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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-K

            [X]      Annual Report Under Section 13 or 15(d)
                     of the Securities Exchange Act of 1934
                    For the Fiscal Year Ended March 31, 2000

                         Commission File Number: 0-25612

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

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

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

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

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: $17,532,000.

The aggregate market value of the voting stock held by non-affiliates of the
registrant as of May 31, 2000, based on the closing price as reported by NASDAQ
was $194,019,000.

Number of shares outstanding as of May 31, 2000: Common Stock: 45,922,998

Documents Incorporated by Reference: None.

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                                TABLE OF CONTENTS

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<CAPTION>
<S>                                                                                          <C>
Part I.......................................................................................   3
   Item 1. Business..........................................................................   3
   Item 2. Properties........................................................................  10
   Item 3. Legal Proceedings.................................................................  10
   Item 4. Submission of Matters to a Vote of Security Holders...............................  10
Part II......................................................................................  11
   Item 5. Market for Registrant's Common Equity.............................................  11
   Item 6. Selected Financial Data...........................................................  12
   Item 7. Management's Discussion and Analysis of Financial Condition and Results of
           Operations........................................................................  12
   Item 8. Financial Statements..............................................................  22
   Item 9. Changes in and Disagreements with Accountants on Accounting and
           Financial Disclosure..............................................................  46
Part III.....................................................................................  47
   Item 10. Directors and Executive Officers of The Registrant...............................  47
   Item 11. Executive Compensation...........................................................  49
   Item 12. Security Ownership of Certain Beneficial Owners and Management...................  55
   Item 13. Certain Relationships and Related Transactions...................................  57
Part IV......................................................................................  58
   Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................  58
</TABLE>


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                                     PART I

FORWARD-LOOKING INFORMATION

The discussion in this Form 10-K contains forward-looking statements that
involve risks and uncertainties. The statements contained in this Form 10-K that
are not purely historical are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. We have based these forward-looking
statements on currently available information and our current beliefs,
expectations and projections about future events, including, among other things,

-       successfully implementing our business strategy;

-       maintaining and expanding market acceptance of the products we offer;
        and

-       our ability to successfully compete in our marketplace.

All forward-looking statements included in this document are based on the
information available to the Company on the date hereof, and the Company assumes
no obligation to update any such forward-looking statement. Actual results could
differ materially from the results discussed herein. Factors that might cause or
contribute to such differences include, but are not limited to, those discussed
under the caption "Risk Factors" of this document and in our other filings with
the Securities and Exchange Commission. Should one or more of these risks or
uncertainties materialize, or should the underlying estimates or assumptions
prove incorrect, actual results or outcomes may vary significantly from those
anticipated, believed, estimated, expected, intended or planned.

ITEM 1. BUSINESS

OVERVIEW

We are a leading provider of eCollaboration products for the creation and
management of integrated code and content eBusiness applications. Our products
are the first to support the continuous cycle of creating, linking and managing
both code and content which comprise today's complex eBusiness applications.

We offer a complete family of user-friendly software products that enable users
with different technical and functional backgrounds to collaborate on the
production of Web sites and eBusiness initiatives within a common project
environment. Our products increase the productivity of centralized and
geographically dispersed teams of people, both internal and external to an
enterprise, as they collaborate on an eBusiness project. All team members have
access to both code and content information during each step of the development
process while maintaining the ability to actively contribute and communicate in
real time, enabling effective design and implementation. Our professional
services organization provides extensive implementation, consulting and training
expertise and support. Our software has been licensed directly to over 1,300
corporations, government agencies, software developers and eBusiness vendors
including both Internet and traditional "bricks and mortar" businesses.

Our address is 4 Hutton Centre Drive, Suite 800, Santa Ana, CA 92707. Our
registered office is in the City of Wilmington, County of New Castle, Delaware.
The main telephone number is (714) 445-4400. The corporate Web site is
http://www.starbase.com. Our federal tax identification number is 33-0567363.

INDUSTRY OVERVIEW

Emergence of the Internet

The Internet has rapidly emerged as an important vehicle for conducting business
electronically, otherwise known as eCommerce or eBusiness. Companies are rapidly
moving to the Internet to capitalize on new business opportunities, reach
broader consumer audiences and reduce operational costs.

Evolution of eBusiness Web Sites


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One of the primary drivers of eBusiness growth is the increasing functionality
of Web sites, where much of this business is transacted. Corporate Web sites are
evolving from simple online brochures developed by a few individuals to
sophisticated Web-based storefronts developed by numerous people across many
disciplines.

To take advantage of the Web's growing popularity, most companies initially
developed their sites as simple online corporate brochures. These early sites
were run primarily by a webmaster and focused on delivering content including
company and product information. The second generation of sites added the
ability to process basic transactions. Analogous to a simple retail store, these
one-way sites provided content and allowed customers to purchase products and
services online. These sites were run from a few geographically centralized
servers and were typically managed by a webmaster with support from an in-house
IT group.

The emerging third generation of sites is a complex combination of both software
code and site content. These sites are content-rich online storefronts powered
by sophisticated eBusiness applications that not only manage transactions but
also provide personalization, customer service and integration with suppliers.
The continuous updating of these sites requires complete interaction throughout
the entire company as well as its customers and partners. This interaction is
increasingly important as bricks and mortar businesses continue to move their
operations online and demand integration between their Web and traditional
online operations. Sophisticated eBusiness requires input from a diverse mix of
individuals across a wide range of disciplines.

Challenges of Building eBusiness Web Sites

While increased reliance on the Internet is helping many businesses improve
efficiencies and reduce costs, it is also adding considerable strain to IT
resources. To alleviate this strain, companies are increasingly seeking
solutions that manage the development of both code and content. Code and content
stores key strategic information and associated processes which comprise a
corporate information technology or IT infrastructure. They include:

-     Source Code

-     Web Content

-     Multimedia and Graphics

-     Process and Workflow

Managing both code and content from their creation and assembly through
deployment and maintenance is crucial to the success of an eBusiness
application.

The complexity of developing eBusiness applications is significantly greater
than traditional legacy applications for the following reasons:

-       More contributors to manage and coordinate

-       Contributors are from a broad range of disciplines

-       Different life-cycles for code and content

-       Digital assets can be diverse in nature

-       More digital assets to manage and coordinate

A critical component of managing code and content is coordinating collaboration
among individuals across a broad range of business disciplines. These
individuals might include, for example, code development participants such as
systems analysts, software designers, programmers, quality assurance engineers
and IT managers as well as content creation participants such as business
managers, graphic designers, product managers, marketing analysts, executive
officers and webmasters. Team members must have access to code and/or content
information during each step of the development process while maintaining the
ability to actively contribute and communicate in real time. The nature of this
task creates an unprecedented challenge for the enterprise. Without the ability
to collaborate through a single platform that manages the process for both code
and content, effective design and implementation becomes difficult.

Limitations of Existing Solutions


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Businesses currently use third-party solutions to manage the development of both
their code and content, but these often provide only limited functionality. Many
of these solutions address the development of legacy, non-Web-enabled
applications, which manage software code without managing Web site content.
Others manage the development of Web site content, but fail to manage software
code. In addition, most existing solutions were designed as solutions for
non-Web-enabled applications but are currently being used to develop Web
applications. Using this type of solution for Web applications, businesses will
likely encounter problems as they increase site traffic and incorporate
additional applications. Finally, many existing solutions fail to provide the
collaboration process necessary to manage the complex process of developing a
third generation site that includes both code and content. Without this
capability, businesses are more prone to development errors, prolonged time to
market and cost overruns.

To remain competitive in the rapidly evolving eBusiness marketplace, enterprises
need an open architecture solution that is designed specifically for eBusiness
applications. This solution will manage the development and maintenance of both
software code and site content while simplifying the increasingly complex
collaboration process. Many of the existing solutions do not have an
architecture designed for eBusiness applications.

THE STARBASE SOLUTION

We are a leading provider of eCollaboration solutions for eBusiness application
management. eCollaboration is the simultaneous coordination, management and
communication of geographically dispersed contributors of both code and content
for eBusiness applications. Our technology supports the continuous cycle of
creating, linking and managing both code and content which comprise complex
eBusiness applications. Our products enable users with differing technical and
functional backgrounds to collaborate on the production of Web sites and
eBusiness initiatives from multiple locations.

Our software products facilitate collaboration by providing a repository that
enables team members to access all project versions of both code and content.
The repository is a central point of storage and synchronization for both code
and content, which are stored as objects. An object, often referred to as a
component, is a collection of information that can be identified, used and
managed independently of other objects. The repository allows for the linking
and tracking of all objects. We believe that our solutions reduce production
time and user errors while improving project predictability, control and
productivity. Our solution offers many benefits, including:

-       Code and Content Management. The development and ongoing modification of
        eBusiness applications requires the integration of Web content with
        software code. Our products enable the simultaneous coordination,
        management and communication of geographically dispersed contributors of
        code and content. The typical eBusiness application consists of code
        from more traditional mainframe and client/server technologies such as
        COBOL, C++, and Visual Basic to newer technologies such as HTML pages,
        Active Server pages, Java applets and graphics images such as GIF and
        JPEG files. Our technology provides support for all stages of
        development, from the creation and assembly of code and content through
        their deployment and maintenance. In addition, our technology supports
        complex activities such as parallel development of the same code and
        content by multiple contributors.

-       Collaboration Management. An eBusiness application will have a broad
        spectrum of contributors, including programmers, content developers and
        marketing directors. To enable collaboration among team members of
        varying technical skill levels, our products feature a variety of
        intuitive user interfaces designed for the specific needs of the user.
        Our solutions enable team members to organize project plans, define
        tasks and milestones, monitor schedules, and control resource allocation
        and availability. In addition, our solutions permit users to access and
        modify project information at any time and from anywhere, keeping
        project management and development workflow synchronized.

-       Unique Repository Links Disparate Components. Our open repository
        enables team members to easily access and track changes of both code and
        content. This version tracking capability expedites problem resolution
        and improves the quality of the code and content. The ability to link
        disparate components that are stored in the repository enables
        information, traditionally kept within the confines of a functional
        area, to be available to every team member. For example, any team member
        can monitor the progress and status of a project from its creation
        through design and coding to testing and implementation. We believe our
        eCollaboration solution reduces production time and user errors while
        improving project predictability, control and productivity.


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-       Open Architecture Supports Industry Standards. Our open architecture
        enables our customers to leverage their existing IT infrastructure
        including best-of-breed software and content development tools. As a
        result, customers can customize our products to better meet their
        business needs. Our StarGate SDK software development kit provides open
        programmable access to the Starbase repository. The SDK is an
        application-programming interface based on Java for platform
        independence. It also supports scripting languages such as Visual Basic,
        JavaScript, and C++ through a component object model interface layer.

PRODUCTS

We offer a family of products designed to improve the collaboration and
productivity of software developers and Web producers for the management of both
code and content for eBusiness applications. Our products reduce the ongoing
cost of managing eBusiness applications and accelerate the implementation of
change while providing the necessary controls to ensure quality.

StarTeam Enterprise is our flagship product. It provides the technology for the
collaboration and configuration management of both code and content. StarTeam
resides on a client system and runs in a variety of development environments
including Microsoft Windows 9x, 2000 and NT, UNIX and Java Virtual Machine. The
StarTeam client is also available as a Web browser. StarTeam supports
integration with a variety of source code control products such as MERANT's PVCS
and Microsoft's Visual Source Safe allowing users to easily export their data
from these products to the StarTeam solution. StarTeam also supports an
interface to Microsoft Project.

StarTeam supports:

-       Team Discussion. This feature supports team collaboration on project
        decisions and direction, in the form of threaded conversations. It also
        provides a historical, sequential record of conversations, useful to new
        team members.

-       Task Management. This allows for the definition and monitoring of tasks,
        the allocation and control of resources working on tasks, and the
        organization of project plans to fulfill tasks. The integration with
        Microsoft Project enables the two environments to be synchronized,
        facilitating project management.

-       Change Management. This is an automated defect tracking system. It
        supports the logging of defect or changes, the creation and linking of
        tasks, the allocation of resources, the check-in/check-out of components
        for change and testing and the automatic notification of status changes.

-       Version Management. This provides a sophisticated versioning system for
        repository objects and files. It supports the linking objects together
        for traceability, parallel development with branching and merging
        capabilities, multiple baselines and the archiving of each configuration
        item.

-       Build Management. This feature provides support for repeatable builds,
        the automatic creation and archiving of complex build configurations
        that could consist of multiple types of components that have different
        versions. It also permits team members to return to any point in the
        project's history.

-       Process Management. This supports the promotion of changes through a
        life-cycle such as from development to testing to production, while
        controlling the conditions that allow this movement.

