and hold
electronic conversations about each file published.

The growth of the Internet and intranet markets represent a new alternative in
the manner that enterprises develop and disseminate internal and external
information. Currently most changes to a corporate web site must go through a
web master or web administrator, and yet it is typical for those changes to come
from collaborators of multiple functional areas and levels of technical
expertise. When considered as a team, it is important to note that out of that
diverse audience (e.g., content providers, Marketing, designers, illustrators,
JAVA and HTML developers, editors, help desk, Sales, etc.) only a minority are
traditional developers. As more companies find themselves communicating and
doing business over the Internet or corporate intranets, the need for tools to
support this unique type of development becomes critical. With tools such as
StarTeam VirtualTeam Server, authorized users can access detailed audit trails
of development, check files in and out for editing, and retrieve past versions
of web site files. Using StarTeam VirtualTeam Server, these users can send
information directly to a web site, easing the burden for web administrators.
Without a product such as StarTeam VirtualTeam Server, it is difficult to
control the configuration of a web site, leading to invalid hyperlinks and
inconsistent information. Additionally, as web pages are constantly undergoing
change and updates, maintaining version control of web page information prevents
potentially costly information errors.

Traditional Software Configuration Management (SCM)
---------------------------------------------------
The traditional SCM market has been defined as a technical, extremely
specialized and intrusive technology, targeted to large groups of developers,
concentrated both geographically and functionally. This market has evolved
historically following major discontinuities created by operating platforms
(i.e., mainframe library managers, UNIX technical SCM tools and PC SCM tools)
and management philosophy (i.e., production control oriented on the mainframe,
process-management oriented on UNIX, and productivity-driven on the PC and Local
Area Network).

Those discontinuities in platform and management strategies created opportunity
for several vendors to secure leading positions in each of those segments.
StarBase management believes that two powerful forces are creating new
discontinuities in this market, and also that those discontinuities create
opportunities for the Company's offering:

1.  Globalization of the corporate info-structure: Technical collaborators,
    tools and environments that allow corporate IT to deliver information
    services (i.e., the "info-structure') are fast becoming totally global and
    distributed. That is, it is becoming increasingly harder to find all people
    working on a single application or mission-critical asset working in the
    same location. This trend favors StarBase because the Company's products
    have, for the last two years, supported fully and extensively distributed
    use across geographical locations, and have been highly optimized for those
    scenarios. Existing SCM products are only now starting to deliver similar
    functionality, however, they are impaired by older product architectures
    that are hard to change without sacrificing continuity for existing
    customers.

2.  Diversification of the development function: Traditional SCM tools were
    developed for highly specialized, highly technical groups of developers. In
    that context, loss of productivity by the need to extensively train users
    and modify existing processes was not significant. However, the new
    collaborative development function is evolving towards a scenario of
    multiple functional groups, in which extensive training and modification of
    existing processes become critical impediments. Management believes it is
    not reasonable to assume that groups from different functional backgrounds


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    and with very different corporate objectives would assume such productivity
    losses just to be able to collaborate with application developers.
    Management also believes this trend also favors the StarBase products, which
    have been consistently rated as the easiest to use and implement in its
    product category, as demonstrated by the large number of the product's users
    who are not traditional application developers.

Year 2000 compliance efforts
----------------------------
Many automated elements of the corporate infrastructure are under severe
distress, caused by the inevitable occurrence of the Year 2000 ("Y2K"). On
January 1, 2000, most time calculation routines embedded in software
applications, embedded chips, firmware and every other conceivable form of
calculation unit will face a major potential crisis. Programmers, designers and
engineers have for many years fell into a very common oversight: that of
representing years just by the last two digits. The problem is, when considering
only the last two digits of a year, the year 1999 becomes "99", and the year
2000 becomes "00": the later year becomes, for a numeric processor, "previous"
to its predecessor (i.e., "00" is less than "99"). This apparently trivial
problem, combined with intricacies of leap year calculation that occur only
every 4 years, can have dramatic impact. When multiplied by millions of lines of
code, millions of embedded systems, and dependencies between systems that span
the globe across different companies and services, the Year 2000 can bring
substantial problems. Management believes that well over 50% of computing
budgets for the years between 1998 and 2000 will be allocated to addressing the
Y2K problem.

As a result of this significant risk exposure, most global corporations embarked
with different levels of expediency into corporate initiative called "Year 2000
remediation", or "Year 2000 compliance". These efforts concentrated initially in
modernizing legacy software applications, expanding the opportunity for StarTeam
and its robust software configuration management and technical collaboration
functionality. This is especially the case since fixing a software application
to make it Year 2000 compliant involves going through every single piece of
existing code, up to millions of individual lines, finding date calculation
routines, evaluating them and fixing them. Such a process generates large
numbers of versions for large numbers of individual software programs, therefore
creating needs for SCM.

When the problem expanded from software to embedded systems, dependent systems
and basic infrastructure, other problems started to appear: those of creating
repositories of record where the thousands of individual compliance efforts
could be managed, tracked and centralized. This problem of compliance and
contingency management is intrinsically distributed (spanning the complete
global companies' infrastructure), collaborative (multiple owners for multiple
types of assets, all feeding information to each other), and of very high value
point (because of the legal liability that corporations incur unless they can
prove adequate due diligence). Those are the typical parameters of problems
addressed by StarTeam, and thus StarBase decided to utilize StarTeam technology
as the foundation for a product specifically targeted to Program Management
Offices that are responsible for managing large-scale initiatives such as the
Year 2000, conversion to the Euro unified currency and others. In late fiscal
1998, StarTeam 2000 entered into beta testing was subsequently released in June
1998. StarTeam 2000 addresses compliance tracking, contingency management and
liability contention through the maintenance of a centralized repository of
record that operates together with the StarTeam Professional ITE.

As of the time of its release, the Company knows of no competitive solutions
with functionality comparable to that of StarTeam 2000. Management believes that
current research indicates that only 10% of global companies have full Y2K
contingency planning in place as of June 1998, and that over 40% of global
companies have experienced some sort of Y2K impact. Based on this and other
research data, StarBase expects demand for the StarTeam 2000 product to rise
sharply in the next two years, sustaining even further growth as the Euro
conversion initiative extends into most global companies.

The four market opportunities described above have convinced StarBase to follow
a simple inside-out strategy based on product strength and expansion from a
developers-only environment (i.e., the corporate info-structure core) to outer
layers of that info-structure, such as technical collaborators and the Program
Management Office.


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Product strength is defined by StarBase as the unique combination of superior
functionality (i.e., better), extreme ease of use (i.e., faster to deploy) and
pricing designed to facilitate enterprise-wide deployment (i.e., less
expensive).

As for market development, StarBase considers the info-structure to be
constructed like an onion-skin of concentric market segments: traditional
application development environment in the core, technical collaborators around
it, Program Management and Project Management Offices even further out, and
finally the office environment in the outmost layer.

Based on product superiority and careful execution, the Company believes that it
can first take a commanding initiative-based lead in the core segment (software
developers) by becoming the SCM solution of choice for emerging NT-centric,
client/server, highly distributed development environments. From there on, the
Company will integrate outer layers by leveraging StarTeam's technical
collaboration architecture.

MARKET SIZE

According to a report by International Data Corporation (IDC), the market for
SCM grew 32% to $462 million in 1997. Management believes that the SCM market is
currently subject to major stress and discontinuities, such as the need of
supporting globally distributed teams and the requirement to integrate
non-developer technical collaborator, both of which are comprehensively
addressed by the currently available StarTeam products.

StarTeam also integrates tools from other markets such as defect tracking and
project management, thus bringing under the same realm not only software
developers but also technical collaborators (designers, documentation staff,
content providers, and so on) which historically have not participated in the
traditional SCM market. Thus, StarBase has the potential to secure market share
beyond SCM. Precise market size and potential for StarBase products beyond SCM
have not been fully developed, partly because the Company's product cross
traditional market boundaries (e.g., software configuration management,
collaboration, workflow and project management) and also because the Company
believes that technical collaboration will fast become a market in and of
itself.

Furthermore, market size information for web site development and white-collar
development teams is not available. The Company believes that these new markets
are potentially much larger than the traditional SCM market.

Finally, management believes that its Y2K efforts will allow the Company to
extend its market potential even further, without the need to deviate from
its core competency or the need to divide its efforts between different target
markets.

INDUSTRY BACKGROUND

The software industry is undergoing a shift in product needs. The widespread
availability of faster and more powerful computer hardware and peripherals at
relatively lower prices has created demand for computers as an integral part of
business operations. Moreover, users are demanding more and better access to
information. As a result, computer needs are shifting from a host-oriented
mainframe and minicomputer architecture to a client/server and network computing
architecture. The industry's goal is to quickly and efficiently deliver
information to the point of need at a lower cost. In a client/server application
environment, corporate data typically resides on dedicated processors, which can
be accessed directly by networked personal computers, known as clients, and
manipulated by most users within the organization.


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The Company believes that the growing demand for client/server applications has
created a large backlog for new, unique, unwritten applications. Despite the
advent of a variety of new software technologies (CASE, relational database
management systems and 4GL), cost overruns, abandoned projects and
ill-performing systems continue to plague information system managers.

Even though programmers worldwide are estimated to produce twice as much code
today as in 1970, the process of application development has not changed
appreciably for almost three decades. For the most part, applications remain
complex, hand-crafted works built by expert programmers, one line of code after
another. Each program must be tested, debugged and tested again in order to
produce a reliable application. The resulting application is typically too
inflexible to accommodate the inevitable modifications needed to reflect the
changing needs of business, thus requiring the whole cycle to start over again.

Currently, programmer tools are very complex, and require a high degree of
specialized knowledge to use. To build effective software applications,
programmers must work in teams with people from other professional disciplines.
Programmers, technical writers, test engineers, and end-user representatives are
expected to work together to build applications, yet the nature of their work
requires them to work in relative isolation. As a result, software projects are
very time-consuming and error-prone, requiring extensive testing of applications
which is an inherently expensive process. Often, more time is spent reconciling
incompatibilities between pieces of software code written by different
developers than is actually spent in developing the code.

Programmer development tools do not resolve this issue. Current tools lack the
attributes of ITE products that automate communication, allow for programmer
collaboration and optimize the flow of work. StarBase believes object-oriented
ITEs provide an important solution to the problem by providing an integrated
environment that surrounds the currently disparate development tools such as
relational database management systems ("RDBMS"), 4GL, and graphical user
interface ("GUI") builders.

Object-Oriented IDEs Address Part of the Problem
------------------------------------------------
Object-oriented technology advances a new, more effective approach to developing
software applications. This technology allows programmers to represent business
models in software applications that closely correspond to real-world business
relationships. Object-oriented programming is based on constructing software in
terms of building blocks called objects. These objects, which may be simple or
complex, can be defined and modified independently, used as-is in new
applications or extended to create new functionality. As a result,
object-oriented technology offers substantial productivity gains for developers.

Many major vendors have initiated research and development efforts in the
object-oriented technology arena, and there has been substantial investment in
start-up companies promising to deliver tools that directly address these
issues. Furthermore, the key to improved application development productivity
lies in the construction of applications from re-usable parts. The Company
believes that application development utilizing component construction
techniques will yield significant improvement in the development and maintenance
of new applications.

Management believes that applications built on a foundation of both
object-oriented software and team-oriented development tools are generally
developed faster and more reliably than their monolithic (non-object oriented)
counterparts. They are generally more flexible and more easily modified than the
non-object oriented counterparts, are more easily distributed throughout a
network to the point of work, and take advantage of the economics of
client/server computer platforms.

ITE Products Complete the Solution
----------------------------------
Object-oriented software development methods have substantially changed the
manner in which development teams operate. Team members now utilize re-usable
components rather than develop code from the ground up. Teams are now typically
smaller in size and require better communication among their members. Teams are
often formed on an as-needed basis to produce applications that directly address
the defined business needs.


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<PAGE>   11

Many vendors are delivering object-oriented or hybrid tools that provide
enhanced individual programmer productivity. They are focused on traditional
enabling technologies, such as C++ compilers, debuggers, browsers, RDBMS, 4GL,
and cross-platform development tools, among others. By contrast, the Company is
focused on products that enable multiple programmers to increase productivity
within a team environment. The Company believes that its new approach to Windows
and Internet application development has created a new product category with a
focus on integrating the team into a collaborative, efficient workflow
environment. Furthermore, StarBase's ITE products bind together many of the
individual object oriented and hybrid tools into a collectively more powerful
application development environment.

The most important attribute for an effective team-oriented tool is that it be
unobtrusive. That is, it needs to deliver only the work that needs to be acted
upon. Programmer productivity is significantly reduced when concentration is
interrupted by team administrative tasks or meetings. Nonetheless, programmers
need to share information in order to collaborate effectively. At the same time,
managers need to know the status of work-in-process in order to make decisions.
StarBase products are intended to enable uninterrupted programmer productivity
by offering electronic collaboration, automatic workflow routing and on-line
access to project status.

The Company believes that ITEs that integrate into an IDE as a component are
more effective than using non-integrated tools in combination. In particular,
the Company believes users achieve greater functionality and programmer
productivity using an ITE that is fully integrated into the IDE environment than
can be achieved with separate, non-integrated ITE components such as version
control, defect tracking and electronic diescussions. As evidenced by Visual
Basic, Visual C++, Delphi, PowerBuilder, and others, the software industry is
quickly moving toward IDEs that offer integrated development tools within the
programmers environment. StarTeam complements the industry's direction through
the high level of integration of its ITEs into the leading IDE. StarTeam
components are intended to extend the tool set found within industry leading
IDEs. To date, the Company is not aware of any other vendor that has achieved
this level of integration in its product.

STARBASE STRATEGY

StarBase's strategy is to deliver technical collaboration solutions that
facilitate managing mission-critical IT assets. The Company seeks to develop
products that are easy to use, offer "best-of-breed" functionality at attractive
prices, feature familiar user interfaces, and deliver a high degree of
integration. In developing its products, the Company relies on a combination of
internal product development efforts, complementary technologies and products
from third parties.