StarDisk is aimed at the non-technical or less-technical team member and, via
Microsoft Explorer, provides an easy-to-use version control capability. Team
members can access, revise, and store files that contain programming code,
letters, graphics, data, or other information. Team members can perform these
functions locally or remotely over private or public networks, including the
Internet.

The StarBase Server provides the central repository for storing all application
development objects related to either code or content. The StarBase Server
provides all team members with access to this centralized information. It can
store multiple types of objects such as documents, graphics and multimedia as
well as other objects like change requests, tasks and topics, and is capable of
storing multiple versions of these objects. It also supports third party
applications such as Web authoring products, application-testing products, and
application servers. The StarBase Server is available on a Windows 9x/NT/2000
environment. It runs on a range of relational database management systems
including Oracle, Sybase, Microsoft SQL Server, Informix and Microsoft Jet
Database engine. Typically, a


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large enterprise maintains one hardware server running the StarBase Server that
provides team members with access to centralized project information. It also
performs project administration such as user and group management, security and
license management.

The StarGate SDK is a comprehensive software development kit providing access to
the Starbase Server. Built as a pure Java interface for platform independence,
the StarGate SDK enables the creation of custom client applications including
specialized Web browser interfaces such as developer and knowledge worker
portals, custom processes for Web content management, and connectivity to third
party applications. In addition to its support for Java, the SDK also supports
scripting languages such as Visual Basic, JavaScript, and C++ through a
component object model interface layer.

StarTeam Web Edition provides browser client access to StarTeam functionality,
enabling any team member with access to the Internet to participate in their
project's change management process from the convenience of a Web browser. It
uses Microsoft's Active Server Pages technology which allows development teams
to customize the product's interface and functionality. StarTeam Web Edition
supports Microsoft Internet Explorer 4.0 or higher and Netscape Navigator 4.0 or
higher.

StarTeam Web Approval provides browser-based code and content approval process
management to StarTeam. The approval process can be customized to support
organizational specific requirements and is then implemented as a workflow.
StarTeam Web Approval uses StarTeam tasks as the approval component, reviewers
are notified of the task using the StarTeam email notification capability, and
can accept or reject the contents of the file. StarTeam Web Approval supports
Microsoft Internet Explorer 4.0 or higher and Netscape Navigator 4.0 or higher.

StarFlow provides Microsoft Exchange and Outlook-based process management and
workflow to StarTeam. From inside the Microsoft Outlook environment, StarTeam
change requests can be raised, approved and tracked throughout their life-cycle.
The change management process can be defined and customized using StarFlow's
graphical Workflow Designer. The people who need to act upon the change request
can also be defined, as well as the timeframe for action. Exception handling
identifies a stoppage in the process and executes the defined action. Users are
notified of the need for action by email and the creation of a task in their
Microsoft Outlook folder.

StarSync provides a publishing and deployment capability for code and content
stored in the StarBase Server. The code and content are accessed by StarSync
from a StarTeam View and deployed according to the source and target
configuration details defined. StarSync allows deployment to be triggered
remotely and allows multiple servers to be specified for the deployment to
provide a scalable solution.

StarEstimator provides project estimation capabilities. It supports the
necessary steps for accurate estimation, from defining the project, to the size
of the application, examining the team's capability, addressing management
constraints, and finally tabulating the results and testing the methodology
employed. Several estimation methodologies and languages are supported. Project
estimates are automatically compared to a reference database of completed
projects. Project plans can be automatically created in Microsoft Project by the
export of the StarEstimator information

StarSweeper is an automated Web content diagnostic tool focused on finding and
reporting Web site and Intranet defects. It identifies defects such as missing
files, slow pages, broken navigational links and distorted graphics in the
eBusiness application before the Web content is deployed into production sites.
StarSweeper allows the quality assurance team to define custom quality control
configurations designed for a specific application. These configurations can be
run in parallel to test many different quality criteria of Web content.
StarSweeper enables the quality assurance team to subscribe to specific tests
and automatically emails each subscriber with the results of the test.

Roundtable Total Software Management System is offered for Progress Software and
is sold exclusively by Progress. Roundtable is a comprehensive repository-based
Total Software Management System designed for and implemented for Progress
customers. Roundtable integrates with the Progress development environment
seamlessly and provides programmers, quality assurance staff and managers with a
wide range of powerful tools to develop and manage the deployment of higher
quality software applications more predictably and at a lower cost.

The Premia Product Line provides software development products that enable
developers to improve their knowledge of source code and thus become more
productive. Premia products allow developers to quickly predict


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source code complexity before they write the code, have assistance and help
while writing it, and better understand, analyze and navigate code after it has
been written. The product line includes:

CodeWright provides an integrated development environment supporting such
leading languages as Microsoft Visual Studio. The powerful editing system
provides a consistent, customizable user interface across several different
languages and external products helping to reduce learning curves and
accommodating work styles and preferences.

DocWright automatically creates organized Web-based documentation for C and C++
source code. It analyzes the code to produce a detailed roadmap showing
implementation details and class hierarchy charts. Complex relationships and
dependencies can be clearly defined.

SpyWright delivers the functionality of a source code browser for Microsoft
Foundation Class applications. SpyWright identifies all class names for a
selected window and presents the information in a graphical hierarchy.

SERVICES

We provide technical support and training services to our customers, and provide
consulting services designed to assist our customers in using our software to
develop eBusiness applications. By offering the complete solution encompassing
both product and services, we believe we can improve the success of our
customers. We intend to continue to broaden the scope of our services and
implementation practice.

Technical Support and Maintenance

We provide post-sale customer support directly through our own technical support
engineers, who handle support calls by telephone and e-mail. We offer annual
maintenance contracts, which entitle our customers to full telephone support
service and software maintenance releases. We also provide our customers with
access to technical support services by e-mail and over the Internet.

Consulting

We offer consulting services to our customers, OEMs, value added resellers and
system integrators to assist them in designing and deploying our applications
tailored to meet their particular eBusiness application needs. Consulting
services are usually offered on a time and materials basis.

Training

We provide training services at our own location as well as at the facilities of
our customers, value added resellers and system integrators worldwide. We
believe our training helps to increase customer satisfaction while enhancing our
ability to make additional sales to our existing customer base. Customers
typically pay for training services on a fixed fee basis.

SALES AND MARKETING

We license and sell our product and services through a direct corporate sales
organization that currently is predominantly telephone based. Regional sales
managers, who are in the field, and sales engineers, who provide pre-sales
technical support, complement this centralized group. Indirect sales channels,
consisting of our distributors, systems integrators, original equipment
manufacturers and value added resellers, enhance our sales efforts.

We have a base of over 1,300 existing customers who use our products for the
development and management of traditional software applications, for extending
their traditional applications onto the Web or building new eBusiness
applications. We have the opportunity to leverage our existing customer base by
selling more of our product to the Web team, and by selling new Web specific
products such as our Web quality control offering. We have the opportunity to
leverage our existing customer base by selling our recent additions to the
Starbase family of products (StarTeam Web Edition, StarTeam Web Approval,
StarFlow, StarSync and StarEstimator) and by selling more of


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our product to the extended Web team. Our recent acquisition of Premia
Corporation adds direct sales personnel and gives us the opportunity to sell
into their existing customer base of more than 20,000 organizations.

We have also developed indirect sales channels through value-added resellers,
system integrators and consultants. In addition, we have established OEM
relationships with software vendors that include our technology in their private
label products. Our partnering programs are targeted at leading eBusiness
infrastructure vendors in the areas of content creation, application servers,
customer relationship management, document management and wireless/handheld
devices. We believe that these relationships should provide additional
distribution channels and increased awareness of our solutions, while enabling
us to further our products' functionality. Our program for consulting, systems
integrator and value added reseller partners is known as the eCycle Technology
Alliance, or eTEAM. These partners will work with us to deliver integration,
vertical market applications, consulting, training and project management
solutions to customers.

Our international distributor program is targeted to a wide variety of
dealers/distributors. Annual targets, discounts, territorial coverage and
overall commitment vary by category and geographical region. We currently have a
distributor network that covers 16 countries throughout the world.

We focus our marketing efforts on educating potential customers, generating new
sales opportunities, supporting our various distributors and partners and
creating market awareness of our products and services. We conduct a variety of
programs to educate our target market including print advertising, Web and
direct seminars, conferences and trade shows, Web and direct mail campaigns,
industry and partner user group speaking engagements, public relations including
press and industry analysts. Our target audience, which has primarily been the
traditional software developer and manager, has shifted to include a much
broader audience ranging from business executives, sales and marketing
personnel, to graphic designers and webmasters. Our marketing strategy now
includes initiatives to increase our presence and visibility in both the Web and
business community. Such initiatives include Internet and portal focused trade
shows and conferences, advertisements in business and Web journals, and
editorial coverage by these journals.

RESEARCH AND DEVELOPMENT

We believe that strong research and product development efforts are essential to
enhancing our core technologies and developing additional products. We have made
substantial investments in research and development through both internal
development and technology acquisitions. We are focused on developing and
enhancing our products for eBusiness applications and the production of Web
sites for eCollaboration solutions. Our research and development efforts are
focused on expanding our support for Extensible Markup Language or XML,
additional digital platforms such as hand-held mobile devices and a broader
range of digital devices. Our research and development expenses were $2.8
million, $4.4 million and $4.6 million for the years ended March 31, 1998, 1999,
and 2000.

COMPETITION

The market for code and content management solutions is highly competitive and
constantly evolving. In this market, new products are frequently introduced and
existing products are often enhanced. We expect competition to increase and
intensify in the future. We have two primary sources of competition:

-       vendors of software that address content-based development, such as
        Interwoven and Vignette; and

-       vendors of software that address code-based development, such as
        Rational Software, MERANT, Mortice Kern Systems, Inc., Continuus
        Software Corp. and Microsoft.

In addition, many of our current and potential customers have engaged in
development efforts of their own software to manage their code and content.

We believe there are many competitive factors in the marketplace including:

-       the ability to manage both code and content;

-       the quality, security and reliability of the software product;


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-       the ability of a geographically diverse team to collaborate on a
        project;

-       the ability to operate on many platforms; and

-       the ability to adhere to emerging industry standards.

We believe our products compete favorably with respect to these factors.

Many of our competitors have longer operating histories and significantly
greater financial, technical, marketing, and other resources than we do and thus
may be able to respond more quickly to new or changing opportunities,
technologies and customer requirements. Also, many current and potential
competitors have greater name recognition and more extensive customer bases that
could be leveraged, thereby gaining market share to our detriment. Such
competitors may be able to undertake more extensive promotional activities,
adopt more aggressive pricing policies and offer more attractive terms to
purchasers than we can. In addition, current and potential competitors have
established or may establish cooperative relationships among themselves or with
third parties to enhance their own products. Accordingly, it is possible that
new competitors or alliances among competitors may emerge and rapidly acquire
significant market share.

PROPRIETARY RIGHTS

Our success is heavily dependent upon our proprietary software technology. We
currently have two patent applications pending with the United States Patent and
Trademark Office and rely 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 our technology. We
generally enter into proprietary information and inventions agreements with our
employees. We also routinely limit access to our software, documentation and
other proprietary information. There can be no assurance that the steps taken by
us will prevent misappropriation of our technology. In addition, such
protections may not preclude competitors from developing products with features
similar to our products. Although we believe our products will not infringe upon
the proprietary rights of third parties, there can be no assurance that
infringement claims will not be brought against us in the future. Any such
claims could result in costly litigation or have a material adverse effect on
our business, operating results and financial condition.

EMPLOYEES

As of March 31, 2000, we had 161 full-time employees. Of these employees, 52
were in Research and Development, 26 were in Administration and 83 were in Sales
and Marketing. Our workforce is not unionized and our management believes that
our relations with its employees are good.

ITEM 2. PROPERTIES

Our principal administrative, sales, marketing, support, and research and
development is currently located in approximately 21,000 square feet of space in
Santa Ana, California, under a lease that expires in September 2003. We also
lease 16,000 square feet in Beaverton, Oregon, under a lease that expires in
March 2002, that was assumed in the acquisition of Premia Corporation.

ITEM 3. LEGAL PROCEEDINGS

We are not currently a party to any material legal proceeding.

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

No matters were submitted to a vote of security holders during the fourth
quarter of 2000.


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                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY

(a) Our common stock trades on the NASDAQ Stock Market under the symbol "SBAS".
The following table sets out the high and low closing sales prices of our common
stock for period indicated.

<TABLE>
<CAPTION>
                                                                HIGH        LOW
                                                               ------      -----
<S>                                                            <C>         <C>
FISCAL YEAR 1999
  Quarter Ended June 30, 1998                                  $ 3.41      $1.47
  Quarter Ended September 30, 1998                             $ 2.13      $0.66
  Quarter Ended December 31, 1998                              $ 1.25      $0.59
  Quarter Ended March 31, 1999                                 $ 2.50      $0.62

FISCAL YEAR 2000
  Quarter Ended June 30, 1999                                  $ 3.38      $1.50
  Quarter Ended September 30, 1999                             $ 2.97      $1.78
  Quarter Ended December 31, 1999                              $15.13      $1.19
  Quarter Ended March 31, 2000                                 $17.13      $8.50
</TABLE>

As of March 31, 2000, based on information received from the transfer agent of
our common stock, the number of stockholders of record was 682. We believe that
there are approximately 31,000 stockholders of our common stock held in street
name.

We have never declared a cash dividend on our common stock or preferred stock.
The Board of Directors presently intends to retain all earnings for use in our
business and therefore does not anticipate paying any cash dividends on our
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 our results of operations, financial condition, capital
needs and acquisition strategy, among others. In addition, under the corporate
law of Delaware, we are prohibited from paying dividends except out of our
surplus (retained earnings) or, if there is no surplus, out of our net profits
for the fiscal year in which the dividend is declared and/or the preceding
fiscal year. At March 31, 2000, our balance sheet reflected an accumulated
deficit of $58,305,000.

(b) In March 2000, we issued an aggregate of 1,869,159 shares of our common
stock to the former stockholders of Premia Corporation in connection of
acquisition of Premia Corporation.

In January 2000, we issued an aggregate of 105,126 shares of our common stock in
lieu of late fees to the investors associated with our private placement of
common stock in July 1999.


                                       11
<PAGE>   12
ITEM 6. SELECTED FINANCIAL DATA

Our statements of operations data for the years ended March 31, 1999 and 2000,
and the balance sheet data as of March 31, 1999 and 2000, have been derived from
our financial statements which have been audited by Deloitte & Touche LLP,
independent auditors and are included herein. Our statement of operations data
for the year ended March 31, 1996, 1997, and 1998 and the balance sheet data as
of March 31, 1996, 1997, and 1998, have been derived from our financial
statements for those periods which have been audited by PricewaterhouseCoopers
LLP, independent accountants. The information set forth below in not necessarily
indicative of the results of future operations and should be read in conjunction
with the financial statements and the notes thereto appearing elsewhere in this
Report.


<TABLE>
<CAPTION>
                                                                        YEAR ENDED MARCH 31,
                                                  1996           1997           1998           1999              2000 (1)
                                                --------       --------       --------       --------          --------
                                                                (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                             <C>            <C>            <C>            <C>               <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
   License                                      $    491       $    968       $  1,863       $  5,964          $ 14,486
   Service                                           500             71            276            868             3,046
                                                --------       --------       --------       --------          --------
      Total revenues                                 991          1,039          2,139          6,832            17,532

Cost of revenues:
   License                                            82             96            162            508             1,136
   Service                                           624              -              -              -             1,480
                                                --------       --------       --------       --------          --------
      Total cost of revenues                         706             96            162            508             2,616
                                                --------       --------       --------       --------          --------
Gross margin                                         285            943          1,977          6,324            14,916

Operating expenses:
   Research and development                        2,466          1,791          2,762          4,437             4,552
   Sales and marketing                             1,817          2,969          3,423          7,638             9,097
   General and administrative                      1,942          2,081          1,947          2,963             4,527
   In-process research and development                 -              -              -              -             2,130
   Amortization of intangibles                         -              -              -              -               377
                                                --------       --------       --------       --------          --------
      Total operating expenses                     6,225          6,841          8,132         15,038            20,683
                                                --------       --------       --------       --------          --------
Operating loss                                    (5,940)        (5,898)        (6,155)        (8,714)           (5,767)

Other income (expense), net                           48            198           (877)            32                50
                                                --------       --------       --------       --------          --------
Loss before income taxes                          (5,892)        (5,700)        (7,032)        (8,682)           (5,717)
Provision for income taxes                             1              3              1              1                 1
                                                --------       --------       --------       --------          --------
Net loss                                          (5,893)        (5,703)        (7,033)        (8,683)           (5,718)
Non-cash dividend and accretion of
   beneficial conversion feature                   3,635          1,096          2,832          1,277               549
                                                --------       --------       --------       --------          --------
Net loss applicable to common stockholders      $ (9,528)      $ (6,799)      $ (9,865)      $ (9,960)         $ (6,267)
                                                ========       ========       ========       ========          ========
Basic and diluted net loss per share            $  (1.64)      $  (0.62)      $  (0.70)      $  (0.49)         $  (0.19)

Basic and diluted weighted average number
  of common shares outstanding                     5,825         10,938         14,126         20,526            33,412
</TABLE>


<TABLE>
<CAPTION>
                                                         MARCH 31,
                                ------------------------------------------------------------
                                  1996          1997         1998         1999         2000
                                -------       -------      -------      -------      -------
BALANCE SHEET DATA:                                     (IN THOUSANDS)
<S>                             <C>           <C>          <C>          <C>          <C>
Cash and cash equivalents       $ 1,252       $ 2,722      $ 4,167      $ 1,363      $11,448
Working capital                    (536)        2,384        3,632        2,308       11,429
Total assets                      2,173         3,876        5,682        6,605       42,213
Long-term liabilities               153             -           38          116          584
Total stockholders' equity           68         2,991        4,430        4,462       34,270
</TABLE>

-------

(1)     See Note 9 to the Notes of the Financial Statements for information
        regarding the Premia acquisition.


                                       12
<PAGE>   13

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

The following discussion of our financial condition and results of operations
should be read in conjunction with the financial statements and the notes
thereto included elsewhere in this Report.

RESULTS OF OPERATIONS

The following table summarizes our results of operations as a percentage of
total revenues for the years ended March 31, 1998, 1999, and 2000.

<TABLE>
<CAPTION>
                                                                 YEAR ENDED MARCH 31,
                                                         ----------------------------------
                                                           1998          1999          2000
                                                         ------        ------        ------
<S>                                                      <C>           <C>           <C>
Revenues:
   License                                                 87.1%         87.3%         82.6%
   Service                                                 12.9          12.7          17.4
                                                         ------        ------        ------

      Total revenues                                      100.0         100.0         100.0

Cost of revenues:
   License                                                  7.6           7.4           6.5
   Service                                                    -             -           8.4
                                                         ------        ------        ------

      Total cost of revenues                                7.6           7.4          14.9
                                                         ------        ------        ------

Gross profit                                               92.4          92.6          85.1

Operating expenses:
   Research and development                               129.1          64.9          26.0
   Sales and marketing                                    160.1         111.8          51.9
   General and administrative                              91.0          43.4          25.8
   In-process research and development                        -             -          12.1
   Amortization of intangibles                                -             -           2.2
                                                         ------        ------        ------

      Total operating expenses                            380.2         220.1         118.0
                                                         ------        ------        ------

Loss from operations                                     (287.8)       (127.5)        (32.9)

Other income (expense), net                               (41.0)          0.4           1.7
Equity in loss of investee                                    -             -          (1.4)
                                                         ------        ------        ------

Loss before income taxes                                 (328.8)       (127.1)        (32.6)
Provision for income taxes                                  0.0           0.0           0.0
                                                         ------        ------        ------

Net loss                                                 (328.8)       (127.1)        (32.6)
Non-cash dividend and accretion of beneficial
   conversion feature                                     132.4          18.7           3.1
                                                         ------        ------        ------

Net loss applicable to common stockholders               (461.2)%      (145.7)%       (35.7)%
                                                         ======        ======        ======
</TABLE>


Years Ended March 31, 1998, 1999 and 2000

REVENUES

Revenues were $2.1 million, $6.8 million and $17.5 million for 1998, 1999 and
2000, respectively, representing increases of $4.7 million, or 219.4% from 1998
to 1999 and $10.7 million, or 157.4% from 1999 to 2000. One customer accounted
for 18%, 10% and 11% of total revenues for 1998, 1999 and 2000, respectively.
International revenues accounted for less than 10% of total revenues in 1998,
1999 and 2000.

Licenses - Licenses were $1.9 million, $6.0 million and $14.5 million in 1998,
1999 and 2000, respectively, representing increases of $4.1 million or 220.1%
from 1998 to 1999, and $8.5 million or 141.7% from 1999 to 2000. Licenses
represented 87.1%, 87.3% and 82.6% of total revenues in 1998, 1999 and 2000,
respectively. The increase

                                       13
<PAGE>   14

in licenses from 1998 to 1999 was due to both an increase in our sales and
marketing organization of 10 people along with the release of StarTeam 4.0 in
February 1999. The increase in licenses from 1999 to 2000 was due to an increase
in our sales and marketing organization of 20 people.

Services - Services were $276,000, $868,000, and $3.0 million in 1998, 1999 and
2000, respectively, representing increases of $592,000 or 214.5% from 1998 to
1999, and $2.2 million or 250.9% from 1999 to 2000. Services represented 12.9%,
12.7% and 17.4% of total revenues in 1998, 1999, and 2000, respectively. The
increase in services reflects the increase in the number of software licenses
sold with maintenance agreements.

COST OF REVENUES

Cost of revenues consists primarily of manufacturing and related costs such as
media, documentation, and product assembly. We outsource manufacturing for all
software products. Cost of licenses was $162,000, $508,000 and $1.1 million in
1998, 1999, and 2000, respectively, representing an increase of $346,000 or
213.6% from 1998 to 1999, and $600,000 or 123.6% from 1999 to 2000. Cost of
licenses as a percentage of license revenue was 8.7%, 8.5%, and 7.8% for 1998,
1999 and 2000, respectively. The decrease in percentage from 1999 to 2000 was
due to the elimination of a royalty bearing component of our product. Cost of
license for 2000 includes the amortization of developed technology associated
with the Premia acquisition. See Note 9 of the Notes to the Financial Statements
for more information concerning the purchase price allocation associated with
the Premia acquisition. Cost of service was $1.5 million for 2000 and consists
of costs associated with performing training and consulting services. There was
no cost of service for 1998 and 1999.

OPERATING EXPENSES

Research and Development - Research and development expenses were $2.8 million,
$4.4 million and $4.6 million in 1998, 1999 and 2000, respectively, representing
increases of $1.7 million, or 60.6% from 1998 to 1999, and $200,000 or 4.5% from
1999 to 2000. The increases for these periods were primarily related to an
increase of 9 people from 1998 to 1999 in the number of software developers and
quality assurance personnel, along with the cost of hiring outside contractors
to support product development activities.

Sales and marketing - Sales and marketing expenses were $3.4 million, $7.6
million and $9.1 million in 1998, 1999 and 2000, respectively, representing
increases of $4.2 million, or 123.5%, from 1998 to 1999, and $1.5 million, or
19.7% from 1999 to 2000. The increases for these periods were primarily related
to the increase in salaries and related expenses incurred in building the sales
and marketing staff.

General and administrative - General and administrative expenses were $1.9
million, $3.0 million and $4.5 million in 1998, 1999 and 2000, respectively,
representing increases of $1.1 million, or 57.9%, from 1998 to 1999, and $1.5
million, or 50.0%, from 1999 to 2000. The increases for these periods were
primarily related to the increase in salaries and related expenses incurred in
building our infrastructure.

In-process research and development - In-process research and development was
$2.1 million for 2000. The valuation of in-process research and development
projects, associated with the Premia acquisition, was based upon the discounted
expected future net cash flows of the products over the products expected life,
reflecting the estimated stage of completion of the projects and the estimate of
the costs to complete the projects. New project developments underway at Premia
at the time of the acquisition included, among other things, CodeWright 6.5,
CodeWright 7.0, DocWright 4.5 and TrackWright 1.0. The Company estimated that
the percent completion of these projects at the date of acquisition was 89%,
57%, 55% and 69% respectively, and that the cost to complete these projects will
aggregate approximately $1.1 million and will be incurred over a two-year
period. There was no in-process research and development in 1998 and 1999.

Amortization of intangibles - Amortization of intangibles was $373,000 for
2000. This included amortization of goodwill, customer list and assembled
workforce associated with the Premia acquisition. See Note 9 to the Notes of the
Financial Statements for more information concerning the purchase price
allocation associated with the Premia acquisition. There was no amortization of
intangibles in 1998 and 1999.

Other income (expense), net - Other income (expense), net was $(877,000) in
1998, $32,000 in 1999, and $300,000 in 2000 representing an increase of $909,000
from 1998 to 1999, and an increase of $277,000 from 1999 to 2000. The expense in
1998 was a non-cash interest charge recorded for the conversion benefit
applicable to the 6% convertible debentures issued in August and September 1997.
Other income (expense), net in 2000 includes an

                                       14
<PAGE>   15

equity in loss from investee of $250,000 which is our portion, 47%, of the
operating results of OpenAvenue Inc. limited to the total amount invested,
$250,000.