The Company believes that it is first to market with an ITE product line that is
overall "best-of-breed". The Company is striving to evolve the products so that
each major integrated component is "best-of-breed" and so that the architecture
also allows the integration of "best-of-breed" components from other companies.
The Company believes it can thereby establish and maintain significant market
share, achieve profitability without sacrificing long-term growth opportunities
and deliver products that offer significant real value to the customer by
containing the cost of development.

The key elements of the Company's strategy are to:

        Achieve Early Market Acceptance and Awareness. A vital part of the
        Company's overall strategy in fiscal 1997 and 1998 involved achieving
        both industry/customer awareness and credibility in preparation for the
        Company's 1998 product launch of its StarTeam 3.0 ITE platform. The
        Company believes that this was achieved. By the end of calendar 1997, a
        solid foundation of more that 800 customers was established through the
        introduction of the initial StarTeam product line, product recognition
        awards from the industry, and the successful expansion of the reseller,
        direct, OEM and international channels.


                                       11

<PAGE>   12

        Establish a Unique Market Position with the Introduction of StarTeam
        3.0. The Company believes StarTeam 3.0 offers improvements over other
        available products unmatched by any individual competitor. The Company
        is not aware of any commercially available team-oriented product with
        the capability, integration, and local and wide area communications
        represented by the StarTeam 3.0 suite of products. These products
        represent a new class of software development tools which should
        uniquely set the Company apart from its competition.

        Expand Market Access through the Internet, Partnerships and Industry
        Alliances. The Company is expanding the market access for its ITE
        products by aggressively pursuing partnerships and alliances with
        industry leading vendors. As a result, Versions 2.0 is bundled as a
        component into several IDE products from the leading software vendors.
        The Company has thus far announced more than ten bundling agreements
        with IDE vendors. A more detailed description of the OEM strategy and
        specific contracts can be found in the Sales and Marketing section of
        this document. The Company is also aggressively pursuing partnerships
        with systems integrators to market the more advanced StarTeam products
        such as StarTeam 2000 and StarTeam Enterprise.

        Expand ITEs Throughout the Enterprise. The Company believes its
        team-oriented technology that was initially designed for software
        development collaboration, can be adapted to encompass generic,
        collaborative work flow throughout the enterprise. StarBase intends to
        leverage its existing technology to other functional areas within the
        enterprise that will result in new market opportunities for the Company
        outside the software development segment. The initial targets are web
        site development and white collar professional product development. The
        Company believes that the extension of ITE capabilities from software
        development to web site and white collar office product development will
        offer significant market expansion to the Company.

STARBASE ITE PRODUCTS

StarBase Corporation develops, markets and supports computer software defined as
ITE product development tools that address the evolving needs of a wide range of
personal computer users. These products are designed for computers running
Windows, Windows NT, Windows 95 and UNIX operating systems within a
client/server environment. The Company's products are used in a variety of
personal computer environments, including desktop, laptop and notebook
computers, as well as local and wide area networks ("LAN" and "WAN").

Product capabilities for StarTeam, the Company's flagship product, currently
include configuration management, threaded conversations (a specialized form of
collaboration management), change requests (providing elements of both
collaboration and work flow), compliance tracking, asset management and change
control auditing (a component of project management). Team administration
commonly found in configuration management systems such as version control,
branching, merging, and archiving is also included. The first ITE product,
StarTeam 1.0, was released in January 1996 and gained critical acclaim from the
industry press and independent testing laboratories. StarTeam 2.0, released in
August 1996, included StarTeam Server and StarTeam Web Connect which added
Internet and intranet access as well as improved performance. StarTeam 2.1,
released in April 1997, offers enhanced functionality, a combined server product
(StarTeam VirtualTeam Server) and a client product for small teams. StarTeam 3.0
Professional, released in February 1998, offers an advanced, visually-oriented
SCM functionality, and a high performance client-server architecture for
distributed, world-wide operation for larger professional teams.

STARTEAM 2.1

StarTeam integrates into IDEs, and supports all popular file-based development
environments and applications including C++, Java, Delphi, Visual Basic,
Developer/2000, HTML and others. StarTeam is designed from the ground up for
Windows 95 and NT, tightly integrating into each to provide

                                       12
<PAGE>   13

an unparalleled level of power and intuitive ease-of-use. StarTeam is a family
of products designed to help teams of application and web developers work
together more efficiently. Because there is a wide range of user requirements,
StarBase offers a range of scalable StarTeam SCM solutions. For first time SCM
users, smaller teams and LAN users, the StarTeam 2.1 client offers an
easy-to-use solution.

StarTeam 2.1 is a tightly integrated suite of SCM tools including version
control, visual differencing, defect tracking with process management, threaded
conversation, project status reports and charts, build and milestone management,
an audit log and an advanced project repository.

StarTeam VirtualTeam Server allows all team members using StarTeam clients to
access projects via the Internet, intranet, WAN and dial-up connectivity. This
allows secure, flexible and dynamic teams to easily be created to complete even
the most ambitious projects by removing limits on where team members are located
or the time they work. In addition, StarTeam VirtualTeam Server utilizes
client/server technology to greatly increase performance while reducing network
traffic to provide a secure scalable solution that serves the needs of even the
largest teams.

StarTeam VirtualTeam Server also provides access to application and web projects
via a web browser. It allows a wide range of users to participate in the
development process in an easy, organized, cost effective and secure way. As
part of an application development project, it provides a way for beta users,
testers, consultants and others to interact, provide feedback and other
information. As part of a web project, it allows the webmaster to create a
framework to interact with everyone involved with content, graphics, testing and
user input.

STARTEAM 3 PROFESSIONAL AND ENTERPRISE

Repository-Based Client/Server Architecture
-------------------------------------------
StarTeam 3 maintains its data in a secure, database-independent repository
compatible with Microsoft Access, Oracle, SQL Server and many other Open
Database Connectivity ("ODBC") databases. The efficient client/server
architecture provides a language and protocol-independent connection to a
variety of clients including a Windows-based Graphical User Interface ("GUI"), a
portable Java-based command line interface and a virtual device driver
interface. This architecture is designed to accommodate additional clients, such
as a graphical Java-based, universal client. Such a client, capable of operating
wherever a Java virtual machine is available, is planned for release by late
1998.

View-Based Projects
-------------------
The core of StarTeam's software configuration management ("SCM") functionality
is based on the concept of a "View". Views provide an intuitive mechanism for
maintaining multiple configurations of a given software development effort. For
example, a team might be well into the development of version 2.0 of a product
when a need arises to create a maintenance release based on the currently
shipping version 1.0. With Views, the StarTeam user can "roll-back" the project
to the state it was in when version 1.0 was released and create a variant
specifically to address the maintenance issue. The Company believes the ability
to graphically create and manipulate such Views is unique to StarTeam 3.

Programmability, Customizability
--------------------------------
No off-the-shelf product can meet the needs of all teams in all situations. To
address the necessity for tailorable solutions, StarTeam provides
industry-standard interfaces based on Microsoft's Component Object Model
("COM"). Support of COM allows any external application, for example a compiler,
editor or project management tool, to programmatically drive StarTeam 3.

Task and Process Management
---------------------------
Task and process management is planned as a part of StarTeam 3.0 Enterprise,
scheduled for release late in 1998. As software development projects get more
complex, many teams find that the most efficient way to work is to organize all
changes to their project around the notion of a task and within a formal process
of software development. Users will be able to create "Tasks", a higher-level
construct than is typically available in competing products. Through Tasks, a
user defines all the file changes necessary to complete

                                       13



<PAGE>   14

a single task. Typically, no changes can be made to any files unless those
changes are assigned to a specific task. This provides managers with the level
of control they need for large, complex projects.

Integration with Windows Explorer
---------------------------------
Most products with which StarTeam competes provide a GUI designed expressly for
the purpose of facilitating the many tasks facing software development teams.
While StarTeam 3 also provides such a GUI, many users, particularly
non-technical users, are unenthusiastic about having to learn yet another
application program, even though they would benefit substantially from the
features StarTeam 3 offers. To address this issue and to provide greater
flexibility for technical users, StarTeam 3 provides an add-on mechanism for
"projecting" StarTeam Views directly into Microsoft Explorer. Once defined, a
View appears as a new storage device, similar to a disk drive, in Explorer. The
user then interacts with files under version control in StarTeam through the
familiar Explorer interface without ever starting the StarTeam GUI.

Designed to Provide High Performance for Today's Internet/intranet Teams
------------------------------------------------------------------------
Increasingly software development teams rely on outside contractors,
telecommuters and other remote team members. StarTeam 3 incorporates numerous
features to support the low-speed connections (dial-up lines, WANs, Internet)
typically available to such remote team members. The architecture has been
designed to minimize data traveling across the client/server connection. For
example, whenever a client requests a file from the server, this request is
routed through a local file cache. Whereas most competitive products send all
such requests to their repositories, in StarTeam 3 any request that can be
fulfilled by the cache is not sent to the server. Moreover, this local cache is
used to dramatically reduce the data sent to the server in a file "check-in"
process. Because the cache "knows" the state of a file prior to any
modifications, only the modifications are sent across the connection to the
server. The Company estimates that network traffic from this type of operation
is reduced between one and two orders of magnitude through this mechanism.

Concurrent Hosting of PVCS and SourceSafe Archives
--------------------------------------------------
Many organizations employ multiple SCM tools, with the tool varying by
department or team. The inability to standardize on a single tool because of
file format incompatibilities decreases collaboration and code reuse and
increases costs. StarTeam 3 takes a unique approach: it supports foreign file
formats as though they were native to StarTeam. This open approach allows
StarTeam to read and write existing SCM archives from Intersolv's PVCS and
Microsoft's SourceSafe in place, without the need for an import operation. For
those users with existing investments in these products, StarTeam provides
significant benefits beyond the tool they currently use. In fact, virtually all
the facilities available in StarTeam become available to them. For example, PVCS
users could access their files securely across the Internet and SourceSafe users
could integrate defect tracking directly to their projects.

STARTEAM 2000

StarTeam 2000 adds compliance tracking, asset management, and contingency
planning to StarTeam 3.0 Professional. The Y2K problem requires companies to
bring their software into Y2K compliance or face software failures that can be
catastrophic for most major companies. To insure compliance, all software
related assets must be documented and reviewed for the possibility and severity
of Y2K problems, remediation efforts must be tracked, and contingency plan
established. In addition, a repository of record is required to minimize legal
liability in the case of Y2K related company failures. StarTeam 2000 was
designed to provide automated support and a repository of record for these
efforts and was released in June 1998.

VERSIONS 2.0

StarTeam was built around a version control component and called Versions.
Versions can also operate as a standalone product or integrate into IDEs as a
component, supporting popular file-based development environments and
applications including C++, Java, Delphi, Visual Basic, Developer/2000, HTML and
others. Versions is designed from the ground up for Windows 95 and NT, tightly
integrating 


                                       14
<PAGE>   15

into each to provide revision control power and intuitive ease-of-use. Versions
provides version control, visual differencing, build and milestone management,
audit logs, security and an advanced project repository for individuals and
groups of application and web site developers on a local area network. The
Company believes Versions provides a unique blend of power and intuitive
ease-of-use unparalleled in other version control products.

ROUNDTABLE TOTAL SOFTWARE MANAGEMENT SYSTEM FOR PROGRESS SOFTWARE

StarBase also offers Roundtable Total Software Management System ("TSMS") for
Progress, which is sold by Progress Software and by StarBase Corporation. TSMS
seamlessly integrates with the Progress ProVision application development
environment to provide team development support, release management and
distributed development capabilities.

TSMS includes extensive version control for source code and database schema,
task management and reporting, automated promotions among workgroups, customer
release management, customized systems management and a variety of powerful
tools that give programmers, testers, managers and customers immediate and
complete information about the content of a software system. TSMS supports
Windows 3.1, Windows 95, Windows NT and any UNIX platform supported by Progress
Software.

COMPETITION

The market for application-development system software products is intensely
competitive. The major developers and competitors of the SCM component of
StarTeam include Intersolv, Inc. (PVCS), Microsoft (SourceSafe) and Mortice Kern
Systems, Inc., "MKS", (Source Integrity). Pure Atria's ClearCase and Platinum's
CCC/Harvest products compete with TSMS at the high end of the configuration
management market. At this time, the Company knows of no company that offers the
comprehensive ITE tools found in StarTeam, nor the Internet management
capabilities that are present in StarTeam VirtualTeam Server. Intersolv, Inc.,
MKS, Microsoft, Pure Atria and others offer SCM capabilities that are similar to
those offered by StarTeam. MKS and others have introduced configuration
management products for the Web that offer some features that are included in
StarTeam VirtualTeam Server. MKS has entered into an OEM agreement with Netscape
for its web configuration management product.

Most of these companies have established greater market recognition and have
substantially greater financial, production and marketing resources than the
Company. The Company, however, is not currently aware that any of these
companies are developing ITEs such as StarTeam that provide a comprehensive set
of ITE capabilities that go beyond SCM to include tightly integrated change
requests, defect tracking, decision management and threaded conversations, as
components that integrate with one another and within the leading IDEs. StarBase
believes that this level of integration is complementary to the industry
direction of providing an increasing number of development tools as integral
parts of an IDE. StarTeam accomplishes this by simply extending the number of
programmer development tools available in an IDE to include ITE components.

The market for the Company's products has different competitive characteristics
by category of product and target market:

        Software Configuration Management ("SCM") -- StarBase Roundtable TSMS.
        Roundtable TSMS is a high-end configuration management system designed
        specifically for Progress Software's ADE (ProVision) and utilizes the
        Progress 4GL as its implementation language. Intersolv, Inc.'s PVCS,
        Pure Atria Corporation's ClearCase and Platinum's CCC/Harvest, although
        leading SCM vendors in the high-end market, are not designed
        specifically for the Progress environment. These competitive products
        offer comprehensive version control, high performance, efficient
        workspace management, accurate and automatic build processes, and scale
        to the enterprise level.