Provision for income taxes - We have incurred minimal income taxes in 1998, 1999
and 2000 due to our cumulative losses. As of March 31, 2000, we have a net
operating loss ("NOL") carryforwards of approximately $42 million and $23
million for federal and state income tax purposes. The NOL carryforwards are
available to offset future taxable income at varying amounts through the year
2020. At March 31, 2000, a 100% valuation allowance has been provided on the net
deferred tax assets since we cannot determine that such are "more likely than
not" to be realized.

Net loss applicable to common stockholders - Net loss applicable to common
stockholders for the year ended March 31, 1998 was $9.9 million, consisting of
our net loss for the year of $7.1 million and $2.8 million of non-cash dividend
and accretion of the beneficial conversion feature of preferred stock. Net loss
applicable to common stockholders for the year ended March 31, 1999 was $10.0
million, consisting of our net loss of $8.7 million and $1.3 million of non-cash
dividend and accretion of the beneficial conversion feature of preferred stock.
Net loss applicable to common stockholders for the year ended March 31, 2000 was
$6.3 million, consisting of our net loss for the year of $5.8 million and
$549,000 of non-cash dividend and accretion of the beneficial conversion feature
of preferred stock.

INFLATION

Inflation has not had a significant effect on our results of operations or
financial position for the years ended March 31, 1998, 1999 and 2000.

LIQUIDITY AND CAPITAL RESOURCES

We have funded our business, to date, primarily from the issuance of equity
securities. Cash and cash equivalents as of March 31, 2000 were $11.4 million.
At March 31, 2000 we had working capital of $11.4 million.

Years Ended March 31, 1999 and 2000

Net cash used in operating activities was $9.6 million and $1.5 million in 1999
and 2000, respectively. The decrease was primarily due to a decreased loss from
operations of $3.0 million, an increase in deferred revenue of $2.3 million
resulting from increased sales, and the write-off of in-process research and
development associated with the Premia acquisition of $2.1 million.

Net cash provided by (used in) investing activities was $(718,000) and $498,000
in 1999 and 2000, respectively. The increase in cash provided in investing
activities in 2000 was due to proceeds from available-for-sale securities
acquired with the Premia acquisition of $1.1 million.

Net cash provided from financing activities was $7.5 million and $11.0 million
in 1999 and 2000, respectively. In 1999, we raised $7.1 million from the sale of
preferred stock. In 2000, we raised $4.2 million from the sale of common stock,
$2.0 million from the exercise of stock options and $5.5 million from the
exercise of warrants.

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

We warrant our products against defects for 90 days and have 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. We have
reserved approximately $202,000 at March 31, 2000 for future returns and other
collection issues.

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.

                                       15
<PAGE>   16

We have experienced no disruptions or problems regarding the year 2000
changeover. As part of our year 2000 plan, prior to January 1, 2000, we tested
and sampled internal systems consisting primarily of desktop and network
computers, and third-party software utilized in our day-to-day. All sampling and
tested completed by January 1, 2000, indicated all systems were operating as
normal. As of the date of the filing of this document, all of our internal
hardware and software continue to operate as normal and to-date, all vendors
utilized by us in our daily operations are operating normally and have not
indicated any year 2000 anomalies.

We still continue to monitor and oversee all internal operations and to be in
contact with our vendors regarding the upcoming dates, which are identified as
presenting potential year 2000 issues. Based upon the successful transition
through the January 1, 2000 rollover period, we do not anticipate any problems
to materialize.

Our expenditures for the year 2000 effort were not material and we do not expect
to incur any material costs over the next few months in regards to year 2000.

NEW ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which the Company
is required to adopt effective in its fiscal year 2002. SFAS No. 133 will
require the Company to record all derivatives on the balance sheet at fair
value. The Company does not currently engage in hedging activities and the
effect of adopting SFAS No. 133 is not presently determinable.

RISK FACTORS

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

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

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

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

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

-       changes in budgets or purchasing patterns of our customers;

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

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

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

-       changes in operating expenses and personnel; and

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

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

Since our inception, we have had a history of losses and as of March 31, 2000,
we had an accumulated deficit of $58,305,000. Further, our cash requirements to
run our business have been and will continue to be significant. In the past, we
have had negative cash flow from operations. We anticipate incurring additional
losses until we can successfully develop, market and distribute our products.
Developing software products is difficult and time consuming and requires the
coordinated participation of various technical and marketing personnel and, at
times, independent third-party suppliers. This development process often
encounters unanticipated delays and expenses. The likelihood of the success of
our business must be considered in light of the problems, expenses,


                                       16
<PAGE>   17

difficulties, complications and unforeseen delays frequently encountered in
connection with the development of new software technologies. Further, our
ability to achieve or sustain our revenue or profit goals depends on a number of
factors outside of our control, including the extent to which:

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

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

-       our customers promote our product.

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

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

For the year ended March 31, 2000, we generated 86% of our total revenues and
91% of our licensing revenues from licenses of our StarTeam product line. We
believe that revenues generated from StarTeam will continue to account for a
large percentage of our revenues for the foreseeable future. A decline in the
price of, or demand for, StarTeam would have a material adverse effect on our
business, operating results and financial condition. The following events may
reduce the demand for StarTeam:

-       competition from other products;

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

-       negative publicity or evaluation of our company; or

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

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

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

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

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

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

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


                                       17
<PAGE>   18

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

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

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

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

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

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

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

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

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

-       rapid technological advances;

-       evolving industry standards, including operating systems;

-       changes in end-user requirements; and

-       frequent new product introductions and enhancements.


                                       18
<PAGE>   19

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

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

To offer products and services to a larger customer base our direct sales force
depends on strategic partnerships and marketing alliances to obtain customer
leads, referrals and distribution. If we are unable to maintain our existing
strategic relationships or fail to enter into additional strategic
relationships, our ability to increase our sales will be harmed. We would also
lose anticipated customer introductions and co-marketing benefits. In addition,
our strategic partners may not regard us as significant for their own
businesses. Therefore, they could reduce their commitment to us or terminate
their relationships with us, pursue other partnerships or relationships, or
attempt to develop or acquire products or services that compete with our
products and services. Even if we succeed in establishing these relationships,
they may not result in additional customers or revenues.

WE MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE OUR RECENT ACQUISITION OF PREMIA
CORPORATION

We acquired Premia Corporation on March 8, 2000. The success of this acquisition
will depend on our ability to:

-       successfully integrate and manage Premia's technology and operations;

-       retain Premia's software developers;

-       develop and market new products and enhance existing products based on
        Premia's technology; and o retain Premia's customer base.

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

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

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

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

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

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

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

-       assumption of liabilities of an acquired company.

Any of these risks could significantly harm our business, operating results or
financial condition or result in dilution to our stockholders. Except for the
proposed merger with ObjectShare, we have no current agreements with respect to
any future acquisitions.

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


                                       19
<PAGE>   20

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

-       costs of customizing products for foreign countries;

-       foreign currency risks;

-       dependence on local vendors;

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

-       longer sales cycles; and

-       import and export restrictions and tariffs.

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

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

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

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

-       hire, train and retain qualified personnel;

-       continue to expand and upgrade core technologies; and

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

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

WE MAY BE UNABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS

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

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

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

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

Our software products are complex and may contain defects or failures. Moreover,
third parties may develop and spread computer viruses that may damage the
functionality of our software products. Any of these events may result in
delayed or lost revenues, loss of market share, failure to achieve market
acceptance, reduced customer satisfaction, diversion of development resources,


                                       20
<PAGE>   21

product liability or warranty claims against us, and damage to our reputation.
Although we maintain liability insurance, this insurance coverage may not be
adequate to cover losses from claims against us. Further, defending a product
liability lawsuit, regardless of its merits, could harm our business because it
entails substantial expense and diverts the time and attention of key management
personnel.

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

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

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

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

WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS

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


                                       21
<PAGE>   22

ITEM 8. FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
<S>                                                                             <C>
Financial Statements of StarBase Corporation:

Independent Auditors' Report                                                      23

Report of Independent Accountants                                                 24

Balance Sheets at March 31, 2000 and 1999                                         25

Statements of Operations for the years ended March 31, 2000, 1999 and 1998        26

Statements of Comprehensive Operations for the years ended March 31, 2000,
1999 and 1998                                                                     27

Statements of Cash Flows for the years ended March 31, 2000, 1999 and 1998        28

Statements of Stockholders' Equity for the years ended March 31, 2000,
1999 and 1998                                                                     30

Notes to Financial Statements                                                     31
</TABLE>


                                       22
<PAGE>   23


INDEPENDENT AUDITORS' REPORT



To The Board of Directors and
Stockholders of StarBase Corporation:

We have audited the accompanying balance sheets of StarBase Corporation (the
Company) as of March 31, 2000 and 1999, and the related statements of
operations, comprehensive operations, stockholders' equity, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements based on our audits.

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

In our opinion, such financial statements present fairly, in all material
respects, the financial position of StarBase Corporation at March 31, 2000 and
1999, and the results of its operations and its cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States of America.



Deloitte & Touche LLP

Costa Mesa, California
June 27, 2000


                                       23
<PAGE>   24

REPORT OF INDEPENDENT ACCOUNTANTS



To The Board of Directors and
Stockholders of StarBase Corporation

In our opinion, the accompanying statements of operations, of comprehensive
operations, of cash flows and of stockholders' equity as of and for the year
ended March 31, 1998 present fairly, in all material respects, results of
operations and cash flows of StarBase Corporation for the year then ended, 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 audit. We conducted our audit 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 audit provides 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. The Company has suffered recurring
losses from operations that raise substantial doubt about its ability to
continue as a going concern. The Company is currently in the process of
negotiating additional financing and believes that the proceeds from the sale of
debt and equity securities will be sufficient to allow the Company to conduct
its operations through the end of the next year. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
We have not audited the financial statements of StarBase Corporation for any
period subsequent to March 31, 1998.



PricewaterhouseCoopers LLP

Costa Mesa, California
June 26, 1998


                                       24
<PAGE>   25

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

<TABLE>
<CAPTION>
                                                                              March 31,       March 31,
                                                                                 2000           1999
                                                                               --------       --------
<S>                                                                           <C>             <C>
ASSETS
Current assets:
  Cash and cash equivalents                                                    $ 11,448       $  1,363
  Restricted cash                                                                    39             39
  Marketable securities                                                              11            121
  Accounts receivable, net of allowances of $202 (2000) and $155 (1999)           6,696          2,528
  Notes and other receivables, net of allowance of $707 (2000)                       26              9
  Prepaid expenses and other assets                                                 568            265
                                                                               --------       --------

    Total current assets                                                         18,788          4,325

Property and equipment, net                                                       1,526            987
Intangible assets, net                                                           21,074            971
Note receivable from officer                                                         99             94
Long-term restricted cash                                                            39             79
Other non-current assets                                                            687            149
                                                                               --------       --------

Total assets                                                                   $ 42,213       $  6,605
                                                                               ========       ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                                             $  1,358       $    640
  Accrued compensation                                                            1,475            493
  Other accrued liabilities                                                         390            131
  Deferred revenue                                                                4,017            658
  Current portion of long-term obligations                                          119             95
                                                                               --------       --------

    Total current liabilities                                                     7,359          2,017

Long-term liabilities:
  Long-term obligations, less current portion                                        49            116
  Long-term deferred revenue                                                        535              -
  Other long-term liabilities                                                         -             10
                                                                               --------       --------

    Total long-term liabilities                                                     584            126
                                                                               --------       --------

    Total liabilities                                                             7,943          2,143

Commitments and contingencies

Stockholders' equity:
  Preferred stock, $.01 par value; 10,000,000 shares authorized, none and
    558,993 shares issued and outstanding at March 31, 2000 and 1999;
    liquidation preference of $4,916 (March 31, 1999)                                 -              6
  Common stock, $.01 par value; 80,000,000 shares authorized, 44,315,610
    and 28,636,362 issued and outstanding at March 31, 2000 and 1999                443            286
  Additional paid-in capital                                                     92,242         56,208
  Accumulated deficit                                                           (58,305)       (52,038)
  Accumulated other comprehensive loss                                             (110)             -
                                                                               --------       --------

    Net stockholders' equity                                                     34,270          4,462
                                                                               --------       --------

Total liabilities and stockholders' equity                                     $ 42,213       $  6,605
                                                                               ========       ========
</TABLE>

     The accompanying notes are an integral part of the financial statements


                                       25
<PAGE>   26


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


<TABLE>
<CAPTION>
                                                                 Years ended March 31,
                                                        --------------------------------------
                                                           2000           1999           1998
                                                        --------       --------       --------
<S>                                                    <C>            <C>            <C>
Revenues:
  License                                               $ 14,486       $  5,964       $  1,863
  Service                                                  3,046            868            276
                                                        --------       --------       --------

    Total revenues                                        17,532          6,832          2,139

Cost of Revenues:
  License                                                  1,136            508            162
  Service                                                  1,480              -              -
                                                        --------       --------       --------

    Total cost of revenues                                 2,616            508            162
                                                        --------       --------       --------

Gross margin                                              14,916          6,324          1,977

Operating Expenses:
  Research and development                                 4,552          4,437          2,762
  Sales and marketing                                      9,097          7,638          3,423
  General and administrative                               4,527          2,963          1,947
  In-process research and development                      2,130              -              -
  Amortization of intangibles                                377              -              -
                                                        --------       --------       --------

    Total operating expenses                              20,683         15,038          8,132
                                                        --------       --------       --------

  Operating loss                                          (5,767)        (8,714)        (6,155)

  Interest and other income (loss)                           300             32           (877)
  Equity in loss of investee                                (250)             -              -
                                                        --------       --------       --------

Loss before income taxes                                  (5,717)        (8,682)        (7,032)

  Provision for income taxes                                   1              1              1
                                                        --------       --------       --------

Net loss                                                  (5,718)        (8,683)        (7,033)

  Non-cash dividend and accretion of
    beneficial conversion feature                            549          1,277          2,832
                                                        --------       --------       --------

Net loss applicable to common stockholders              $ (6,267)      $ (9,960)      $ (9,865)
                                                        ========       ========       ========

Per share data:
  Basic and diluted net loss per common share           $  (0.19)      $  (0.49)      $  (0.70)
                                                        ========       ========       ========

  Basic and diluted weighted average common
    shares outstanding                                    33,412         20,526         14,126
                                                        ========       ========       ========
</TABLE>

     The accompanying notes are an integral part of the financial statements


                                       26
<PAGE>   27

                              STARBASE CORPORATION
                     STATEMENTS OF COMPREHENSIVE OPERATIONS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                 Years ended March 31,
                                                        -----------------------------------
                                                          2000          1999          1998
                                                        -------       -------       -------
<S>                                                     <C>           <C>           <C>
Net loss                                                $(5,718)      $(8,683)      $(7,033)
Other comprehensive loss:
  Unrealized loss on available for sale securities         (110)            -             -
                                                        -------       -------       -------

Total comprehensive loss                                $(5,828)      $(8,683)      $(7,033)
                                                        =======       =======       =======
</TABLE>

     The accompanying notes are an integral part of the financial statements


                                       27
<PAGE>   28


                              STARBASE CORPORATION
                            STATEMENTS OF CASH FLOWS
                                     (in thousands)

<TABLE>
<CAPTION>
                                                                                       Years ended March 31,
                                                                               --------------------------------------
                                                                                 2000           1999           1998
                                                                               --------       --------       --------
<S>                                                                           <C>             <C>            <C>
Cash Flows from Operating Activities:
  Net loss                                                                     $ (5,718)      $ (8,683)      $ (7,033)
  Adjustments to reconcile net loss to cash used in operating activities:
    Non-cash interest                                                                 -              -            933
    Depreciation and amortization                                                   865            386            238
    In-process research and development                                           2,130              -              -
    Provision for doubtful accounts                                                 754             66             24
    Loss on disposition of property and equipment                                     5              7              -
    Stock option compensation expense                                               629            177              -
    Gain on sales of available for sale securities                                  (78)             -              -
    Equity in loss of investee                                                      250              -              -
    Other adjustments                                                                 -              -             19
    Changes in operating assets and liabilities, net of effects of
      acquisition:
      Accounts receivable                                                        (3,535)        (2,251)          (370)
      Notes and other receivables                                                  (722)            36             38
      Prepaid expenses and other assets                                            (203)           156            176
      Other non-current assets                                                     (529)          (156)            (6)
      Accounts payable and accrued liabilities                                    1,592            314            159
      Deferred revenue                                                            3,105            397            160
                                                                               --------       --------       --------

      Net cash used in operating activities                                      (1,455)        (9,551)        (5,662)

Cash Flows from Investing Activities:
  Decrease (increase) in restricted cash                                             40           (118)             -
  Proceeds from sale of available for sale securities                             1,141              -              -
  Investment in equity investee                                                    (250)             -              -
  Cash paid for acquisitions, net of cash acquired                                   57              -              -
  Capital expenditures                                                             (490)          (600)          (407)
                                                                               --------       --------       --------

      Net cash provided by (used in) investing activities                           498           (718)          (407)

Cash Flows from Financing Activities:
  Proceeds from sale of preferred stock                                               -          7,053          4,950
  Proceeds from issuance of common stock:
    From private placements                                                       4,225             60              -
    For payment of expenses                                                           -            152              -
    Exercise of options                                                           2,030             61            181
    Exercise of warrants                                                          5,495            581              -
  Proceeds from convertible debentures                                                -              -          3,100
  Payment of financing related costs                                               (575)          (358)          (711)
  Payments on capitalized lease obligations                                        (133)           (84)            (6)
                                                                               --------       --------       --------

      Net cash provided by financing activities                                  11,042          7,465          7,514
                                                                               --------       --------       --------

Net increase (decrease) in cash and cash equivalents                             10,085         (2,804)         1,445

Cash and cash equivalents, beginning of period                                    1,363          4,167          2,722
                                                                               --------       --------       --------

Cash and cash equivalents, end of period                                       $ 11,448       $  1,363       $  4,167
                                                                               ========       ========       ========
</TABLE>

     The accompanying notes are an integral part of the financial statements


                                       28
<PAGE>   29


                              STARBASE CORPORATION
                      STATEMENTS OF CASH FLOWS (CONTINUED)
                                     (in thousands)

<TABLE>
<CAPTION>
                                                                                Years ended March 31,
                                                                          ------------------------------
                                                                           2000        1999        1998
                                                                          ------      ------      ------
<S>                                                                       <C>         <C>         <C>
Supplemental Cash Flow Information:

  Interest paid                                                           $   31      $   16      $   11
                                                                          ======      ======      ======
  Income taxes paid                                                       $    1      $    5      $    1
                                                                          ======      ======      ======

Non-cash investing and financing transactions:
  Non-cash preferred stock and common stock dividends                     $  549      $1,277      $4,492
                                                                          ======      ======      ======
  Conversion of preferred stock to common stock                           $   48      $   85      $    8
                                                                          ======      ======      ======
  Capitalized lease and insurance financing                               $   90      $  268      $   54
                                                                          ======      ======      ======
  Change in net unrealized loss on securities available for sale          $  110
                                                                          ======
  Common stock issued for offering expense                                $  231
                                                                          ======
  Conversion of debentures to equity                                                              $2,875
                                                                                                  ======
  Conversion of warrants to common stock                                                          $   16
                                                                                                  ======
  Options for services provided                                                                   $   28
                                                                                                  ======
  Marketable securities received in exchange for accounts receivable                  $  121
                                                                                      ======
  Issuance of common stock for developed technology                                   $  987
                                                                                      ======
</TABLE>



See Note 9 for details of assets acquired and liabilities assumed in purchase
transactions.

    The accompanying notes are an integral part of the financial statements


                                       29
<PAGE>   30

                              STARBASE CORPORATION
                       STATEMENTS OF STOCKHOLDERS' EQUITY
                                     (in thousands)

<TABLE>
<CAPTION>

                                                    Preferred Stock               Common Stock           Additional
                                                -----------------------       ----------------------      Paid-in      Accumulated
                                                 Shares         Amount         Shares        Amount       Capital         Deficit
                                                --------       --------       --------      --------      --------       --------
<S>                                             <C>            <C>            <C>           <C>          <C>           <C>
BALANCE at March 31, 1997                             25       $      -         13,319      $    133      $ 33,411       $(30,553)
Preferred stock conversion to common                (710)            (7)           855             9            (2)             -
Preferred stock issued - Series D                  1,200             12              -             -         1,347              -
Preferred stock issued - Series E                  2,873             29              -             -         3,105              -
Preferred stock issued - Series F                    385              4              -             -           477              -
Warrants converted to common stock                     -              -          1,581            16           (16)             -
Debentures converted to common stock                   -              -          2,704            27         3,263              -
Stock option exercised                                 -              -            121             1           179              -
Options for services provided                          -              -              -             -            28              -
Non-cash dividend and accretion of
beneficial                                             -              -              -             -         4,492         (4,492)
  conversion feature
Net loss                                               -              -              -             -             -         (7,033)

                                                --------       --------       --------      --------      --------       --------
BALANCE at March 31, 1998                          3,773             38         18,580           186        46,284        (42,078)
                                                --------       --------       --------      --------      --------       --------

Preferred stock conversion to common              (3,191)           (32)         8,500            85           (53)             -
Preferred stock issued - Series D                      -              -              -             -            (8)             -
Preferred stock issued - Series E                      -              -              -             -           (26)             -
Preferred stock issued - Series F                      -              -              -             -            (4)             -
Preferred stock issued - Series G                      3              -              -             -         2,866              -
Preferred stock issued - Series H                      3              -              -             -         2,938              -
Preferred stock issued - Series I                      1              -              -             -           884              -
Options and warrants issued
for services provided                                  -              -              -             -           177              -
Common stock issued:
  Exercise of options                                  -              -             49             -            61              -
  Exercise of warrants                                 -              -            688             7           623              -
  Asset purchase                                       -              -            625             6           981              -
  Private placement                                    -              -             38             -            58              -
  Payment of liabilities                               -              -            156             2           150              -
Non-cash dividend and accretion of
beneficial                                             -              -              -             -         1,277         (1,277)
  conversion feature
Net loss                                               -              -              -             -             -         (8,683)

                                                --------       --------       --------      --------      --------       --------
BALANCE at March 31, 1999                            589              6         28,636           286        56,208        (52,038)
                                                --------       --------       --------      --------      --------       --------

Preferred stock conversion to common stock          (589)            (6)         4,775            48           (42)             -
Options and warrants issued for
services provided                                      -              -              -             -           629              -
Common stock issued:
  Exercise of options                                  -              -          1,510            15         2,015              -
  Exercise of warrants                                 -              -          4,893            49         5,446              -
  Acquisition                                          -              -          1,869            19        23,813              -
  Private placement                                    -              -          2,504            25         4,200              -
Payment of financing related costs                     -              -            129             1          (576)             -
Non-cash dividend and accretion of
beneficial                                             -              -              -             -           549           (549)
  conversation feature
Unrealized loss on available for
sale securities                                        -              -              -             -             -              -
Net loss                                               -              -              -             -             -         (5,718)
                                                --------       --------       --------      --------      --------       --------
BALANCE at March 31, 2000                              -       $      -         44,31       $    443      $ 92,242       $(58,305)
                                                ========       ========       ========      ========      ========       ========
</TABLE>


<TABLE>
                                                 Accumulated
                                                    Other          Total
                                                Comprehensive   Stockholders'
                                                     Loss          Equity
                                                   --------       --------
<S>                                             <C>             <C>
BALANCE at March 31, 1997                          $      -       $  2,991
Preferred stock conversion to common                      -              -
Preferred stock issued - Series D                         -          1,359
Preferred stock issued - Series E                         -          3,134
Preferred stock issued - Series F                         -            481
Warrants converted to common stock                        -              -
Debentures converted to common stock                      -          3,290
Stock option exercised                                    -            180
Options for services provided                             -             28
Non-cash dividend and accretion of
beneficial                                                -              -
  conversion feature
Net loss                                                  -         (7,033)

                                                   --------       --------
BALANCE at March 31, 1998                                 -          4,430
                                                   --------       --------

Preferred stock conversion to common                      -              -
Preferred stock issued - Series D                         -             (8)
Preferred stock issued - Series E                         -            (26)
Preferred stock issued - Series F                         -             (4)
Preferred stock issued - Series G                         -          2,866
Preferred stock issued - Series H                         -          2,938
Preferred stock issued - Series I                         -            884
Options and warrants issued
for services provided                                     -            177
Common stock issued:
  Exercise of options                                     -             61
  Exercise of warrants                                    -            630
  Asset purchase                                          -            987
  Private placement                                       -             58
  Payment of liabilities                                  -            152
Non-cash dividend and accretion of
beneficial                                                -              -
  conversion feature
Net loss                                                  -         (8,683)

                                                   --------       --------
BALANCE at March 31, 1999                                 -          4,462
                                                   --------       --------

Preferred stock conversion to common stock                -              -
Options and warrants issued for
services provided                                         -            629
Common stock issued:
  Exercise of options                                     -          2,030
  Exercise of warrants                                    -          5,495
  Acquisition                                             -         23,832
  Private placement                                       -          4,225
Payment of financing related costs                        -           (575)
Non-cash dividend and accretion of
beneficial                                                -              -
  conversation feature
Unrealized loss on available for
sale securities                                        (110)          (110)
Net loss                                                  -         (5,718)
                                                   --------       --------
BALANCE at March 31, 2000                          $   (110)      $(34,270)
                                                   ========       ========
</TABLE>


     The accompanying notes are an integral part of the financial statements


                                       30
<PAGE>   31


                              STARBASE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

1.      NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS

StarBase Corporation, a Delaware corporation (the Company), is a leading
provider of collaboration solutions for integrated content and software
applications. Collaboration is the simultaneous coordination, management and
communication of geographically dispersed contributors of both code and content
for eBusiness applications. The Company develops, markets, and supports a
complete family of user-friendly software products that support the continuous
cycle of creating, linking and managing digital assets, which comprise complex
eBusiness applications. The Company's products enable users with differing
technical and functional backgrounds to collaborate on the production of Web
sites and eBusiness initiatives from multiple locations. The Company's
professional services organization provides implementation, consulting and
training expertise. The Company's current product line consists of StarTeam(R)
4.2 and StarTeam(R) Enterprise 4.2, StarDisk(R), StarGate(R), StarSweeper(TM),
RoundTable(R), and Versions(R) as well as the product lines acquired in the
Premia acquisition: CodeWright(R), DocWright(R) and SpyWright(R).