                                       15



<PAGE>   16

        ITE - StarTeam. A full service ITE will incorporate a number of software
        categories including on-line decision management, project status,
        software component analysis, version control, software configuration
        management, change management including defect tracking, conversation
        management and work flow with role management. The Company plans to
        integrate these eight functional areas into a new category or class of
        product, an ITE. Although StarTeam currently integrates only items 4
        through 8, below, at this point in time, the Company knows of no other
        vendor attempting to integrate these software categories into a complete
        solution. However, several of these categories have vendors with
        dominant market positions. A detailed discussion of the eight functional
        areas is as follows:

        1)     Decision Management. Decision management is an on-line facility
               for identifying and tracking management and technical decisions
               as they are made on-line, during collaborative team discussions
               or through notification by the team leaders. The Company is
               unaware of a competitive or planned product with these features.

        2)     Project Status. There are currently several project management
               products, such as Symantec's Timeline and Microsoft's Project,
               that provide project status. However, project task information
               must be entered manually into these products. The Company's
               current plans call for its ITEs to track task information on-line
               as work is performed by programmers. The Company knows of no
               products that provide on-line project scheduling and modeling
               information that is derived directly from a programmer's
               day-to-day work activities.

        3)     Software Component Analysis. There are currently specialized,
               individual tools that analyze such things as test coverage and
               software code complexity. The Company's ITEs are planned to
               include these as well as more advanced capabilities such as
               pattern recognition analysis of software code errors and
               programmer error rate forecasting. The Company is currently
               unaware of a competitive or planned product offering with these
               features.

        4)     Software Configuration Management. The primary competitors in
               this category are Intersolv, Inc. with PVCS, MKS with Source
               Integrity, and Microsoft with SourceSafe. All three vendors offer
               robust administrative capabilities (multi-user support, project
               branching, file/project merging, and multiple directory support),
               a graphical user interface for ease-of-use, and report
               generators. All three vendors integrate with the leading
               development platforms including Microsoft's Visual Basic and
               Visual C++. The Company believes that the SCM functionality
               available in StarTeam competes favorably with these products at
               both the user interface and feature level.

        5)     Process-oriented Software Configuration Management. Pure Atria
               Corporation's ClearCase and Platinum's CCC/Harvest are the two
               leading SCM products on the market. Both of these products are
               high-end tools offering comprehensive version control, high
               performance, efficient work space management, accurate and
               automatic build processes, and scale to the enterprise level.
               StarTeam offers competitive SCM features applicable to
               small-to-large size development groups and will scale to the
               enterprise level in StarTeam 3.0 Enterprise.

        6)     Change Management with Defect Tracking. There is no dominant
               vendor in the bug database (defect tracking) segment of the
               market today. Archimedes Software's BugBase and Intersolv's
               Tracker are two of the more popular products and offer equivalent
               functionality including bug identification and disposition,
               responsibility routing, security and reporting. Currently, bug
               database products typically operate in a stand-alone fashion and
               do not integrate well with existing version control and
               configuration management products. However, both Intersolv and
               MKS have recently begun offering defect tracking products, and
               over time other version control vendors are 


                                       16

<PAGE>   17

               expected to evolve their products to include defect tracking. The
               Company believes that the StarTeam 3 change management with
               defect tracking offers features that exceed those of existing bug
               database products, while offering integration within the ITE
               environment.

        7)     Conversation Management. There are a number of products on the
               market today that allow software developers to communicate
               electronically, including electronic mail systems (e.g.,
               Microsoft Mail and Lotus cc: Mail), commercial bulletin board
               services (e.g., CompuServe and America Online), and workgroup
               systems such as Lotus Notes. All these systems offer an effective
               mechanism to share information with others electronically.
               However, keeping the conversations on a focused topic over a
               sustained period of time has proven to be difficult and
               time-consuming. These problems have resulted in a new messaging
               paradigm referred to as threaded conversations. Collabra Software
               Inc.'s Share 1.0, released in December of 1994, successfully
               implemented threaded conversations and was recognized as one of
               the most innovative products in 1994 by PC Magazine, receiving
               the Editor's Choice Award. StarBase has delivered a threaded
               conversation capability in the initial version of StarTeam that
               is comparable to the features offered in Share 1.0. However,
               StarTeam is integrated into the software development process
               yielding focused conversations on defects, project status, and
               code modules, as well as links to E-mail and electronic forums.

        8)     Work Flow Systems. Work flow concepts are beginning to appear in
               personal computing. Vendors who provide the electronic backbone
               for information sharing (Novell Netware and Microsoft EMS) are
               now beginning to incorporate the notion of work flow into their
               messaging paradigms and numerous companies are delivering market
               specific solutions (such as FileNet's document imaging and
               Delrina FormsFlow forms routing). Although there are numerous
               vendors addressing workflow, at this time the Company knows of no
               vendor designing workflow concepts into a team-oriented software
               development tool. StarTeam plans, in future releases, to include
               a software development life-cycle feature that allows flexible
               model definition (e.g., changes in variables including work flow
               process, the definition and assignment of roles and
               responsibilities, and their effect on the project development
               life cycle) for a particular software development and maintenance
               process.

The Company believes that StarTeam's integration of on-line decision management,
project status, version control, software configuration management, defect
tracking, threaded conversations, work flow, security, administration, software
component analysis and reporting features into one user-friendly product is
unique within this segment of the industry. . StarTeam has won several awards
including Infoworld's 1997 "Best of the Test Center", PC Week Analyst's Choice
and PC Week 1996 IT Excellence Award.

Management believes there are significant barriers-to-entry into the ITE market
inhibiting an immediate response by competitors. This is due to the high level
of integration and functionality necessary to provide workflow automation and
information sharing. The Company believes that its competitors will need to
re-engineer their software offerings to deliver a truly competitive product.
Over time, as the Company integrates more functionality and performance
enhancements, management believes that this differentiation is likely to
increase.

MARKETING AND SALES

During fiscal 1998, StarBase Corporation executed on its strategy of building a
broad customer base with StarTeam 2.1 sales in preparation for the launch of
StarTeam 3.0, building a comprehensive, multi-channel sales organization that
includes OEM sales, a direct sales group (Corporate Sales), domestic channel
sales and an international distribution network.


                                       17


<PAGE>   18

CORPORATE SALES

The Company has established a corporate sales organization that is predominately
telephone based to respond to customer leads and to proactively sell product to
corporate end-user customers. Leads are generated through a number of marketing
programs, including focused advertisements, direct mail campaigns, trade show
participation, seminars, and press relations. Since the introduction of StarTeam
in 1996 through March 1998, the corporate sales organization has sold over 7,800
copies of StarTeam to over 1,000 corporate customers, including consulting
organizations (Booz, Allen and Hamilton, EDS, Coopers and Lybrand, ABT
Corporation, KPMG Peat Marwick, Anderson Consulting), manufacturers
(Westinghouse, Eaton, GE), software companies (Network Associates, Auto-Soft),
electronics companies (Intel, Fujitsu), financial institutions (Deutche Bank,
Schwab), and the federal government (IRS, Air Force, Navy). Although many of the
StarTeam 2 sales were made to address the needs of departmental groups, it is
management's belief that the current installed base will be of significant
benefit in selling StarTeam 3, which addresses enterprise level needs.

OEM SALES OF VERSIONS

A major element of the OEM program is the Versions 2.0 bundling strategy.
StarBase's management believes that this strategy will present significant
market exposure and revenue opportunities due to the strong market acceptance
and broad distribution of the partners' products and the complementary
relationship of Versions 2.0 to the partners' products.

Management believes that including lite versions of software in larger packages
is very effective when there is a natural relationship between the two products.
Several companies have employed bundling to popularize their products including
WinFAX by Delrina (now Symantec), Crystal Reports by Seagate and Caere optical
character recognition software. The anticipation is for the customer to install
and use the lite product, recognize an increase in productivity, and see the
benefits to be gained from upgrading to the entire StarTeam package.

StarBase has announced agreements to bundle the Company's Versions 2.0 product
with product offerings from Oracle (Developer/2000), Symantec (Visual Cafe Pro),
Asymetrix (SuperCede Java/ActiveX Edition & SuperCede Database Edition),
SoftQuad (HoTMetaL PRO), Visix (Vibe), and Aonix (ObjectAda for Windows). In
addition, Corel (VENTURA and WordPerfect Office) is an OEM customer. The Company
believes these agreements will uniquely position the Company for revenue growth
and market acceptance. There are three primary reasons for this:

    1)  The Company expects more than 1 million software developers to receive
        Versions 2.0 bundled with products from StarBase partners during the
        next 18 months;

    2)  Versions 2.0 bundling creates the potential for the product becoming a
        standard brand for revision management and version control;

    3)  Planned inclusion of StarTeam collateral-marketing materials with each
        bundled product is expected to create broad-based market exposure for
        StarBase products.

StarBase's management believes that the bundling of Versions 2.0 with the most
popular programmer development products and authoring tools is unique in the
industry and provides the foundation for Versions 2.0 becoming the standard
brand for revision management and version control.

PROGRESS SALES

StarBase Corporation currently has a nonexclusive contract with Progress that
allows Progress to resell the Roundtable Total Software Management System
through July 1999.



                                       18


<PAGE>   19

DOMESTIC CHANNEL SALES

In fiscal 1998, the Company continued the recruitment program for VAR's. The
StarPartner Program is intended to expand the channel to include SCM
consultants, value added resellers, web site developers, system integrators, and
traditional computer product retailers. The Company plans to route the majority
of the business generated by these new resellers through two-step distribution.
The Company currently has a two-step distribution agreement with Ingram Micro.

INTERNATIONAL SALES

In fiscal 1997 and 1998, StarBase Corporation signed distribution agreements
with several new international distributors to distribute, market, and support
StarBase products to end-users, corporations, resellers, VARs and mail-order
catalogs in their respective territories. The agreements mark the beginning of
representation of StarBase products in each respective country.

Each distributor actively markets StarBase products in a number of ways
including telesales, direct mail, trade shows and exhibits, magazine and catalog
advertising, public relations and the Internet. In addition, each provides
comprehensive technical support, consulting and training services.

PROPRIETARY RIGHTS

The Company's success is heavily dependent upon its proprietary software
technology. The Company does not currently have any patents and relies upon a
combination of copyright, trademark and trade secret laws, as well as license,
proprietary rights, non-disclosure and other contractual agreements to protect
the proprietary rights to its technology. The Company generally enters into
proprietary information and inventions agreements with its employees. The
Company also routinely limits access to its software, documentation and other
proprietary information. There can be no assurance that the steps taken by the
Company will prevent misappropriation of its technology. In addition, such
protections may not preclude competitors from developing products with features
similar to the Company's products. Although the Company believes its products
will not infringe upon the proprietary rights of third parties, there can be no
assurance that infringement claims will not be brought against the Company in
the future. Any such claims could result in costly litigation or have a material
adverse effect on the Company's business, operating results and financial
condition.

EMPLOYEES

As of March 31, 1998, the Company had 64 full-time and 4 part-time employees. Of
these employees, 29 full-time and 3 part-time were in Research and Development,
9 full-time and 1 part-time were in Administration and 26 full-time were in
Sales and Marketing. The Company's workforce is not unionized and management
believes that the Company's relations with its employees are good.


                                       19


<PAGE>   20

FORWARD LOOKING STATEMENTS

Certain information contained in this Annual Report on Form 10-KSB, including,
without limitation, statements made under this Part I, Item 1, "Business" which
are not historical facts, may include forward looking statements. In reviewing
such information, it should be kept in mind that the Company's actual results
may differ materially from those set forth in such forward looking statements.
The Company assumes no obligation to update these forward looking statements to
reflect actual results or changes in factors or assumptions affecting such
forward looking statements.

RISK FACTORS

Early Stage of Development; History of Losses
---------------------------------------------
The Company is a development stage company and is subject to all of the risks
inherent in a development stage company. There can be no assurance that the
Company's product development efforts will result in a commercially viable
business or that the Company will be able to generate significant revenues or
operate profitably. Since its inception, the Company has had a history of losses
and as of March 31, 1998, the Company had an accumulated deficit of $41,856,000.
To date a substantial portion of the Company's revenues have been derived from
the activities of its Consulting Division, which was discontinued in fiscal
1996, and from sales of products that have been de-emphasized. The Company
anticipates incurring additional losses until it can successfully market and
distribute its existing ITE products, as well as successfully develop, market,
and distribute its planned future products. The development of software products
is difficult and time consuming, requiring the coordinated participation of
various technical and marketing personnel and, at times, independent third-party
suppliers. This development process often encounters unanticipated delays and
expenses. The likelihood of the success of the Company's business must be
considered in light of the problems, expenses, difficulties, complications, and
unforeseen delays frequently encountered in connection with the development of
new technologies.

Product Lines Under Development; Developing Market
--------------------------------------------------
The Company's success will be dependent in large part upon its ability to market
its StarTeam 2 and 3 product lines and to quickly introduce and market
additional products. While the Company is in various stages of developing
additional products, there can be no assurance that such additional products
will be completed or successfully marketed. User preferences for software
products are difficult to predict and, historically, only a limited number of
software products have achieved sustained market acceptance. Demand for software
products is subject to a number of variables, including user preferences and the
size of the installed base of personal computers capable of running the
products. Further, the market for ITE software products is evolving. There can
be no assurance that the products introduced by the Company will achieve
acceptance, or that other software vendors will not develop and market products
which render the Company's products obsolete or less competitive. Failure to
obtain significant customer satisfaction or market share for the Company's
products would have a material adverse effect on the Company.

ITEM 2. PROPERTIES

The Company's executive offices consist of approximately 12,000 square feet in
an office building leased by the Company, in Irvine, California. The office
lease expires in February 1999. The property and equipment of the Company
consist principally of office furniture, equipment and personal computers.



                                       20

<PAGE>   21

ITEM 3. LEGAL PROCEEDINGS

The Company is a party to the following lawsuit:

On January 5, 1995, the Company obtained a judgment for non-payment on a
promissory note against Dr. James Parker in Los Angeles Superior Court, case #BC
090 584, entitled StarBase Corporation vs. James Parker, in the amount of
$311,822.88, together with interest of $86.62 per day until the judgment has
been paid. Collection efforts were temporarily halted by a stay order in U.S.
Bankruptcy case #LA 94-1079ER; however, the stay order has now expired and
collection efforts are in process. As of March 31, 1998, a total of $67,000 has
been collected.