BASIS OF PRESENTATION

The Company's financial statements are presented in accordance with accounting
principles generally accepted in the United States of America.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. The majority of the Company's cash
and cash equivalents are held in uninsured money market funds with one
institution.

RESTRICTED CASH

On September 17, 1998, the Company pledged $118,000 of cash for an irrevocable
letter of credit related to the lease of new office space that was classified as
restricted cash on the balance sheet. The letter of credit will be reduced by
33.33% each year and will expire on July 2, 2001. At March 31, 2000, the balance
of the letter of credit was $78,000.

MARKETABLE SECURITIES

The Company accounts for marketable securities in accordance with Statement of
Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities. This standard requires the Company to
classify and account for investments in equity securities that have readily
determinable fair values and all debt securities as follows: (1) debt securities
that the Company has the intent and the ability to hold to maturity are
classified as held-to-maturity securities and are reported at amortized cost;
(2) debt and equity securities that are bought and held principally for the
purpose of selling them in the near-term are classified as trading securities
and are reported at fair value, with unrealized gains and losses included in
earnings; and (3) debt and equity securities not classified as held-to-maturity
securities or trading securities are classified as available-for-sale securities
and reported at fair value, with unrealized gains and losses excluded from
earnings and reported as a separate component of stockholders' equity.

In March 1999, the Company received marketable equity securities in exchange for
accounts receivable valued at $121,000. As of March 31, 2000, the fair market
value of the security was $11,000. The unrealized loss of $110,000 has been
recorded as a separate component of stockholders' equity.

ACCOUNTS RECEIVABLE

The Company sells its products worldwide. The Company performs ongoing credit
evaluations of its customers and generally does not require collateral. The
Company maintains reserves for potential credit losses and those losses have
been within management's estimates. Allowances for sales returns are included in
accounts receivable on the accompanying balance sheets and are based on
historical experience.


                                       31
<PAGE>   32


                              STARBASE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

Activity related to the allowance account for the years ended March 31, 1998,
1999 and 2000 is as follows:

<TABLE>
<CAPTION>
                                      Balance at   Charges to                 Balance at
                                      Beginning    Costs and                    End of
                                      of Period     Expenses    Deductions      Period
                                      ----------   ----------   ----------    ----------
<S>                                   <C>          <C>          <C>           <C>
Year ended March 31, 2000:
  Allowance for doubtful accounts       $155         $838         $(84)          $909

Year ended March 31, 1999:
  Allowance for doubtful accounts       $ 89         $ 75         $ (9)          $155

Year ended March 31, 1998:
  Allowance for doubtful accounts       $ 65         $105         $(81)          $ 89
</TABLE>

INVENTORIES

Inventories consist of the Company's software products and packaging and are
stated at the lower of first-in, first-out cost or market. Inventories are
included in prepaid expenses and other assets.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost, net of accumulated depreciation and
amortization. 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, 2000 and 1999 property and equipment included equipment under capital
leases, net of accumulated amortization, of $87,000 and $60,000, respectively.

IMPAIRMENT OF LONG-LIVED ASSETS

The Company accounts for the impairment and disposition of long-lived assets in
accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of. In accordance with SFAS 121,
long-lived assets to be held are reviewed for events or changes in circumstances
which indicate that their carrying value may not be recoverable. The Company
periodically reviews the carrying value of long-lived assets to determine
whether or not an impairment to such value has occurred and has determined based
on its most recent assessment that there was no impairment at March 31, 2000.

DEVELOPED TECHNOLOGY

Developed technology (Note 9) is recorded at cost or, for the amounts related to
acquisitions, at appraised value and amortized on a straight-line basis over
five years. Accumulated amortization was $17,000 and $308,000 at March 31, 1999
and 2000, respectively.

GOODWILL

Goodwill arising from acquisitions (Note 9) is amortized on a straight-line
basis over five years. Accumulated amortization was $173,000 at March 31, 2000.

AMOUNTS ALLOCATED TO CUSTOMER LIST AND ASSEMBLED WORKFORCE

Customer list arising from acquisitions (Note 9) is amortized on a straight-line
basis over four and one-half years. Accumulated amortization was $2,000 at March
31, 2000. Assembled workforce arising from acquisitions (Note 9) is amortized on
a straight-line basis over four years. Accumulated amortization was $5,000 at
March 31, 2000.

REVENUE RECOGNITION

Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended,
provides guidance in recognizing revenue on software transactions. The Company
adopted this statement, as amended, during the year ended March 31, 1999.


                                       32
<PAGE>   33

                              STARBASE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

Software license revenue is recognized upon shipment of packaged products in
accordance with SOP 97-2. Software maintenance revenue is deferred and
recognized ratably over the contractual maintenance period, generally one year.
Maintenance contracts greater than one year are recorded as long-term deferred
revenue. Revenue from training and consulting, which is recognized after the
related services have been performed, totaled $1,035,000 for the year ended
March 31, 2000, $72,000 for the year ended March 31, 1999, and $12,000 for the
year ended March 31, 1998.

WARRANTY AND SALES RETURNS

The Company warrants products against defects for 90 days and has a policy
permitting the return of products within 30 days that meet specified criteria.
The Company provides an allowance for sales returns at the time of shipment.
Warranty costs and sales returns, which are not significant, have historically
been within management's estimates.

RESEARCH AND DEVELOPMENT

In accordance with SFAS 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 all research and
development costs are expensed as incurred.

INCOME TAXES

The Company follows the provisions of SFAS 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.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's balance sheets include the following financial instruments: cash
and cash equivalents, restricted cash, accounts receivable, notes and other
receivables, accounts payable, and accrued liabilities. The Company considers
the carrying value of cash and cash equivalents, accounts receivable, notes
receivable, accounts payable, and accrued liabilities in the financial
statements to approximate fair value for these financial instruments because of
the relatively short period of time between origination of the instruments and
their expected realization. Based on borrowing rates currently available, the
fair value of the notes receivable and the Company's other financial instruments
generally approximate their fair values at March 31, 2000 and 1999.

STOCK-BASED COMPENSATION

The Company accounts for stock-based awards to employees using the intrinsic
value method in accordance with Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock Issued to Employees.

NET LOSS PER SHARE

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

                                       33
<PAGE>   34

                              STARBASE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS


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.

For the year ended March 31, 2000, net loss applicable to common stockholders
was $6,267,000 representing net loss of $5,718,000 plus non-cash dividend and
accretion of beneficial conversion feature of $549,000 consisting of $501,000
associated with the Series H Preferred Stock, $48,000 associated with the Series
I Preferred Stock. For the year ended March 31, 1999, net loss applicable to
common stockholders was $9,960,000 representing net loss of $8,683,000 plus
non-cash dividend and accretion of beneficial conversion feature of $1,277,000
consisting of $156,000 associated with Series D Preferred Stock, $187,000
associated with Series E Preferred Stock, $275,000 associated with Series G
Preferred Stock, $643,000 associated with Series H Preferred Stock and $16,000
associated with Series I Preferred Stock. For the year ended March 31, 1998, net
loss applicable to common stockholders was $9,865,000 representing net loss of
$7,033,000 plus non-cash dividend and accretion of beneficial conversion feature
of $2,832,000 consisting of $1,030,000 associated with Series D Preferred Stock,
$1,576,000 associated with Series E Preferred Stock, and $226,000 associated
with Series F Preferred Stock.

Potentially dilutive securities, which consist of options to purchase 2,832,465
shares of common stock at prices ranging from $0.625 to $13.07 per share,
warrants to purchase 239,669 shares of common stock at prices ranging from $0.73
to $2.00 per share, and 1,418,638 common shares held in escrow were not included
in the computation of diluted loss per share because such inclusion would have
been antidilutive for the year ended March 31, 2000. Potentially dilutive
securities, which consist of options to purchase 2,091,067 shares of common
stock at prices ranging from $0.625 to $3.44 per share, warrants to purchase
2,984,388 shares of common stock at prices ranging from $0.59 to $3.25 per
share, and 1,418,638 common shares held in escrow were not included in the
computation of diluted loss per share because such inclusion would have been
antidilutive for the year ended March 31, 1999. Potentially dilutive securities,
which consist of options to purchase 3,420,527 shares of common stock at prices
ranging from $0.84 to $3.44 per share, warrants to purchase 2,177,722 shares of
common stock at prices ranging from $1.25 to $1.80 per share, and 1,418,638
common shares held in escrow were not included in the computation of diluted
loss per share because such inclusion would have been antidilutive for the year
ended March 31, 1998.

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$.

USE OF ESTIMATES

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

COMPREHENSIVE INCOME (LOSS)

The Company has adopted SFAS No. 130, Reporting Comprehensive Income. This
statement established standards for the reporting of comprehensive income and
its components. Comprehensive income, as defined, includes all changes in equity
(net assets) during a period from non-owner sources. For the year ended March
31, 2000, the difference between net loss and comprehensive net loss was an
unrealized loss for available-for-sale securities of $110,000. There was no
difference between net loss and comprehensive net loss for the years ended March
31, 1999 and 1998.

NEW ACCOUNTING PRONOUNCEMENTS

The Company has adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information. In accordance with SFAS No. 131, the Company
has disclosed in Note 8 certain information about the Company's operating
segments, revenue types, geographical areas to which the Company sells its
products, and major customers.


                                       34
<PAGE>   35


                              STARBASE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which the Company
is required to adopt effective in its fiscal year 2002. SFAS No. 133 will
require the Company to record all derivatives on the balance sheet at fair
value. The Company does not currently engage in hedging activities and the
effect of adopting SFAS No. 133 is not presently determinable.

RISKS AND UNCERTAINTIES

The Company is subject to risks and uncertainties in the normal course of
business including customer acceptance of its products, rapid technological
changes, delays in introducing and market acceptance of new products,
competition, eBusiness developments, ability to attract and retain qualified
personnel, ability to protect its intellectual property, and other matters
inherent in the software industry.

2.   COMPOSITION OF CERTAIN BALANCE SHEET CAPTIONS

<TABLE>
<CAPTION>

       (In thousands)                               March 31,      March 31,
                                                      2000           1999
                                                    --------       --------
<S>                                                <C>            <C>
Property and equipment:
Computer hardware                                   $  1,836       $  1,337
Furniture and fixtures                                   628            315
Computer software                                        239            199
Motor vehicle                                             32              -
Leasehold improvements                                   251            198
                                                    --------       --------
                                                       2,986          2,049
Less accumulated depreciation and amortization        (1,460)        (1,062)
                                                    --------       --------
                                                    $  1,526       $    987
                                                    ========       ========
Intangible assets:
Patents and trademarks                              $     20       $     20
Developed technology                                   7,073            988
Customer lists                                           161              -
Assembled workforce                                      368              -
Goodwill                                              13,959              -
                                                    --------       --------
                                                      21,581          1,008
Less accumulated amortization                           (507)           (37)
                                                    --------       --------
                                                    $ 21,074       $    971
                                                    ========       ========
</TABLE>


                                       35
<PAGE>   36

                              STARBASE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS



3.      CAPITAL LEASE AND LONG-TERM OBLIGATIONS

The Company is lessee of certain office equipment under capital leases that
expire in 2002 and 2004. The assets are depreciated over their estimated useful
life.