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

None.



                                       21
<PAGE>   22
                                     PART II


ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY

The Company's Common Stock trades on the NASDAQ Stock Market under the symbol
"SBAS". The following table sets out the high and low sales prices of the
Company's Common Stock for each quarter within the last two fiscal years.
Quotations are bid and ask prices and may not necessarily reflect actual
transactions.

<TABLE>
<CAPTION>

           DATE                                    HIGH         LOW
           ----                                   ------       ------
           <S>                                    <C>          <C>
           FISCAL YEAR 1998
               Quarter Ended March 31, 1998       $ 3.75       $ 1.13
               Quarter Ended December 31, 1997      2.00         1.00
               Quarter Ended September 30, 1997     2.06         0.88
               Quarter Ended June 30, 1997          1.75         0.53
           FISCAL YEAR 1997
               Quarter Ended March 31, 1997       $ 2.81       $ 1.25
               Quarter Ended December 31, 1996      4.56         1.47
               Quarter Ended September 30, 1996     6.50         2.50
               Quarter Ended June 30, 1996         10.50         3.25
</TABLE>

As of March 31, 1998, based on information received from the Company's transfer
agent on the Company's common stock, the number of shareholders of record were
638. There were 41 holders of the Company's Series E Preferred Stock and 1
holder of Series D Preferred Stock.

The Company has never declared a cash dividend on its Common Stock or Preferred
Stock. The Board of Directors presently intends to retain all earnings for use
in the Company's business and therefore does not anticipate paying any cash
dividends on its Common Stock in the foreseeable future. Payment of dividends on
Common Stock, if any, would be subject to the discretion of the Board of
Directors, which may consider factors such as the Company's results of
operations, financial condition, capital needs and acquisition strategy, among
others. In addition, under the corporate law of Delaware, the Company is
prohibited from paying dividends except out of the Company's surplus (retained
earnings) or, if there is no surplus, out of the Company's net profits for the
fiscal year in which the dividend is declared and/or the preceding fiscal year.
At March 31, 1998, the Company's balance sheet reflected an accumulated deficit
of $41,855,000.

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

RESTATEMENT OF PRIOR PERIOD RESULTS

The Company has restated its financial statements to conform with Topic No. D-60
of the Emerging Issues Task Force. Topic No. D-60 communicates the views of the
Securities and Exchange Commission staff that the beneficial conversion feature
of convertible preferred stock should be recognized. The amount of the
beneficial conversion feature is measured at the date of issue of the
convertible security as the difference between the conversion price and the
market value of the common stock into which the security is convertible,
multiplied by the number of shares into which the security is convertible. For
convertible preferred stock, this amount is accounted for as a non-cash
dividend, with the same amount credited to additional paid-in capital, allocated
over the period from issuance to first convertibility. Thus, there is no change
to total shareholders' equity.


                                       22

<PAGE>   23

In conformance with the provisions of Topic No. D-60, the Company has restated
its financial statements by recording non-cash preferred stock dividends
attributable to the issuance of Series A, B and C Preferred stock aggregating
$1,096,000, $2,763,000, $872,000, $862,000, $882,000 and $134,000 for the
quarters ended June 30, 1996, March 31, 1996, June 30, 1995, March 31, 1995,
December 31, 1994 and September 30, 1994, respectively.

In addition, the Company has restated the results of the first quarter of fiscal
1998 to recognize a non-cash dividend aggregating $1,660,000 as a result of
common stock issued in exchange for warrants to acquire shares of the Company's
common stock (Note 6 to the Financial Statements). This dividend represents the
excess of the fair value of the Company's common stock on the offer date over
the estimated fair value of the warrants exchanged. The estimated fair value of
the warrants was determined using the Black-Scholes method. This also did not
change overall shareholders' equity.

Also, at the time the Company was formed, it issued 1,418,638 common shares,
which are presently held in escrow. The shares may be released from the escrow
and delivered to individuals based upon the Company's achieving certain cash
flow requirements. If such cash flows are not attained by October 21, 2002 the
escrowed shares will be cancelled. Prior to March 1997, the escrowed shares were
included in the weighted average number of common shares used to report loss per
common share. Subsequently, the Company determined that it was not appropriate
to include the escrowed shares in the calculation of loss per common share
because such shares are considered contingent shares, and it has not been
considered probable that the requirements for release would be met.
Additionally, the escrowed shares would have an anti-dilutive effect.

The result of these changes, which did not change reported revenue and reported
net loss, is included in the following table:

(In Thousands of dollars, except per share data)

<TABLE>
<CAPTION>
                                                  Net Loss   Weighted
                                                 Applicable  Average   Loss Per               Additional
                                       Non-cash  To Common   Common     Common   Accumulated   Paid-In
   1998                      Net Loss  Dividend   Stock      Shares      Share     Deficit     Capital
   ----                     --------  --------  ---------  ---------   --------  -----------  ----------
   <S>                       <C>       <C>       <C>        <C>         <C>        <C>          <C>
   Quarter ended 12/31/97    (2,124)             (2,124)     14,448     (0.15)     (37,444)     37,472
   Quarter ended 9/30/97     (1,772)             (1,772)     13,629     (0.13)     (35,320)     36,020
   Quarter ended 6/30/97     (1,332)    1,660    (2,992)     12,002     (0.25)     (33,548)     35,057
   
   1997
   ----
   Year ended 3/31/97        (5,703)    1,096    (6,799)     10,938     (0.62)     (30,556)     33,414
   Quarter ended 12/31/96    (1,268)             (1,268)     13,210     (0.10)     (28,698)     33,270
   Quarter ended 9/30/96     (1,367)             (1,367)     11,296     (0.12)     (27,409)     33,240
   Quarter ended 6/30/96     (1,210)    1,096    (2,306)      8,796     (0.25)     (26,042)     32,603
   
   1996
   ----
   Year ended 3/31/96        (5,893)    3,635    (9,528)      5,825     (1.64)     (23,736)     23,698
   Quarter ended 12/31/95    (1,047)             (1,047)      6,404     (0.16)     (19,692)     16,765
   Quarter ended 9/30/95     (1,439)             (1,439)      6,308     (0.23)     (18,644)     16,765
   Quarter ended 6/30/95     (2,125)      872    (2,997)      4,174     (0.72)     (17,205)     16,462
   
   1995
   ----
   Year ended 3/31/95        (7,720)    1,878    (9,598)      3,625     (2.65)     (14,208)     12,799
   Quarter ended 12/31/94    (1,842)      882    (2,724)      3,675     (0.74)     (10,200)     10,675
   Quarter ended 9/30/94     (1,380)      134    (1,514)      3,571     (0.42)      (7,476)      8,555
</TABLE>


                                       23

<PAGE>   24

The following table summarizes data, before the changes (as previously
reported):

(In Thousands of dollars, except per share data)

<TABLE>
<CAPTION>
                                                    Net Loss   Weighted
                                                   Applicable  Average    Loss Per               Additional
                                         Non-cash  To Common   Common      Common   Accumulated   Paid-in
      1998                     Net Loss  Dividend    Stock     Shares      Share      Deficit     Capital
      ----                     --------  --------  ---------   ------     --------  -----------  ----------
      <S>                      <C>       <C>       <C>         <C>        <C>        <C>          <C>
      Quarter ended 12/31/97    (2,124)              (2,124)    14,448     (0.15)    (29,175)     29,203
      Quarter ended 9/30/97     (1,772)              (1,772)    13,629     (0.13)    (27,051)     27,751
      Quarter ended 6/30/97     (1,332)              (1,332)    12,002     (0.11)    (25,279)     26,788
      
      1997
      ----
      Year ended 3/31/97        (5,703)              (5,703)    10,938     (0.52)    (23,947)     26,805
      Quarter ended 12/31/96    (1,268)              (1,268)    13,210 *   (0.10)    (22,089)     26,661
      Quarter ended 9/30/96     (1,367)              (1,367)    11,296 *   (0.12)    (20,800)     26,631
      Quarter ended 6/30/96     (1,210)              (1,210)     8,796 *   (0.14)    (19,433)     25,994
      
      1996
      ----
      Year ended 3/31/96        (5,893)              (5,893)     5,825 *   (1.01)    (18,223)     18,185
      Quarter ended 12/31/95    (1,047)              (1,047)     7,823     (0.13)    (16,942)     14,015
      Quarter ended 9/30/95     (1,439)              (1,439)     7,727     (0.19)    (15,894)     14,015
      Quarter ended 6/30/95     (2,125)              (2,125)     5,593     (0.38)    (14,455)     13,712
      
      1995
      ----
      Year ended 3/31/95        (7,720)              (7,720)     5,044     (1.53)    (12,330)     10,921
      Quarter ended 12/31/94    (1,842)              (1,842)     5,094     (0.36)    (9,184)       9,659
      Quarter ended 9/30/94     (1,380)              (1,380)     4,990     (0.28)    (7,342)       8,421
</TABLE>

-------------
*  As previously reported and restated to exclude the Escrow Shares in 
   Form 10-KSB for the year ended March 31, 1997 and Forms 10-QSB for the year
   ended March 31, 1998.

RESULTS OF OPERATIONS

Year ended March 31, 1998 compared to 1997

Total revenue increased $1,100,000 or 106%, to $2,139,000, from $1,039,000 in
fiscal 1997. This increase was substantially due to increased product and
maintenance revenue from the StarTeam product line. StarTeam 2.1 was released in
April 1997 and StarTeam 3.0 was released in February 1998.

StarTeam is marketed primarily to technical professionals. In the typical sales
cycle, the product is purchased as a pilot test program, installed and evaluated
on a smaller scale (10-20 seats), and, if the evaluation is satisfactory,
implemented on larger projects or throughout the company, possibly involving up
to hundreds of users. The time span from an initial test order to implementation
throughout the customer's organization varies depending on the organization and
the level of standardization within the individual company, but in very large
companies, may take 6 months to a year. The Company has observed this scenario
with many of its existing customers and is now seeing a substantial increase in
revenues from these customers.

Gross profit increased 110% to $1,977,000 in fiscal 1998 from $943,000 in fiscal
1997, primarily due to the increased sales volume. Gross profit, as a percentage
of revenues, increased to 92% from 91% in fiscal 1998.

Cost of products consists primarily of manufacturing and related costs such as
media, documentation, product assembly and third party royalties. The Company
outsources manufacturing for all software products, except Roundtable.

Operating expenses increased by approximately $1,226,000 or 18% from fiscal
1997. This increase was substantially all due to increased labor costs necessary
to develop and market the new products.


                                       24

<PAGE>   25

The number of persons employed by the company at March 31, 1998 compared with
March 31, 1997:

      Department:                  1998       1997
      -----------                  ----       ----
      Research & Development        31         25
      Sales & Marketing             26         14
      Administration                 9          7
                                    --         --
         Total                      66         46
                                    ==         ==

      Part time employees are included in the count as one-half.

Research and development expenses

StarBase continues to make significant investments in research and development
intended to bring its products to market and to support existing products.
Research & development expenses increased $971,000 from the prior year. The
majority of the increase was due to increased compensation-related expenses due
to a higher average number of employees during fiscal 1998 as compared to fiscal
1997. In addition, costs increased for outside contractors engaged for special
programming and testing.

Selling, general and administrative expenses

For the year ended March 31, 1998, selling, general & administrative expenses
increased approximately $320,000 over the prior year. This was substantially all
due to increased compensation related expenses due to a higher average number of
employees during fiscal 1998 as compared to fiscal 1997.

Income Taxes

The Company incurred minimal income taxes in the last two fiscal years due to
its cumulative losses. The Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109") in fiscal 1994.
SFAS 109 requires that deferred taxes be calculated using an asset and liability
approach at currently enacted tax rates. As of March 31, 1998, the Company has
net operating loss ("NOL") carryforwards of approximately $30.1 million and
$15.4 million for federal and state income tax purposes. The NOLS are available
to offset future taxable income at varying amounts through the year 2019. At
March 31, 1998, a 100% valuation allowance has been provided on the net deferred
tax assets since the Company can not determine that such are "more likely than
not" to be realized.

Inflation

Management believes that inflation has not had a material impact on the
Company's results of operations.

LIQUIDITY AND CAPITAL RESOURCES

Cash and Marketable Securities on hand as of year-end totaled $4.1 million in
fiscal 1998 and $2.7 million in fiscal 1997. At March 31, 1998 the Company had
working capital of $3.7 million, compared to $2.4 million at March 31, 1997.

Proceeds from the issuance of equity securities represent the primary source of
funds for meeting the Company's requirements for operations. During fiscal 1998,
the Company generated $5.0 million in cash from the sale of new Preferred Stock.
In addition, $3.1 million of capital was raised from the issue of Convertible
Debentures. The exercise of employee stock options added $0.2 million to
capital.


                                       25

<PAGE>   26

During fiscal 1998, the Company used $5.7 million for operations, a decrease of
approximately $0.8 million from the amount used for operations in the prior
year. The increase was primarily due to increased investments in research and
development. Capital expenditures totaled $0.5 million, representing purchases
primarily of computer equipment and furniture. Capital expenditures in fiscal
1997 totaled $0.1 million.

Management projects that the Company will use approximately $15 million for
operating activities during the next fiscal year. Based upon these projections,
the Company's working capital is insufficient for the Company to maintain its
current level of operations through fiscal 1999. The Company is currently in the
process of arranging additional financing for fiscal 1999. The Company believes
that proceeds from the sale of debt and equity securities during fiscal 1999,
combined with operating revenues, will be sufficient to allow the Company to
conduct its operations during the fiscal year ending March 31, 1999. Continuing
operations thereafter will depend on cash flow from operations or the Company's
ability to raise additional funds through equity, debt, or other financing.
There can be no assurance, however, that such funds will be available.

THE YEAR 2000

The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any computer programs
that have date-sensitive software may recognize a date using "00" as the
calendar year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.