The future annual minimum lease payments under the capital leases are as
follows:

<TABLE>
<CAPTION>

       Years ending March 31: (in thousands)
<S>                                                    <C>
         2001                                           $   48
         2002                                               46
         2003                                                7
         2004                                                2
                                                        ------
       Total minimum lease payments                        103
       Less amount representing interest                   (19)
                                                        ------
       Present value of minimum lease payments              84
       Less current maturities                             (35)
                                                        ------
                                                        $   49
                                                        ======
</TABLE>

In September 1998, the Company financed the renewal of its director's and
officer's insurance (3 year policy). In September 1999, the Company financed the
renewal of its commercial insurance (1 year policy). The assets are amortized
over the life of the policies and the amortization is included in general and
administrative expense.

The future annual minimum payments under the financing are as follows:

<TABLE>
<CAPTION>

       Years ending March 31: (in thousands)

<S>                                                    <C>
         2001                                           $    87
       Less amount representing interest                     (3)
                                                        -------
       Present value of minimum payments                     84
       Less current maturities                              (84)
                                                        -------
                                                        $     -
                                                        =======
</TABLE>

4.      INCOME TAXES

The provision for income taxes for the years ended March 31, 2000, 1999 and 1998
is comprised of the following:

<TABLE>
<CAPTION>
                       March 31,     March 31,     March 31,
                         2000          1999          1998
                         ----          ----          ----
<S>                    <C>           <C>           <C>
Current:
   Federal               $  -          $  -          $  -
   State                  800           800           800
                         ----          ----          ----
Total provision          $800          $800          $800
                         ====          ====          ====
</TABLE>

                                       36
<PAGE>   37

                              STARBASE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

The reported provision for income taxes for the years ended March 31, 2000 and
1999 differs from the amount computed by applying the statutory federal income
tax rate of 35% to the loss before income taxes as follows:

<TABLE>
<CAPTION>
                                               March 31,          March 31,
                                                 2000               1999
                                              ---------          ---------
<S>                                            <C>                <C>
Benefit computed at statutory rates            (35.00)%           (35.00)%
Increase (reduction) resulting from:
   State tax                                     0.01%             (3.06)%
   Goodwill                                     14.71%                 -
   Other                                         2.46%              0.40%
   Change in valuation allowance                17.83%             37.67%
                                              -------            -------
                                                 0.01%              0.01%
                                              =======            =======
</TABLE>

The main reconciling item between the statutory federal income tax rate of 35%
and the effective rate for the year ended March 31, 1998 is due to the change in
valuation allowance. For the year ended March 31, 1998, the Company did not
record a current or deferred provision for federal income taxes as a result of
losses incurred since its inception. The provision for income taxes for such
years represents the minimum required for state taxes.

The tax effects of temporary differences and carryforwards that give rise to the
Company's deferred income tax assets and liabilities consist of the following:

Deferred tax assets (liabilities) consist of the following:

<TABLE>
<CAPTION>
(In thousands)                           March 31,      March 31,     March 31,
                                           2000           1999          1998
                                         --------       --------      --------
<S>                                      <C>            <C>           <C>
Net operating loss carryforward          $ 17,040       $ 14,451      $ 11,995
State taxes                                     -           (711)            -
Research credit carryforward                1,286            990             -
Deferred revenue                            1,761            289           109
Other accrueds                                833            222            54
                                         --------       --------      --------

Net deferred income tax assets             20,920         15,241        12,158

Valuation allowance                       (20,920)       (15,241)      (12,158)
                                         --------       --------      --------

Net deferred tax assets                  $      0       $      0      $      0
                                         ========       ========      ========
</TABLE>

For the years ended March 31, 2000 and 1999, the Company has recorded a
valuation allowance equal to the current and deferred provision for federal
income tax benefit for all periods 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, 2000, approximately $2.8 million of the valuation allowance is
attributable to the potential tax benefit of stock option transactions, which
will be credited directly to stockholders' equity if realized.

At March 31, 2000, the Company had net operating loss carryforwards of
approximately $42 million and $23 million for federal and state income tax
purposes, respectively, expiring in varying amounts through the year 2020 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.


                                       37
<PAGE>   38

                              STARBASE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS


5.      RELATED PARTY TRANSACTIONS

During the quarter ended September 30, 1999, the Company invested $250,000 for
900,000 shares of common stock, or 47%, of OpenAvenue Inc ("OpenAvenue"), which
was subsequently reduced to 21% as of March 31, 2000 due to the issuance of
additional equity by OpenAvenue. OpenAvenue is an Internet portal company for
open-source knowledge and effort sharing over the Internet providing a meeting
and work place for virtual development teams acting in concert on distributed
projects. The Company accounts for this ownership under the equity method of
accounting for investments in common stock and through the year ended March 31,
2000, the Company's equity in losses of OpenAvenue reduced the net investment to
zero. In addition, the Company agreed to loan OpenAvenue up to $750,000 on a
short-term basis until OpenAvenue's financing arrangements are completed. As of
March 31, 2000, the amount outstanding from the loan was $707,465. The loan
balance is fully reserved for as of March 31, 2000 because of the uncertainty of
repayment and such amount is included in selling, general and administrative
expense.

The Company also entered into a software license agreement with OpenAvenue,
where a one-time license fee of $1,000,000 will be paid in equal quarterly
installments over the next twelve months. The Company recognized revenue of
$500,000 during the three month period ended December 31, 1999 and deferred
recognition of the remaining $500,000 because the ability to collect the second
$500,000 was not certain. Under the same agreement, the Company will also
provide maintenance and support services for the licensed software for an annual
fee of $180,000 which will also be paid in equal quarterly installments over the
next twelve months. The Company recorded the annual maintenance fee as deferred
revenue and will recognize it ratably over the applicable twelve month period.
As of March 31, 2000, the Company has $956,000 in accounts receivable from
OpenAvenue consisting of $750,000 of the license fee, $135,000 of
the annual maintenance fee and $71,000 or the sales tax on the transaction.
Deferred revenue related to these amounts was $620,000 as of March 31, 2000.

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. Principal and
accrued interest aggregated $99,087 and $94,259, at March 31, 2000 and 1999,
respectively. The loan is evidenced by a promissory note and is collateralized
by shares of the Company's common stock, which are owned by Mr. Stow. The note
bears interest at a rate of 6.34% per annum, payable at maturity. The maturity
date was originally November 4, 1998, and during the year ended March 31, 1999,
the maturity date on the note was extended to November 4, 2000.

6.      EQUITY TRANSACTIONS

The Company has authorized 80,000,000 shares of common stock and 10,000,000
shares of preferred stock with a par value of $0.01 per share. There was no
preferred stock outstanding at March 31, 2000.

The Company accounts for the beneficial conversion feature of convertible
preferred stock in accordance with Emerging Issues Task Force Issue No. 98-5.
Under Issue No. 98-5, the beneficial conversion feature of convertible preferred
stock is recognized as a dividend and additional paid-in capital. The amount of
the beneficial conversion feature is measured at the date of the issuance 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 increase to
additional paid-in capital and is recognized over the period from issuance date
to the date the preferred stock is first convertible. For the years ended March
31, 2000, 1999 and 1998 the non-cash dividend and accretion of beneficial
conversion feature was $549,000, $1,277,000, and $2,832,000, respectively.

ACTIVITY FOR THE YEAR ENDED MARCH 31, 2000

During the year ended March 31, 2000, 584,808 shares of Series E Preferred Stock
were converted into 584,808 shares of common stock, 3,066 shares of Series H
Preferred Stock were converted into 3,392,136 shares of common stock and 1,000
shares of Series I Preferred Stock were converted into 797,987 shares of common
stock.


                                       38
<PAGE>   39

                              STARBASE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

During July 1999, the Company entered into agreements to complete a
three-tranche private placement consisting of 2,503,877 shares of Common Stock
for $4,225,000. The first tranche closed on July 15, 1999, the second tranche
closed on July 30, 1999, and the third tranche closed on September 2, 1999. In
addition, the Company issued warrants to purchase 1,877,908 shares of common
stock of which warrants to purchase 999,041 shares are exercisable at $2.68 per
share and expire on July 15, 2002, warrants to purchase 763,037 shares are
exercisable at $2.11 per share and expire on July 30, 2002 and warrants to
purchase 115,830 shares are exercisable at $2.09 per share and expire on
September 3, 2002. The fair value of these warrants using the Black-Scholes
model at the date of grant was $2,749,637. At November 6, 1999, the warrants
were repriced to $1.00 per share and subsequently exercised.

During September 1999, the Company bought back 119 shares of Series H Preferred
Stock for $119,000. The shares were originally issued in lieu of cash for
finder's fees relating to the Series H Preferred Stock private placement.

ACTIVITY FOR THE YEAR ENDED MARCH 31, 1999

During the year ended March 31, 1999, 900,000 shares of Series D Preferred
Stock, 2,288,145 shares of Series E Preferred Stock, and 3,100 shares of Series
G Preferred Stock were converted into 1,068,982, 2,288,145 and 5,142,550 shares
of common stock, respectively.

Effective July 31, 1998, the Company completed a private placement of 3,100
shares of Series G Preferred Stock for $3,000,000. The Series G Preferred Stock
is not redeemable and has a liquidation preference of $1,000 per share. The
holders of Series G Preferred Stock are not entitled to receive any dividends
nor, except as provided by law, vote upon any matter relating to the business or
affairs of the Company. Each share of Series G Preferred Stock is convertible,
after 120 days, into the Company's common stock, at a conversion rate which is
determined by dividing $1,000 by the Conversion Price. The Conversion Price
shall be the lesser of (a) $1.66 or (b) 95% of the average closing bid price of
the three lowest bid prices of common stock as reported by Bloomberg, L.P. for
shares traded in the United States during the 22 consecutive trading days
preceding the conversion date. In conjunction, the Company issued 805,234
warrants related to the Series G Preferred Stock. Of these warrants, 635,034 are
exercisable for one share of common stock at $0.75 through August 31, 2000,
after which the warrants will expire and 170,200 warrants are exercisable for
one share of common stock at a range of $0.59 to $0.84, expiring from November
10, 2000 to January 4, 2001. The fair value of these warrants using the
Black-Scholes pricing model at the date of grant was $201,354 and was recorded
as a non-cash dividend at the time of issuance.

During November 1998, the Company entered into agreements to complete a
three-phase private placement consisting of 3,185 shares of Series H Preferred
Stock for $3,000,000. The first phase closed in November 1998, the second phase
closed in December 1998 and the third phase closed in February 1999. The Series
H Preferred Stock is not redeemable and has a liquidation preference of $1,000
per share. The holders of Series H Preferred Stock are not entitled to receive
any dividends nor, except as provided by law, vote upon any matter relating to
the business or affairs of the Company. Each share of Series H Preferred Stock
is convertible, after 120 days, into the Company's common stock, at a conversion
rate which is determined by dividing $1,000 by the Conversion Price. The
Conversion Price shall be the lesser of (a) 110% of the average of the closing
bid prices of the common stock for the five-day trading period on the trading
date immediately preceding each Closing Date (the Closing Price) or (b) the
average of the two (2) lowest closing bid prices of the common stock during the
thirty (30) trading days preceding the conversion date. In conjunction, the
Company issued 323,025 warrants with the Series H Preferred Stock. One-third of
the warrants is exercisable for one share of common stock at $0.95 through
November 24, 2003, one-third of the warrants is exercisable for one share of
common stock at $0.73 through December 20, 2003, and one-third of the warrants
is exercisable for one share of common stock at $1.93 through February 8, 2004
after which the warrants will expire. The fair value of these warrants using the
Black-Scholes pricing model at the date of grant was $177,642.

Effective January 26, 1999, the Company completed a private placement of 37,736
shares of restricted Common Stock for $60,000 to Company executives. The Company
also issued 7,548 warrants to purchase shares of common stock at $1.59 through
January 26, 2001.


                                       39
<PAGE>   40

                              STARBASE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

On January 19, 1999, the Company entered into an accounts receivable purchase
agreement with Silicon Valley Bank for up to $2,000,000 of receivables. In
conjunction with the agreement, the Company issued 55,452 warrants to purchase
shares of common stock at $1.08 exercisable through January 19, 2004. At March
31, 2000, the Company has not sold any of its receivables pursuant to this
agreement. The fair value of these warrants using the Black-Scholes pricing
model at the date of grant was $47,312 and was recorded as compensation expense.

Effective March 16, 1999, the Company completed a private placement of 1,000
shares of Series I Preferred Stock for $1,000,000. The Series I Preferred Stock
is not redeemable and has a liquidation preference of $1,000 per share. The
holders of Series I Preferred Stock are not entitled to receive any dividends
nor, except as provided by law, vote upon any matter relating to the business or
affairs of the Company. Each share of Series I Preferred Stock is convertible,
after 120 days, into the Company's common stock, at a conversion rate which is
determined by dividing $1,000 by the Conversion Price. The Conversion Price
shall be the lesser of (a) $1.50 or (b) 90% of the average closing bid price of
the two lowest closing bid prices of common stock during the thirty (30)
consecutive trading days preceding the conversion date. In conjunction, the
Company issued 253,333 warrants with the Series I Preferred Stock. Each warrant
is exercisable for one share of common stock at $1.50 through March 16, 2002,
after which the warrants will expire. The fair value of these warrants using the
Black-Scholes pricing model at the date of grant was $198,360.