The Company believes that it has no exposure to Year 2000 issues for the
products it has sold, as the products were designed with four digit year
recognition.

The Company has begun its assessment of its internal systems affected by the
Year 2000 Issue and anticipates that it will not be required to modify or
replace significant portions of its software so that its computer systems will
properly utilize dates past December 31, 1999.

The Company has initiated communications with its significant suppliers and
customers to determine the extent to which the Company is vulnerable to those
third parties' failure to remediate their own Year 2000 Issue. There can be no
guarantee that the systems of other companies on which the Company's systems
rely will be timely converted, or that a failure to convert by another company,
or a conversion that is incompatible with the Company's systems, would not have
a material adverse effect on the Company.

NEW ACCOUNTING STANDARDS

In October 1997 and March 1998, the Accounting Standards Executive Committee
("AcSEC") issued Statement of Position ("SOP") 97-2, "Software Revenue
Recognition" and SOP 98-4, "Deferral of the Effective Date of a Provision of SOP
97-2, Software Revenue Recognition," respectively, which provide guidance on
applying generally accepted accounting principles in recognizing revenue on
software transactions and is effective for the Company's transactions entered
into subsequent to March 31, 1998. AcSEC is currently deliberating the potential
permanent deferral of certain provisions of SOP 97-2. The Company does not
believe that implementation of SOP 97-2 and SOP 98-4 will have a material
adverse affect on expected revenues or earnings.


                                       26

<PAGE>   27

ITEM 7. FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                 Page
                                                                                 ----
<S>                                                                               <C>
Financial Statements of StarBase Corporation

Report of Independent Accountants                                                  28

Balance Sheets at March 31, 1998 and 1997                                          29

Statements of Operations for the years ended March 31, 1998 and 1997               30

Statements of Cash Flows for the years ended March 31, 1998 and 1997               31

Statements of Shareholders' Equity for the years ended March 31, 1998 and 1997     32

Notes to Financial Statements                                                      33
</TABLE>


                                       27

<PAGE>   28

REPORT OF INDEPENDENT ACCOUNTANTS



To The Board of Directors and
Shareholders of StarBase Corporation


In our opinion, the financial statements listed in the index appearing in Item 7
present fairly, in all material respects, the financial position of StarBase
Corporation at March 31, 1998 and 1997, and the results of its operations and
its cash flows for each of the two years in the period ended March 31, 1998 in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
that raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to this matter are described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

As discussed in Note 3 to the financial statements, the Company has restated its
loss per common share calculation for the years ended March 31, 1997, 1996 and
1995 to conform with Topic No. D-60 of the Emerging Issues Task Force. Topic No.
D-60 communicated the Securities and Exchange Commission staff view that the
beneficial conversion feature of convertible preferred stock should be accounted
for as a dividend and additional paid-in capital.



PRICEWATERHOUSECOOPERS LLP


Costa Mesa, California
June 26, 1998


                                       28
<PAGE>   29

                                 STARBASE CORPORATION

                                    BALANCE SHEETS
                           (In thousands, except par values)

<TABLE>
<CAPTION>
                                                                               March 31,
                                                                                 1997
                                                              March 31,       (Restated
                                                                1998          See Note 3)
                                                              --------        -----------
<S>                                                           <C>              <C>
ASSETS

Current assets:
  Cash and cash equivalents                                   $  4,167         $  2,722
  Accounts receivable, net of allowances of $89 (1998)
    and $65 (1997)                                                 464              118
  Other receivables                                                 45               83
  Prepaid expenses                                                 113              312
  Inventories                                                       57               34
                                                              --------         --------
    Total current assets                                         4,846            3,269

  Property and equipment, net                                      747              524
  Note receivable from officer                                      76               76
  Other non-current assets                                          13                7
                                                              --------         --------
    Total assets                                              $  5,682         $  3,876
                                                              ========         ========

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
  Accounts payable and accrued liabilities                    $    941         $    782
  Deferred Income                                                  263              103
  Current portion of capitalized lease obligation                   10               --
                                                              --------         --------
    Total current liabilities                                    1,214              885

Capitalized lease obligation, less current portion                  38               --
                                                              --------         --------
    Total liabilities                                            1,252              885
                                                              --------         --------

Commitments and contingencies (Note 9)

Shareholders' equity (Note 3):
  Preferred stock, $.01 par value; $4,716 (1998)
    and $75 (1997) liquidation value; authorized
    10,000; issued and outstanding 3,773 (1998) and 
    25 (1997)                                                       38               --
  Common stock, $.01 par value; authorized 50,000;
    issued and outstanding 18,580 (1998) and 13,319
    (1997)                                                         186              133
  Additional paid-in capital                                    46,287           33,414
  Accumulated deficit                                          (42,081)         (30,556)
                                                              --------         --------
  Total shareholders' equity                                     4,430            2,991
                                                              --------         --------
Total liabilities and shareholders' equity                    $  5,682         $  3,876
                                                              ========         ========
</TABLE>


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


                                       29

<PAGE>   30

                              STARBASE CORPORATION

                            STATEMENTS OF OPERATIONS
                    (In thousands, except per share amounts)


<TABLE>
<CAPTION>
                                              For the years ended
                                                   March 31,
                                           -------------------------
                                                              1997
                                                           (Restated
                                             1998          See Note 3)
                                           --------        -----------
<S>                                        <C>              <C>
Revenues:
  Products                                 $  1,481         $    527
  Maintenance & training                        276               71
  License and royalty                           382              441
                                           --------         --------
    Total revenues                            2,139            1,039

Cost of Sales:
  Products, licenses and other                  162               96
                                           --------         --------
Gross margin                                  1,977              943

Operating Expenses:
  Research and development                    2,762            1,791
  Selling, general and
  administrative                              5,370            5,050
                                           --------         --------
    Total operating expenses                  8,132            6,841
                                           --------         --------
  Operating loss                             (6,155)          (5,898)

  Interest Income                               106              228
  Non - cash interest charges                  (933)            --
  Other income and expense                      (50)             (30)
                                           --------         --------
    Total interest and other income
      expense                                  (877)             198
                                           --------         --------
Loss before income taxes                     (7,032)          (5,700)

  Provision for income taxes                      1                3
                                           --------         --------
Net loss                                   $ (7,033)        $ (5,703)

  Non-cash dividend                           2,832            1,096
                                           --------         --------
Net loss applicable to common stock        $ (9,865)        $ (6,799)
 (Note 3)                                  ========         ========

Per share data:
  Basic and diluted loss per common
    share                                  $  (0.70)        $  (0.62)
                                           ========         ========
  Weighted average number of
   common shares outstanding                 14,126           10,938
                                           ========         ========
</TABLE>


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


                                       30

<PAGE>   31

                              STARBASE CORPORATION

                            STATEMENTS OF CASH FLOWS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                        For the years ended 
                                                             March 31,
                                                      ------------------------
                                                        1998            1997
                                                      --------         -------
<S>                                                    <C>             <C>
Cash Flows from Operating Activities:
  Net loss                                            $(7,033)        $(5,703)
  Adjustments to reconcile net loss to
    net cash used in operating activities:
    Non-cash interest                                     933              --
    Depreciation and amortization                         238             236
    Loss on disposition of property, equipment
      and capital lease                                    --              25
    Provision for doubtful accounts                        24              97
    Deferred income                                       160            (135)
    Other adjustments                                      19              12
    Changes in assets and liabilities,
      excluding the effect
      of non-cash transactions:
      Accounts receivable                                (370)           (212)
      Other receivables                                    38             (73)
      Inventories                                         (23)            (20)
      Prepaid expenses                                    199            (112)
      Other non- current assets                            (6)             10
      Accounts payable and accrued liabilities            159            (631)
                                                      -------         -------
Net cash used in operating activities                  (5,662)         (6,506)

Cash Flows from Investing Activities:
  Proceeds from disposition of property 
    and equipment                                          --               3
  Capital expenditures                                   (407)           (124)
                                                      -------         -------
Net cash used in investing activities                    (407)           (121)

Cash Flows from Financing Activities:
  Proceeds from sale of preferred stock                 4,950           1,021
  Proceeds from issuance of common stock:
    Private placements                                     --           6,300
    Exercise of options                                   181             282
    Exercise of warrants                                   --           1,630
  Proceeds from convertible debentures                  3,100              --
  Payments on promissory notes                             --            (111)
  Payment of financing related costs                     (711)         (1,025)
  Payments on capitalized lease obligations                (6)             --
                                                      -------         -------
Net cash provided from financing activities             7,514           8,097
                                                      -------         -------
Net increase in cash and cash equivalents               1,445           1,470

Cash and cash equivalents, beginning of year            2,722           1,252
                                                      -------         -------
Cash and cash equivalents, end of year                $ 4,167         $ 2,722
                                                      =======         =======
</TABLE>


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


                                       31

<PAGE>   32

                              STARBASE CORPORATION

                       STATEMENTS OF SHAREHOLDERS' EQUITY

                                 (In thousands)

<TABLE>
<CAPTION>
                             Preferred Stock       Common Stock         Common   Additional                           Total
                             ---------------     ----------------       Stock      Paid-in   Accumulated  Treasury Stockholders'
                             Shares   Amount     Shares    Amount     Subscribed   Capital     Deficit     Stock      Equity
                             ------   ------     ------    ------     ----------   -------   -----------  -------- ------------
<S>                          <C>       <C>        <C>      <C>           <C>       <C>         <C>          <C>    <C>
Balance at March 31, 1996
  as reported                 2,228    $ 22       7,842    $  78          $27      $18,185     $(18,223)    $(21)   $   68
Adjustment for non-cash
  dividend (Note 3)              --      --          --       --           --        5,513       (5,513)      --        --
                             ------    ----     -------     ----         ----      -------     --------     ----    ------
Balance at March 31, 
  1996, as restated           2,228      22       7,842       78           27       23,698      (23,736)     (21)       68
                             ------    ----     -------     ----         ----      -------     --------     ----    ------
Preferred stock 
  conversion to common       (2,568)    (25)      2,656       26           --           (1)          --       --        --
Preferred stock issued          365       3          --       --           --          975           --       --       978
Common stock issued:
  Private placements             --      --       2,100       21           --        5,412           --       --     5,433
  Exercise of options            --      --         127        1           --          280           --       --       281
  Exercise of warrants           --      --         441        5           --        1,625           --       --     1,630
  Payment of liabilities         --      --         159        2          (27)         277           --       --       252
Options for services provided    --      --          --       --           --           52           --       --        52
Retirement of 6,261 
  treasury shares                --      --          (6)      --           --           --          (21)      21        --
Non-cash dividend (Note 3)       --      --          --       --           --        1,096       (1,096)      --        --
Net loss                         --      --          --       --           --           --       (5,703)      --    (5,703)
                             ------    ----     -------     ----         ----      -------     --------     ----    ------
Balance at March 31, 1997,
  as restated                    25      --      13,319      133           --       33,414      (30,556)      --     2,991
                             ------    ----     -------     ----         ----      -------     --------     ----    ------

Preferred stock conversion 
  to common stock              (710)     (7)        855        9           --           (2)          --       --        --
Preferred stock issued --
  Series D                    1,200      12          --       --           --        1,347           --       --     1,359
Preferred stock issued --
  Series E                    2,873      29          --       --           --        3,105           --       --     3,134
Preferred stock issued --
  Series F                      385       4          --       --           --          477           --       --       481
Warrants converted to 
  common stock                   --      --       1,581       16           --          (16)          --       --        --
Debentures converted to
  common stock                   --      --       2,704       27           --        3,263           --       --     3,290
Stock options exercised          --      --         121        1           --          179           --       --       180
Options for services 
  provided                       --      --          --       --           --           28           --       --        28
Non-cash dividend                --      --          --       --           --        4,492       (4,492)      --        --
Net loss                         --      --          --       --           --           --       (7,033)      --     (7,033)
                             ------    ----     -------     ----         ----      -------     --------     ----    ------
Balance at March 31, 1998     3,773    $ 38      18,580     $186         $ --      $46,287     $(42,081)    $ --    $ 4,430
                             ======    ====     =======     ====         ====      =======     ========     ====    =======
</TABLE>

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


                                       32

<PAGE>   33

                              STARBASE CORPORATION

                          NOTES TO FINANCIAL STATEMENTS


1.   DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

StarBase Corporation (the "Company"), a Delaware corporation, develops, markets
and supports team-oriented product development software that addresses the
evolving needs of personal computer users involved in projects requiring
substantial collaboration. StarBase was founded in 1991 to address the inability
of software development projects to deliver software products on time and within
budget, initially through the improvement of individual programmer productivity
tools. During fiscal 1994, however, the Company determined that a next
generation of individual productivity tools would not be a lasting solution to
the software productivity problem. Based on focus group studies and market
research, StarBase decided to focus entirely on the development and marketing of
software designed to increase team productivity, rather than individual
programmer productivity. The Company was reorganized in fiscal 1996 to reflect
this change in product and market focus. In line with the reorganization, the
Consulting Division was discontinued. During the fourth quarter of fiscal 1998,
management determined that the Company was no longer in the development stage.

USE OF ESTIMATES

The financial statements have been prepared in conformity with generally
accepted accounting principles, which require management to make estimates and
assumptions that affect the amounts and disclosures reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Financial instruments of the Company consist of cash and cash equivalents;
accounts, notes and other receivables; accounts payable and accrued liabilities;
and capital lease obligation. The carrying amount of the Company's capital lease
obligation approximates fair market value based on prevailing market rates. The
Company's other financial instruments generally approximate their fair values at
March 31, 1998 and 1997 based on the short-term nature of these instruments.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with a maturity of three
months or less at the time of purchase to be cash equivalents.

REPORTING CURRENCY

The accompanying financial statements are reported in the currency of the United
States of America. Certain warrants are denominated in Canadian dollars and are
indicated as CDN$.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost, net of accumulated depreciation and
amortization. Major renewals and betterments are capitalized; minor maintenance
and repairs are charged to current operations. Depreciation and amortization are
calculated under the straight-line basis over the shorter of the estimated
useful lives of the respective assets, generally three to seven years, or the
related lease term. At March 31, 1998, property and equipment included
equipment under capital lease and related accumulated amortization of $63,000
and $12,000, respectively.

IMPAIRMENT OF LONG-LIVED ASSETS

The Company follows the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" (SFAS 121). Under the provisions of SFAS
121, whenever certain events or changes of circumstances occur, the Company
reviews the recoverability of long-lived assets and intangible assets by
comparing cash flows on an undiscounted basis to the net book value of the
assets. In the event the projected undiscounted cash flows are less than the net
book value of the assets, the carrying values of the assets are written down to
their fair value, less cost to sell. In addition, SFAS 121 requires that assets
to be disposed of be measured at the lower of cost or fair value, less cost to
sell.

                                       33
<PAGE>   34

                              STARBASE CORPORATION

                          NOTES TO FINANCIAL STATEMENTS

REVENUE RECOGNITION

Software revenue is recognized upon shipment of packaged products. Software
maintenance revenue is recorded as deferred revenue and recognized ratably over
the contractual maintenance period, generally twelve months. Revenue from
training totaled $12,000 for the year ended March 31, 1998 and nil for the year
ended March 31, 1997. License and royalty revenue pertains to sales of the
Company's Roundtable Total Software Management System licensed to a distributor
for resale. Such revenue is recorded at the time the distributor sells the
licensed product.

In October 1997 and March 1998, the Accounting Standards Executive Committee
("AcSEC") issued Statement of Position ("SOP") 97-2, Software Revenue
Recognition" and SOP 98-4, "Deferral of the Effective Date of a Provision of SOP
97-2, Software Revenue Recognition," respectively, which provide guidance on
applying generally accepted accounting principles in recognizing revenue on
software transactions and is effective for the Company's transactions entered
into subsequent to March 31, 1998. AcSEC is currently deliberating the potential
permanent deferral of certain provisions of SOP 97-2. The Company does not
believe that implementation of SOP 97-2 and SOP 98-4 will have a material
adverse affect on expected revenues or earnings.

WARRANTIES AND RETURNS

The Company warrants products against defects for 90 days and has a policy
permitting the return of products within 30 days. Warranty costs and returns,
which are not significant, have historically been within management's
expectations.

CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS

The Company is potentially subject to a concentration of credit risk from its
trade accounts, which are generally not collateralized, and notes receivable.
The Company performs periodic credit reviews of its customers and maintains
reserves for potential losses for uncollectible accounts. Such losses have
historically been within management's expectations.

One customer represented 18% of total revenue for the year ended March 31, 1998;
and 43% of total revenue for the year ended March 31, 1997. At March 31, 1998
and March 31, 1997 no one customer comprised greater than 8% of outstanding
accounts receivable.

INVENTORIES

Inventories consist of the Company's software products and packaging and are
stated at the lower of cost or market. Cost is determined using the first-in,
first-out method.

RESEARCH AND DEVELOPMENT

In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed," technological feasibility is typically established when a working
model is completed and its consistency with product design has been confirmed by
testing. As technological feasibility typically is established immediately prior
to first customer shipment, capitalizable research and development costs are
insignificant. Consequently research and development costs related to the
development of the Company's software systems are expensed as incurred.

INCOME TAXES

The Company follows the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," which requires recognition of
deferred tax assets and liabilities for the expected future tax consequences of
events that have been included in the financial statements and tax returns.
Deferred tax assets and liabilities are determined based upon the difference
between the financial statement and tax bases of assets and liabilities, using
the enacted tax rates in effect for the year in which the differences are
expected to reverse. A valuation allowance is provided when it is more likely
than not that deferred tax assets will not be realized.


                                       34

<PAGE>   35

                              STARBASE CORPORATION

                          NOTES TO FINANCIAL STATEMENTS

LOSS PER COMMON SHARE

Loss per common share is calculated by dividing net loss applicable to common
stock by the weighted average shares of common stock outstanding, excluding
outstanding common shares held in escrow (the "Escrow Shares") which are
considered contingent shares. Common stock equivalents are considered
anti-dilutive and are excluded from the calculation. Escrow Shares can be
released upon attaining certain defined cash flow requirements. The release of
the Escrow Shares will be deemed compensatory and, accordingly, will result in
charges to earnings equal to the fair market value of these shares recorded
ratably over the period beginning on the date when management determines that
the cash flow requirements are probable of being met and ending on the date when
the goal is attained, causing the Escrow Shares to be released. At the time a
goal is attained, previously unrecognized compensation expense will be adjusted
by a one-time charge based on the then fair market value of the shares released
from escrow. Such charges could substantially reduce the Company's net income or
increase the Company's loss for financial reporting purposes in the periods such
charges are recorded. Based upon historical results, the attainment of the goal
is not probable at this time. However, this does not preclude the attainment of
the goal with future results.

In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS 128"). FAS
128 establishes standards for computing and presenting earnings per share
("EPS"). It replaces the presentation of primary EPS with a presentation of
basic EPS. Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. It also requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation. Diluted EPS is computed similarly to fully diluted
EPS pursuant to Accounting Principles Board Opinion No. 15. This statement
became effective for the Company beginning with its quarterly period ended
December 31, 1997. Since the Company is considered a simple capital structure
for reporting EPS, the adoption of this principle did not have a material impact
on reported EPS. In accordance with the implementation provisions of FAS 128,
loss per common share in the statement of operations for the year ended March
31, 1997 was restated.

RECLASSIFICATION

Certain amounts for the fiscal year ended March 31, 1997 have been reclassified
to conform to the current year's presentation.

2.  BASIS OF PRESENTATION

Management believes based upon projected operating needs that the Company's
working capital is insufficient for the Company to maintain its current level of
operating activities through the end of fiscal 1999. The Company has also
experienced recurring losses from operations. These factors, among others, raise
substantial doubt about the Company's ability to continue as a going concern.
The Company is currently in the process of negotiating additional financing
through the private placement of convertible Preferred stock. The Company
believes that proceeds from the sale of debt and equity securities during fiscal
1999, combined with operating revenues, will be sufficient to allow the Company
to conduct its operations during the fiscal year ending March 31, 1999. While
the Company has successfully raised equity capital in the past, there can be no
assurance that the Company will be successful in their efforts to obtain
additional financing in the future.

3.  RESTATEMENT OF PRIOR PERIOD RESULTS

The Company has restated its net loss per common share for the years ended March
31, 1997, 1996 and 1995 to conform with Topic No. D-60 of the Emerging Issues
Task Force. Topic No. D-60 communicated the views of the Securities and Exchange
Commission staff that the beneficial conversion feature of convertible preferred
stock should be recognized as a dividend and additional paid-in capital. The
amount of the beneficial conversion feature is measured at the date of issue of
the convertible security as the difference between the conversion price and the
market value of the common stock into which the security is convertible. This
amount is recorded as a non-cash dividend, with a corresponding addition to
additional paid-in capital and is recognized over the period from issuance date
to the date the preferred stock is first convertible. Thus, there is no effect
on total shareholders' equity.

                                       35
<PAGE>   36

                              STARBASE CORPORATION

                          NOTES TO FINANCIAL STATEMENTS

In conformance with the provisions of Topic No. D-60, the Company restated its
financial statements by recording non-cash dividends attributable to the
issuance of Series A, B and C Preferred stock aggregating $2,750,000, $2,763,000
and $1,096,000, respectively. Accordingly, the Company recorded non-cash
dividends aggregating $1,096,000, $2,763,000, $872,000, $862,000, $882,000 and
$134,000 for the quarters ended June 30, 1996, March 31, 1996, June 30, 1995,
March 31, 1995, December 31, 1994 and September 30, 1994, respectively. As a
result, non-cash dividends recorded for the years ended March 31, 1997, 1996 and
1995 aggregated $1,096,000, $3,635,000 and $1,878,000 respectively. Accordingly,
previously reported additional paid-in capital increased with an offsetting
charge to accumulated deficit for each period. The impact on the Company's
financial results as originally reported for fiscal 1997, 1996 and 1995 is
summarized below:

Amounts in thousands, except per share:

<TABLE>
<CAPTION>

                                        Net loss       Loss per 
                                      applicable to     Common  
                         Net loss     Common Stock       Share  
                         --------     -------------    -------- 
<S>                      <C>            <C>              <C>      
1997:
   As reported           $(5,703)       $(5,703)        $(0.52)
   As restated           $(5,703)       $(6,799)        $(0.62)

1996:
   As reported           $(5,893)       $(5,893)        $(1.01)
   As restated           $(5,893)       $(9,528)        $(1.64)

1995:
   As reported           $(7,720)       $(7,720)        $(1.53)*
   As restated           $(7,720)       $(9,598)        $(2.65) 
</TABLE>

*  During the year ended March 31, 1997, the Company revised its accounting for
   escrowed shares, which had previously been included as outstanding common
   shares for purposes of computing loss per common share. As a result of such
   revision, the escrowed shares are not considered outstanding for purposes of
   earnings per share because such shares are contingent shares. In the table
   above, the "As reported" loss per common share for the years ended March 31,
   1997 and 1996 treats such escrowed shares as contingent shares. The "As
   restated" loss per common share for the year ended March 31, 1995 treats the
   escrowed shares as contingent shares. See Note 1.

4.   COMPOSITION OF CERTAIN BALANCE SHEET CAPTIONS

<TABLE>
<CAPTION>
                                                   March 31,
                                            -----------------------
(In thousands)                                1998            1997
--------------                              -------         -------
<S>                                         <C>             <C>
Property and equipment
Computer hardware                           $ 1,110         $   888
Furniture and fixtures                          255             164
Computer software                               269             132
Leasehold improvements                           40              29
                                            -------         -------
                                              1,674           1,213
Less accumulated depreciation and 
  amortization                                 (927)           (689)
                                            -------         -------
                                            $   747         $   524
                                            =======         =======

Accounts payable and accrued
liabilities
Trade accounts payable                      $   390         $   431
Accrued professional fees                       255             179
Accrued wages and benefits                      205             139
Other accrued expenses                           91              33
                                            -------         -------
                                            $   941         $   782
                                            =======         =======


Accounts receivable
Trade accounts receivable                   $   553         $   183
Less allowance for doubtful accounts            (89)            (65)
                                            -------         -------
                                            $   464         $   118
                                            =======         =======
</TABLE>


                                       36

<PAGE>   37

                              STARBASE CORPORATION

                          NOTES TO FINANCIAL STATEMENTS

5.  INCOME TAXES

The Company has not recorded a current or deferred provision for federal income
taxes for any period to date, as a result of losses incurred since its
inception. The provision for income taxes represents the minimum required for
state taxes. At March 31, 1998, the Company had net operating loss carryforwards
of approximately $30.1 million and $15.4 million for federal and state income
tax purposes, respectively, expiring in varying amounts through the year 2013
which are available to offset future federal and state taxable income. The
ability of the Company to utilize the federal and state net operating loss
carryforwards may be subject to annual limitations under certain provisions of
the Internal Revenue Code, as a result of ownership changes.

Deferred tax assets (liabilities) consist of the following:

<TABLE>
<CAPTION>
                                                               March 31,
                                                       ------------------------
(In thousands)                                           1998            1997
--------------                                         --------        --------
<S>                                                    <C>             <C>
Deferred tax assets:
   Net operating loss carryforwards                    $ 11,995        $  9,285
   Accounts and notes receivable allowances                  28              26
   Accrued expenses                                          26              14
   Deferred income                                          109              41
   Deferred tax asset valuation allowance               (12,158)         (9,366)
                                                       --------        --------
Net deferred tax assets                                $     --        $     --
                                                       ========        ========
</TABLE>

6.  FINANCING TRANSACTIONS

The Company has authorized 50,000,000 shares of common stock and 10,000,000
shares of preferred stock with a par value of $0.01 per share. Of the preferred
stock, 900,000 shares of Series D and 2,872,953 shares of Series E convertible
preferred stock are outstanding at March 31, 1998. 

In September 1994, the Company sold 2,500,000 shares of its Series A preferred
stock in a private placement at a price of $1.00 per share. The Company granted
the same investors the right to purchase an additional 500,000 shares on the
same terms, of which 250,000 shares were purchased in October 1994. 

On June 30, 1995, all of the Series A preferred stock was converted into the
Company's common stock. The conversion benefit applicable to the Series A
preferred stock, calculated at $2,750,000, has been accounted for as a non-cash
dividend, with a corresponding credit to additional paid-in capital (Note 3).

In May 1996, a private placement of common stock was completed. In this private
placement, 2,099,832 Units were issued, each Unit consisting of one share of
common stock and one non-transferable warrant to purchase one share of common
stock. The warrants were exercisable at $2.00 per share through April 30, 1997,
and thereafter exercisable at $2.50 per share through January 31, 1998, after
which date the warrants expired.

As a result of the May 1996 private placement of common stock, the 2,227,946
shares of the Company's Series B preferred stock, issued in a fiscal 1996
private placement, automatically converted into 2,227,946 shares of the
Company's common stock in fiscal 1997. The conversion benefit applicable to the
Series B preferred stock, calculated at $2,763,000, has been accounted for as a
non-cash dividend, with a corresponding addition to additional paid-in capital
(Note 3).

In June 1996, the private placement of Series C preferred stock was completed.
In this private placement, 365,496 Units were issued, each Unit consisting of
one share of Series C preferred stock and one non-transferable warrant to
purchase one share of common stock. The warrants were exercisable at $2.00 per
share through April 30, 1997, and thereafter exercisable at $2.50 per share
through January 31, 1998, after which date the warrants expired. During fiscal
1997 and 1998 all of the Series C preferred stock was converted into the
Company's common stock. The conversion benefit applicable to the Series C
preferred stock, calculated at $1,096,000, has been accounted for as a non-cash
dividend, with a corresponding increase to additional paid-in
capital (Note 3).

                                       37
<PAGE>   38

                              STARBASE CORPORATION

                          NOTES TO FINANCIAL STATEMENTS

In August and September 1997, the Company issued $3,100,000 in convertible 6%
debentures. The conversion benefit applicable to the debentures, calculated at
$870,000, has been accounted for as a non-cash interest charge, with a
corresponding addition to additional paid-in capital. The sale of the debentures
included the issuance of an aggregate of 82,668 warrants to purchase the
Company's common stock. The warrants are exercisable into the Company's common
stock at prices ranging from $1.58 to $1.80 and expire after three years. The
estimated value of the warrants, utilizing the Black-Scholes Model, was $85,000
and is being amortized over the two-year life of the debentures as additional
interest. In addition, 117,167 warrants were issued as finders' fees to the
selling group on the same terms, valued at approximately $120,000. During the
year, holders of $2,630,000 debentures converted their debentures into 2,703,823
shares of the Company's common stock. When the debentures were converted, the
corresponding unamortized warrant value and debt issuance costs were offset to
additional paid-in capital.

The remaining holders of $470,000 debentures exchanged their debentures for
384,715 shares of Series F convertible preferred stock and warrants to acquire
12,533 shares of common stock at $1.25 per share for three years. The value of
the Series F preferred stock and warrants approximated the carrying value of the
convertible debentures on the date of the exchange. Additionally, the Series F
preferred stock had the same conversion terms as the convertible debentures. The
conversion benefit applicable to the series F preferred stock was calculated at
$226,000 and has been amortized and accounted for as a non-cash dividend, with a
corresponding increase to additional paid-in capital as of March 31, 1998. The
Series F convertible preferred stock was subsequently converted into 411,019
shares of the Company's common stock.

During January and March 1998, the Company issued units consisting of 1,200,000
shares of Series D preferred stock and 500,000 warrants. The stock is
convertible into the Company's common stock. The warrants are exercisable into
common stock at $1.50 per share for five years. During the year 300,000 shares
were exchanged for 300,000 shares of common stock, with the remaining 900,000
outstanding. The conversion benefit applicable to the Series D preferred stock
was calculated at $1,209,000 of which $1,030,000 has been amortized and
accounted for as a non-cash dividend, with a corresponding increase to
additional paid-in capital as of March 31, 1998.

In January and February 1998, the Company issued units consisting of 2,872,953
shares of Series E preferred stock and 1,436,686 warrants. This stock is
convertible into the Company's common stock. The conversion benefit applicable
to the Series E preferred stock was calculated at $1,576,000 and has been
amortized and accounted for as a non-cash dividend, with a corresponding
increase to additional paid-in capital as of March 31, 1998. The warrants are
exercisable at $1.80 per share during the first year and $2.00 per share through
the second year. If the market price is less than $2.50 one year after issue,
then the exercise price is reduced to $1.00. The warrants expire at the end of
the second year. At March 31, 1998, none of this issue had been converted.

In June 1997, the Company offered to exchange its common stock for the
outstanding warrants. Holders of 4,743,534 warrants tendered, thereby receiving
1,581,178 shares of Common Stock. Warrant holders received one share of common
stock for every three warrants. The differential value of the stock on the offer
date over the calculated value of the warrants, aggregated $1,660,000 and has
been reflected as a non-cash dividend, with a corresponding increase in
additional paid-in capital.


                                       38

<PAGE>   39

                              STARBASE CORPORATION

                          NOTES TO FINANCIAL STATEMENTS


WARRANTS TO ACQUIRE COMMON STOCK

Warrant activity for the two years ended March 31, 1998 is as follows:

<TABLE>
<CAPTION>
                                                                       Warrant Price
                                                          Shares         Per Share
                                                      ------------   -----------------
<S>                                                      <C>         <C>
Outstanding at March 31, 1996                            2,949,595

Issued in connection with stock offerings                2,585,328             US$2.00
Exercised                                                 (441,383)     US$2.00 - 5.67
Expired                                                   (260,006)  US$5.67, CDN$8.46
                                                        ----------
Outstanding at March 31, 1997                            4,833,534

Issued in connection with stock and debenture            2,177,722      US$1.25 - 1.80
offerings
Exchanged                                               (4,743,534)  US$2.50, CDN$8.22
Expired                                                    (90,000)  US$2.50, CDN$8.22
                                                        ----------
Outstanding at March 31, 1998                            2,177,722
                                                        ==========
</TABLE>


CONVERSION OF NOTES PAYABLE

During fiscal 1997, investors converted notes payable with an aggregate face
value of $228,000 into 58,333 and 25,000 shares of the Company's common stock
and Series C preferred stock, respectively. The notes converted into common
stock had a face value of $153,000 and were from three directors (Note 10). The
note payable converted, by an investor, into Series C preferred stock had a face
value of $75,000 and was converted at a price of $3.00 per Unit. The value of
the common stock and the value of the Series C preferred stock units
approximated the carrying value of the corresponding notes payable converted on
the date of exchange. Each Unit consisted of one share of Series C preferred
stock and one warrant to purchase one share of common stock. The warrants were
exercisable at $2.00 per share through April 30, 1997 and $2.50 per share
through January 31, 1998, after which date the warrants expired.

7.  EMPLOYEE BENEFIT PLAN

Effective April 1, 1992, the Company adopted a 401(k) savings plan covering all
employees. Employees who work for the Company are eligible for participation
after three months of service. Company contributions to the savings plan are
made at the discretion of the Company's Board of Directors. The Company made no
contributions in 1998 and 1997.


                                       39

<PAGE>   40
                              STARBASE CORPORATION

                   NOTES TO FINANCIAL STATEMENTS (Continued)

8.  STOCK OPTION PLANS

The Company's stock option plan (the "1996 Plan") provides for the grant of
non-qualified and incentive stock options to directors, officers and employees
of the Company. Options are granted at exercise prices equal to the fair market
value of the common stock on the date of grant. Generally, twenty-five percent
of the options are available for exercise at the end of one year, while the
remainder of the grant is exercisable ratably over the next thirty-six month
period, provided the optionee remains in service to the Company. The
weighted-average remaining contractual life of options outstanding at March 31,
1998 was nine years. A total of 2,833,333 shares of common stock have been
authorized under the 1996 Plan, of which 2,452,531 were outstanding at March 31,
1998. In addition, the Company has granted non-qualified stock options, of which
967,996 were outstanding at March 31, 1998.

Stock option activity for the two years ended March 31, 1998 is as follows:

<TABLE>
<CAPTION>
                                                           Number       Option price
                                                         Of Shares      per share (US$)
                                                         ---------      ---------------
<S>                                                      <C>            <C>
Outstanding at March 31, 1996                            1,637,395       2.21 - 10.10

Granted                                                  1,345,280       1.43 -  4.44
Lapsed or canceled                                        (773,795)      2.21 - 10.10
Exercised                                                 (126,838)      2.21 -  2.42
                                                         ---------
Outstanding at March 31, 1997                            2,082,042       1.43 -  5.46

Granted                                                  2,045,827        .84 -  3.44
Lapsed or canceled                                        (586,552)      1.25 -  5.46
Exercised                                                 (120,790)      1.25 -  1.75
                                                         ---------
Outstanding at March 31, 1998                            3,420,527        .84 -  3.44
                                                         =========
Exercisable at March 31, 1998                              945,819
                                                         =========
</TABLE>

In May 1997, the Board of Directors authorized a repricing of employee stock
options then outstanding, to $1.25, which was above market value.

ACCOUNTING FOR STOCK-BASED COMPENSATION

Pursuant to SFAS no. 123, "Accounting for Stock-Based Compensation", the Company
is required to disclose the effects on the net loss and per share data as if the
Company had elected to use the fair value approach to account for all its
employee stock-based compensation plans. Had the compensation cost for the
Company's plan been determined using the fair value method, the compensation
expense would have had the effect of increasing the Company's net loss
applicable to common stock for the years ended March 31, 1998 and 1997 to the
pro forma amounts of $10,286,000 and $7,042,000, respectively, with a
corresponding pro forma loss per common share of $0.73 and $0.64, respectively.
These pro forma amounts were determined estimating the fair value of each option
on its grant date using the Black-Scholes option-pricing model. Assumptions of
no dividend yield, the Federal Reserve Board's 5 year treasury constant maturity
interest rate for the month of grant, 5 years expected life and an expected rate
of volatility of 45.8% were applied to all grants for the year ended March 31,
1997. Assumptions of no dividend yield, the Federal Reserve Board's 3 year
treasury constant maturity interest rate for the month of grant, 3 years
expected life and an expected rate of volatility of 55.0% were applied to all
grants for the year ended March 31, 1998. The weighted-average fair value at
grant date for the options granted during 1998 and 1997 was $.48 and $1.38 per
option, respectively.


                                       40

<PAGE>   41
                              STARBASE CORPORATION

                   NOTES TO FINANCIAL STATEMENTS (Continued)


9.  COMMITMENTS AND CONTINGENCIES

The Company leases its office space, under a non-cancelable operating lease
expiring in February 1999, as well as certain of its office equipment. Minimum
rental commitments under lease agreements at March 31, 1998 are as follows:

<TABLE>
<CAPTION>
                                                 Non-cancelable
Year ending March 31,                           Operating Leases
                                                ----------------
                                                 (In thousands)
<S>                                                  <C>
        1999                                          $197
        2000                                            23
        2001                                            23
        2002                                            23
        2003                                             5
                                                      ----
Total payments                                        $271
                                                      ====
</TABLE>

Rent expense totaled $200,000 (1998) and $245,000 (1997).

During fiscal year 1996, the Company borrowed shares of the Company's stock from
certain directors (Note 10). Since the borrowed shares were not registered and
were sold, a future liability estimated at $153,000 could arise, if the
underlying transactions conducted by the directors were rescinded. Management
believes, based on counsel's advice, that the liability, if any, would not have
a material adverse impact on the Company's financial position, results of
operation or cash flows.

10. RELATED PARTIES

During fiscal 1996, the Company was experiencing financial difficulties and had
limited cash flow. Three directors of the Company agreed to assist the Company
by "loaning" to the Company a total of 58,333 shares of the Company's Common
Stock beneficially owned by the directors. In fiscal 1996, the Company entered
into agreements with the directors evidencing the stock loans. The shares, or
the proceeds from the shares, were used by the Company for general corporate
purposes. One of the directors sold 33,333 shares in the public market and
delivered the proceeds to the Company. The other two directors transferred an
aggregate of 25,000 shares to a third party in payment of an obligation of the
Company. In fiscal 1997, the Board of Directors of the Company approved the
repayment of the stock loans by issuing restricted shares to the directors.

In fiscal 1995, the Board of Directors authorized the Company to loan William
Stow III, President and CEO of StarBase, the sum of $126,000. At March 31, 1998,
the principal and accrued interest aggregated $89,447. At March 31, 1997, the
principal and accrued interest aggregated $84,619. The loan is evidenced by a
promissory note and is secured by shares of the Company's common stock, which
are owned by Mr. Stow. The note is payable on November 4, 1998 and bears
interest at a rate of 6.34% per annum, payable at maturity.

The Company entered into a two year agreement with John Snedegar, a director,
which was terminated through mutual consent by the parties on March 31, 1996,
subject to payment of $280,000 to Mr. Snedegar for services performed by him.
The Company paid Mr. Snedegar in the first quarter of fiscal 1997.

In January 1997, the Company entered into consulting agreements with Mr. Alan M.
Davis, former President and CEO, and Mr. Robert W. Leimena, former Chief
Financial Officer of the Company. The total amount due aggregated $160,000 and
was paid in fiscal 1997.


                                       41

<PAGE>   42

                              STARBASE CORPORATION

                          NOTES TO FINANCIAL STATEMENTS

11.   SUPPLEMENTAL CASH FLOWS INFORMATION

<TABLE>
<CAPTION>
                                                               Year ended 
                                                                March 31,
                                                           -------------------
(In thousands)                                              1998         1997
--------------                                             ------       ------
<S>                                                        <C>           <C>
  Interest paid in cash                                    $  11         $ 21
  Income taxes paid                                            1            3

Non-cash investing and financing transactions:
  Non-cash preferred stock and common stock dividends      4,492        1,096
  Conversion of preferred stock to common stock
    (Note 6)                                                   8           26
  Conversion of debentures to equity (Note 6)              2,875
  Conversion of warrants to common stock (Note 6)             16
  Capitalized Lease Financing                                 54
  Conversion of promissory notes to equity (Note 6)                        75
  Conversion of loans from officers to equity (Note 6)                    153
  Common stock issued as finder's fees                                     40
  Retirement of treasury shares                                            21
  Common stock Issued for services                                        127
  Options for  services provided                              28           51
</TABLE>


                                       42


<PAGE>   43

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

Not applicable.



                                       43

<PAGE>   44

                                    PART III


ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this Item is incorporated by reference to the
Company's definitive proxy statement to be filed within 120 days after the end
of the Company's fiscal year ended March 31, 1998.


ITEM 10. EXECUTIVE COMPENSATION

The information required by this Item is incorporated by reference to the
Company's definitive proxy statement to be filed within 120 days after the end
of the Company's fiscal year ended March 31, 1998.


ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item is incorporated by reference to the
Company's definitive proxy statement to be filed within 120 days after the end
of the Company's fiscal year ended March 31, 1998.


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item is incorporated by reference to the
Company's definitive proxy statement to be filed within 120 days after the end
of the Company's fiscal year ended March 31, 1998.



                                       44

<PAGE>   45

                                     PART IV

ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(A) (3) EXHIBITS WITH EACH MANAGEMENT CONTRACT OR COMPENSATORY PLAN OR
        ARRANGEMENT REQUIRED TO BE FILED IDENTIFIED

See paragraph (c) below.

(B)     REPORTS ON FORM 8-K

In a report filed on Form 8-K, dated January 9, 1998, the Company reported the
completion of the first tranche of a private placement of Series D preferred
stock and warrants to purchase common stock as well as the commencement of a
private placement of Series E preferred stock and warrants to purchase common
stock.

In a report filed on Form 8-K, dated February 20, 1998, the Company reported the
completion of the private placement of the Series E preferred stock and warrants
to purchase common stock.

(C)     EXHIBITS

Certain exhibits have been previously filed with the Commission and are
incorporated herein by reference.

<TABLE>
<CAPTION>

Exhibit                                                                              Ref./
 Number                            Description Of Document                           Page
-------------------------------------------------------------------------------------------
<S>    <C>                                                                           <C>
  1.1  Underwriting Agreement between the Company and Dabney/ Resnick, Inc.          (F)
  3.1  Amended and Restated Certificate of Incorporation of the Company.             (B)
  3.2  Amended and Restated Bylaws of the Company.                                   (A)
  3.3  Certificate of Designation, Series C Preferred Stock.                         (F)
  3.4  Certificate of Amendment of Certificate of Designation, Series C
       Preferred Stock.                                                              (F)
  4.1  Investor's Rights Agreement date September 16, 1994 among the Company 
       and certain investors.                                                        (B)
  4.2  Registration Rights Agreement dated December 15, 1994.                        (B)
  4.3  Registration Rights Agreement dated December 1995.                            (E)
  4.4  Registration Rights Agreement dated May 1996.                                 (D)
  4.5  Registration Rights Agreement dated June 1996.                                (F)
  10.1 Form of Indemnity Agreement for Directors.                                    (A)
  10.2 Form of Indemnity Agreement for Officers.                                     (A)
  10.3 Performance Share Escrow Agreement, as amended, among the Company,
       Montreal Trust Company of Canada as Escrow Agent, and certain of the
       Company's stockholders.                                                       (A)
  10.4 Sublease dated December 2, 1993 between McDonnell Douglas Travel Company
       and StarBase Corporation, for the Company's Irvine, California facilities.    (B)
  10.5 1996 Stock Option Plan, as amended. (*)                                       (G)
  10.6 Form of Restricted Stock Issuance Agreement.                                  (A)
  10.7 Form of Restricted Stock Purchase Agreement.                                  (A)
  10.8 Forms of Common Stock Subscription Agreements and Warrants used from time
       to time between the Company and certain of its stockholders in connection
       with certain equity financings, together with a list of equity investors.     (A)
</TABLE>


                                       45

<PAGE>   46

<TABLE>
<CAPTION>

Exhibit                                                                              Ref./
 Number                            Description Of Document                           Page
-------------------------------------------------------------------------------------------
<S>    <C>                                                                           <C>
 10.9  Forms of Common Stock Subscription Agreement and Warrants used in November
       1994 Private Placement.                                                       (B)
 10.10 Forms of Common Stock  Subscription  Agreement  and Warrants  used in March
       1995 Private Placement.                                                       (C)
 10.11 Regional Prototype Defined Contribution Plan and Trust of the Company. (*)    (A)
 10.12 Fiscal Agency Agreement between the Company and Canaccord Capital
       Corporation.                                                                  (B)
 10.13 Form of Agents' Warrant. (B) 10.14 Silicon Valley Bank Warrant dated
       December 15, 1994. (B) 10.15 Secured Promissory Note dated July 1, 1995 from
       William R. Stow III. (E) 10.16 Forms of Preferred Stock Subscription 
       Agreements and Warrants used in January 1996 Private Placement, together 
       with a list of equity investors.                                              (E)
 10.17 Amendment No. 1 to the Sublease  dated  December 1, 1994 between McDonnell
       Douglas Travel Company and StarBase Corporation, for the Company's
       Irvine, California facilities.                                                (E)
 10.18 Amendment No. 2 to the Sublease dated September 1, 1995 between
       McDonnell Douglas Travel Company and StarBase Corporation, for the
       Company's Irvine, California facilities.                                      (E)
 10.19 Forms of Common Stock Subscription Agreement and Warrants used in July
       1995 Private Placement, together with a list of equity investors.             (E)
 10.20 Form of Warrant used in the May 13, 1996 Private Placement.                   (D)
 10.21 Form of Subscription Agreement used in the May 13, 1996 Private Placement.    (D)
 10.22 Form of Preferred Stock Subscription Agreement and Warrant used in the
       June 1996 Private Placement, together with a list of equity investors
       and placement agent.                                                          (F)
 10.23 Lease dated November 22, 1996 between The Provider Fund and StarBase
       Corporation, for the Company's Irvine, California facilities.                 (H)
 10.24 Form of compensation arrangement with former officers and directors.(*)       (I)
 10.25 Form of Convertible Debenture Agreement,  Registration Rights Agreement
       and Warrant used in the August and September 1997 Private Placement.          (J)
 10.26 Form of Convertible Preferred Stock Agreement and Warrant (Series D Units)
       used in the January 1998 Private Placement.                                   (K)
 10.27 Form of Securities Purchase Agreement, Certificate of Amendment of
       Certificate of Designation (Series E Preferred Stock), Form of
       Registration Rights and Warrant used in the February 1998 Private
       Placement.                                                                    (L)
 23.1  Written consent of PricewaterhouseCoopers LLP, Independent Accountants
 27    Financial data schedule
</TABLE>

-------------------------
  (A)    Incorporated herein by reference to the Company's Registration
         Statement on Form SB-2 (file number 33-68228) filed with the Commission
         on November 2, 1993.

  (B)    Incorporated herein by reference to the Company's Registration
         Statement on Form 10 (file number 0-25612) filed with the Commission on
         February 23, 1995.

  (C)    Incorporated herein by reference to the Company's Form 10-K (file
         number 0-25612) filed with the Commission on July 14, 1995.

  (D)    Incorporated herein by reference to the Company's Form 8-K (file number
         0-25612) filed with the Commission on May 16, 1996.

  (E)    Incorporated herein by reference to the Company's Form 10-K, as
         amended, (file number 0-25612) filed with the Commission on July 1,
         1996.

  (F)    Incorporated herein by reference to the Company's Form 10-QSB (file
         number 0-25612) filed with the Commission on August 14, 1996.


                                       46

<PAGE>   47

  (G)    Incorporated herein by reference to the Company's Definitive Proxy
         Statement (file number 0-25612) filed with the Commission on July 29,
         1996.

  (H)    Incorporated herein by reference to the Company's Form 10-QSB (file
         number 0-25612) filed with the Commission on February 11, 1997.

  (I)    Incorporated herein by reference to the Company's Form 8-K (file number
         0-25612) filed with the Commission on January 27, 1997.

  (J)    Incorporated herein by reference to the Company's Form 8-K (file number
         0-25612) filed with the Commission on September 16, 1997.

  (K)    Incorporated herein by reference to the Company's Form 8-K (file number
         0-25612) filed with the Commission on January 12, 1998.

  (L)    Incorporated herein by reference to the Company's Form 8-K (file number
         0-25612) filed with the Commission on February 26, 1998.

----------------------
* Denotes a management contract or compensatory plan or arrangement.



                                       47

<PAGE>   48

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 2nd day of July,
1998.

                                                STARBASE CORPORATION


                                                By: /s/ Douglas S. Norman
                                                    ----------------------------
                                                        Douglas S. Norman
                                                        Director of Finance
                                                        Chief Accounting Officer

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

<TABLE>
<CAPTION>
          Signature                         Title                          Date
          ---------                         -----                          ----
<S>                              <C>                                  <C>

/s/ William R. Stow III          Chairman of the Board, Chief          July 2, 1998
------------------------------      Executive Officer, and
    William R. Stow III         Director (principal executive
                                           officer)


/s/ Donald R. Farrow                President and Director             July 2, 1998
------------------------------
    Donald R. Farrow


/s/ Phillip E. Pearce                      Director                    July 2, 1998
------------------------------
    Phillip E. Pearce


/s/ Daniel P. Ginns                        Director                    July 2, 1998
------------------------------
    Daniel P. Ginns


/s/ John R. Snedegar                       Director                    July 2, 1998
------------------------------
    John R. Snedegar
</TABLE>


                                       48


<PAGE>   49

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>

Exhibit                                                                              Ref./
 Number                            Description Of Document                           Page
-------------------------------------------------------------------------------------------
<S>    <C>                                                                           <C>
  1.1  Underwriting Agreement between the Company and Dabney/ Resnick, Inc.          (F)
  3.1  Amended and Restated Certificate of Incorporation of the Company.             (B)
  3.2  Amended and Restated Bylaws of the Company.                                   (A)
  3.3  Certificate of Designation, Series C Preferred Stock.                         (F)
  3.4  Certificate of Amendment of Certificate of Designation, Series C
       Preferred Stock.                                                              (F)
  4.1  Investor's Rights Agreement date September 16, 1994 among the Company 
       and certain investors.                                                        (B)
  4.2  Registration Rights Agreement dated December 15, 1994.                        (B)
  4.3  Registration Rights Agreement dated December 1995.                            (E)
  4.4  Registration Rights Agreement dated May 1996.                                 (D)
  4.5  Registration Rights Agreement dated June 1996.                                (F)
  10.1 Form of Indemnity Agreement for Directors.                                    (A)
  10.2 Form of Indemnity Agreement for Officers.                                     (A)
  10.3 Performance Share Escrow Agreement, as amended, among the Company,
       Montreal Trust Company of Canada as Escrow Agent, and certain of the
       Company's stockholders.                                                       (A)
  10.4 Sublease dated December 2, 1993 between McDonnell Douglas Travel Company
       and StarBase Corporation, for the Company's Irvine, California facilities.    (B)
  10.5 1996 Stock Option Plan, as amended. (*)                                       (G)
  10.6 Form of Restricted Stock Issuance Agreement.                                  (A)
  10.7 Form of Restricted Stock Purchase Agreement.                                  (A)
  10.8 Forms of Common Stock Subscription Agreements and Warrants used from time
       to time between the Company and certain of its stockholders in connection
       with certain equity financings, together with a list of equity investors.     (A)
</TABLE>


<PAGE>   50

<TABLE>
<CAPTION>

Exhibit                                                                              Ref./
 Number                            Description Of Document                           Page
-------------------------------------------------------------------------------------------
<S>    <C>                                                                           <C>
 10.9  Forms of Common Stock Subscription Agreement and Warrants used in November
       1994 Private Placement.                                                       (B)
 10.10 Forms of Common Stock  Subscription  Agreement  and Warrants  used in March
       1995 Private Placement.                                                       (C)
 10.11 Regional Prototype Defined Contribution Plan and Trust of the Company. (*)    (A)
 10.12 Fiscal Agency Agreement between the Company and Canaccord Capital
       Corporation.                                                                  (B)
 10.13 Form of Agents' Warrant. (B) 10.14 Silicon Valley Bank Warrant dated
       December 15, 1994. (B) 10.15 Secured Promissory Note dated July 1, 1995 from
       William R. Stow III. (E) 10.16 Forms of Preferred Stock Subscription 
       Agreements and Warrants used in January 1996 Private Placement, together 
       with a list of equity investors.                                              (E)
 10.17 Amendment No. 1 to the Sublease  dated  December 1, 1994 between McDonnell
       Douglas Travel Company and StarBase Corporation, for the Company's
       Irvine, California facilities.                                                (E)
 10.18 Amendment No. 2 to the Sublease dated September 1, 1995 between
       McDonnell Douglas Travel Company and StarBase Corporation, for the
       Company's Irvine, California facilities.                                      (E)
 10.19 Forms of Common Stock Subscription Agreement and Warrants used in July
       1995 Private Placement, together with a list of equity investors.             (E)
 10.20 Form of Warrant used in the May 13, 1996 Private Placement.                   (D)
 10.21 Form of Subscription Agreement used in the May 13, 1996 Private Placement.    (D)
 10.22 Form of Preferred Stock Subscription Agreement and Warrant used in the
       June 1996 Private Placement, together with a list of equity investors
       and placement agent.                                                          (F)
 10.23 Lease dated November 22, 1996 between The Provider Fund and StarBase
       Corporation, for the Company's Irvine, California facilities.                 (H)
 10.24 Form of compensation arrangement with former officers and directors.(*)       (I)
 10.25 Form of Convertible Debenture Agreement,  Registration Rights Agreement
       and Warrant used in the August and September 1997 Private Placement.          (J)
 10.26 Form of Convertible Preferred Stock Agreement and Warrant (Series D Units)
       used in the January 1998 Private Placement.                                   (K)
 10.27 Form of Securities Purchase Agreement, Certificate of Amendment of
       Certificate of Designation (Series E Preferred Stock), Form of
       Registration Rights and Warrant used in the February 1998 Private
       Placement.                                                                    (L)
 23.1  Written consent of Price Waterhouse LLP, Independent Auditors
 27    Financial data schedule
</TABLE>

-------------------------
  (A)    Incorporated herein by reference to the Company's Registration
         Statement on Form SB-2 (file number 33-68228) filed with the Commission
         on November 2, 1993.

  (B)    Incorporated herein by reference to the Company's Registration
         Statement on Form 10 (file number 0-25612) filed with the Commission on
         February 23, 1995.

  (C)    Incorporated herein by reference to the Company's Form 10-K (file
         number 0-25612) filed with the Commission on July 14, 1995.

  (D)    Incorporated herein by reference to the Company's Form 8-K (file number
         0-25612) filed with the Commission on May 16, 1996.

  (E)    Incorporated herein by reference to the Company's Form 10-K, as
         amended, (file number 0-25612) filed with the Commission on July 1,
         1996.

  (F)    Incorporated herein by reference to the Company's Form 10-QSB (file
         number 0-25612) filed with the Commission on August 14, 1996.

  (G)    Incorporated herein by reference to the Company's Definitive Proxy
         Statement (file number 0-25612) filed with the Commission on July 29,
         1996.

  (H)    Incorporated herein by reference to the Company's Form 10-QSB (file
         number 0-25612) filed with the Commission on February 11, 1997.

  (I)    Incorporated herein by reference to the Company's Form 8-K (file number
         0-25612) filed with the Commission on January 27, 1997.

  (J)    Incorporated herein by reference to the Company's Form 8-K (file number
         0-25612) filed with the Commission on September 16, 1997.

  (K)    Incorporated herein by reference to the Company's Form 8-K (file number
         0-25612) filed with the Commission on January 12, 1998.

  (L)    Incorporated herein by reference to the Company's Form 8-K (file number
         0-25612) filed with the Commission on February 26, 1998.

----------------
* Denotes a management contract or compensatory plan or arrangement.