On March 17, 1999, the Company completed the purchase of certain intangible
assets of Site Technologies, Inc. for 625,000 shares of restricted Common Stock
valued at $987,500. The purchase price was allocated to intangible assets. The
purchase provides for the exclusive ownership and distribution rights of Site
Technologies core technology assets including the SiteSweeper, SiteMaster,
QuickSite, WebTools and SiteMarks products and related assets. The technologies
will be integrated with the Company's StarTeam product line, to produce a
next-generation technical collaboration and content management solution for
e-commerce application development.

ACTIVITY FOR THE YEAR ENDED MARCH 31, 1998

In June 1997, the Company offered to exchange its common stock for then all
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.

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 conjunction, 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.


                                       40
<PAGE>   41

                              STARBASE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS


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 Series D preferred
stock is convertible into the Company's common stock over the two years after
the issuance date and is automatically converted upon the second anniversary of
the issuance date. The warrants are exercisable into common stock at $1.50 per
share for five years. During the year ended March 31, 1998, 300,000 preferred
shares were exchanged for 300,000 shares of common stock. 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 twenty-day average close price of the common stock as
reported by Bloomberg, LP, is not at least $2.50 one year after issuance date,
then the exercise price will be reduced to $1.00. The warrants expire at the end
of the second year. At March 31, 1998, none of the shares had been converted.

WARRANTS

Warrant activity for the years ended March 31, 1998, 1999 and 2000 was as
follows:

<TABLE>
<CAPTION>
                                                                                        Warrant Price
                                                                       Shares              Per Share
                                                                      ----------       ---------------
<S>                                                                    <C>             <C>
Outstanding at March 31, 1997                                          4,833,534       $2.50, CDN$8.22

Granted                                                                2,177,722        $1.25 - $1.80
Exchanged                                                             (4,743,534)      $2.50, CDN$8.22
Expired                                                                  (90,000)      $2.50, CDN$8.22
                                                                      ----------       ---------------
Outstanding at March 31, 1998                                          2,177,722        $1.25 - $1.80

Granted                                                                1,494,592        $0.59 - $3.25
Exercised                                                               (687,926)       $0.75 - $1.00
                                                                      ----------       ---------------
Outstanding at March 31, 1999                                          2,984,388        $0.59 - $3.25

Granted                                                                2,148,011        $2.00 - $2.68
Exercised                                                             (4,892,730)       $0.59 - $3.25
                                                                      ----------       ---------------
Outstanding at March 31, 2000                                            239,669        $0.73 - $2.00
                                                                      ==========       ===============
</TABLE>


7.      STOCK OPTION PLAN

The Company's stock option plan (the 1996 Plan) provides for the grant of
non-qualified and incentive stock options to directors, officers and employees
of the Company. Options are granted at exercise prices equal to the fair market
value of the common stock on the date of grant. Generally, twenty-five percent
of the options are available for exercise at the end of one year, while the
remainder of the grant is exercisable ratably over the next thirty-six month
period, provided the optionee remains in service to the Company. The
weighted-average remaining contractual life of options outstanding at March 31,
2000 was 8.6 years. A total of 2,833,333 shares of common stock have been
authorized under the 1996 Plan, of which 1,584,983 were outstanding at March 31,
2000. In addition, the Company has granted non-qualified stock options, of which
9,981,056 were outstanding at March 31, 2000.

As a result of the acquisition of Premia Corporation (Premia)(Note 9), the
Company assumed all of the outstanding options granted under the Premia ISO
stock option plan (Premia Plan). At the date of


                                       41
<PAGE>   42

                              STARBASE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

acquisition, there were 270,084 options outstanding at a weighted average
exercise price of $1.48, of which 213,451 were outstanding at a weighted average
exercise price of $1.48. Stock option activity for the years ended March 31,
2000, 1999, and 1998 was as follows:

<TABLE>
<CAPTION>
                                                        Weighted-
                                                         Average
                                                        Exercise
                                        Shares            Price
                                       ----------       ---------
<S>                                   <C>               <C>
Outstanding at March 31, 1997          2,082,042         $2.63

Granted                                2,045,827         $1.40
Lapsed or canceled                      (586,552)        $2.44
Exercised                               (120,790)        $1.49
                                      ----------
Outstanding at March 31, 1998          3,420,527         $1.44

Granted                                3,873,160         $1.16
Lapsed or canceled                      (696,747)        $1.92
Exercised                                (49,529)        $1.24
                                      ----------
Outstanding at March 31, 1999          6,547,411         $1.23

Granted                                7,167,508         $6.20
Assumed in acquisition                   270,084         $1.48
Lapsed or canceled                      (639,455)        $2.33
Exercised                             (1,509,425)        $1.34
                                      ----------
Outstanding at March 31, 2000         11,836,123         $4.17
                                      ===========
Exercisable at March 31, 2000          2,832,465         $1.34
                                      ===========
</TABLE>


Stock option summary information at March 31, 2000 is as follows:

<TABLE>
<CAPTION>
                                  Options Outstanding                         Options Exercisable
                     ---------------------------------------------        --------------------------
                                       Weighted-         Weighted-                         Weighted-
   Range of                             Average           Average                          Average
   Exercise                            Remaining          Exercise                         Exercise
    Prices             Shares       Contractual Life       Price           Shares            Price
 -------------       -----------    ----------------     ---------        ---------        ---------
<S>                  <C>            <C>                  <C>              <C>             <C>
 $0.50 - $1.00         2,009,096        8.4 years          $ 0.67           806,082          $ 0.67
 $1.01 - $1.50         4,033,117        8.4 years          $ 1.32         1,009,113          $ 1.30
 $1.51 - $2.00         1,721,807        8.2 years          $ 1.66           708,323          $ 1.64
 $2.01 - $2.50           406,352        9.3 years          $ 2.11           198,310          $ 2.05
 $2.51 - $3.00           229,000        5.4 years          $ 2.69            78,264          $ 2.69
 $3.01 - $3.50           278,751        5.7 years          $ 3.46            26,040          $ 3.45
 $3.51 - $4.00            35,000        9.7 years          $ 3.57                 0          $ 0.00
 $4.01 - $4.50           250,000        8.1 years          $ 4.05                 0          $ 0.00
 $4.51 - $10.00           79,000        7.3 years          $ 8.56             6,000          $ 9.75
$10.01 - $20.00        2,794,000        9.9 years          $12.73               333          $13.07
                     -----------                                          ---------
                      11,836,123                                          2,832,465
                     ===========                                          =========
</TABLE>


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 stockholders for the years ended March 31, 2000, 1999 and
1998 to the pro forma amounts of $7,932,000, $10,611,000, and $10,739,000,


                                       42
<PAGE>   43

                              STARBASE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

respectively, with a corresponding pro forma net loss per common share of $0.24,
$0.52, and $0.76, 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
average of the Federal Reserve Board's 3-year and 5-year treasury constant
maturity interest rate for the month of grant, 4 years expected life and an
expected rate of volatility of 100.0% were applied to all grants for the years
ended March 31, 2000 and 1999. Assumptions of no dividend yield, the average of
the Federal Reserve Board's 3-year and 5-year treasury constant maturity
interest rate for the month of grant, 4 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 the years ended March 31, 2000, 1999 and 1998 was $4.46, $0.78, and $0.53
per option, respectively.

8.      OPERATING SEGMENT INFORMATION

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

The Company's reportable operating segments include software licenses and
services. The software licenses operating segment develops and markets the
Company's eBusiness digital asset management products. The services segment
provides after-sale support for software products and fee-based training and
consulting services related to the Company products.

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

Operating segment data for the years ended March 31, 2000, 1999, and 1998 was as
follows:

<TABLE>
<CAPTION>
                                  Licenses      Services         Total
                                  --------      --------        -------
(In thousands)
<S>                               <C>            <C>            <C>
Year ended March 31, 2000:
    Revenues                      $14,486        $ 3,046        $17,532
    Cost of revenues                1,136          1,480          2,616
                                  -------        -------        -------

        Gross margin              $13,350        $ 1,566        $14,916
                                  =======        =======        =======

Year ended March 31, 1999:
    Revenues                      $ 5,964        $   868        $ 6,832
    Cost of revenues                  508              -            508
                                  -------        -------        -------

        Gross margin              $ 5,456        $   868        $ 6,324
                                  =======        =======        =======

Year ended March 31, 1998:
    Revenues                      $ 1,863        $   276        $ 2,139
    Cost of revenues                  162              -            162
                                  -------        -------        -------

        Gross margin              $ 1,701        $   276        $ 1,977
                                  =======        =======        =======
</TABLE>


For the year ended March 31, 2000, one customer represented 11% of total
revenue. One customer represented 10% of total revenue for the year ended March
31, 1999, and 18% of total revenue for the year ended March 31, 1998. At March
31, 2000 one customer comprised 14% of outstanding accounts


                                       43
<PAGE>   44

                              STARBASE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

receivable and at March 31, 1999, and March 31, 1998, no one customer comprised
greater than 10% of outstanding accounts receivable.

9.      ACQUISITIONS

On March 8, 2000, the Company acquired all of the outstanding capital stock and
stock options of Premia Corporation (Premia) in exchange for 1,869,159 shares
of the Company's common stock valued at $23,832,000 and cash transaction costs
of $250,000. The acquisition was accounted for as a purchase and the purchase
price of $24,082 was allocated as follows:

<TABLE>
<CAPTION>

<S>                                        <C>
(In thousands)
Current assets                             $  2,126
Fixed assets                                    384
Developed technology                          6,086
Customer list                                   161
Assembled workforce                             368
Goodwill                                     13,959
In-process research and development           2,130
Long-term assets                                 14
Liabilities assumed                          (1,146)
                                           --------
   Total purchase price                    $ 24,082
                                           ========
</TABLE>


Premia's operating results have been included in the Company's financial
statements from the date of acquisition. Goodwill and assembled workforce will
be amortized on a straight-line basis over five years. Developed technology will
be amortized on a straight-line basis over four years. Customer list will be
amortized on a straight-line basis over four and one-half years. In-process
research and development was expensed at the date of acquisition. The in-process
research and development arose from new product projects that were under
development at the date of acquisition and expected to eventually lead to new
products but had not yet established technological feasibility and for which no
future alternative use was identified. The valuation of the in-process research
and development projects was based upon the discounted expected future net cash
flows of the products over the products expected life, reflecting the estimated
stage of completion of the projects and the estimate of the costs to complete
the projects.

New project developments underway at Premia at the time of the acquisition
included, among other things, CodeWright 6.5, CodeWright 7.0, DocWright 4.5 and
TrackWright 1.0. The Company estimated that the percent completion of these
projects at the date of acquisition was 89%, 57%, 55% and 69% respectively, and
that the cost to complete these projects will aggregate approximately $1.1
million and will be incurred over a two-year period.

The following unaudited pro forma results of operations assumes that the Premia
acquisition had occurred on the first day of each year presented. The pro forma
results of operations is presented for information purposes only. It is based on
historical information and does not necessarily reflect the actual results that
would have occurred nor is it indicative of future results of operations of the
combined enterprise.

<TABLE>
<CAPTION>
                                                      Years ended March 31,
                                                  --------------------------
                                                    2000             1999
                                                  ---------        ---------
                                                    (in thousands, except
                                                      per share amounts)
<S>                                               <C>              <C>
Net revenues                                      $ 22,961         $ 11,730
Net loss                                            (8,792)         (14,955)

Net loss applicable to common stockholders           (0.26)           (0.67)
</TABLE>


                                       44
<PAGE>   45

                              STARBASE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS


On April 13, 2000, the Company, through a wholly owned subsidiary, acquired all
of the outstanding common stock of ObjectShare, Inc. (ObjectShare), in exchange
for 1,211,983 shares of the Company's common stock valued at $8,850,000,
transaction costs of $1,012,000 (payable in 100,000 shares of the Company's
common stock valued at $506,000 and cash of $506,000) and the assumption of net
liabilities of $954,000. The net liabilities assumed include a write-down of
$279,000 of property to its estimated fair market value and the assumption of
$253,000 of severance liabilities which will be settled by the issuance of
49,985 shares of the Company's common stock. The acquisition will be accounted
for as a purchase and the purchase price is expected to be allocated primarily
to goodwill which will be amortized on a straight-line basis over five years. In
addition, the Company has provided ObjectShare with a $500,000 line of credit
under the terms of a credit agreement. The line of credit is secured by all of
the accounts receivable and other assets of ObjectShare. The outstanding balance
of the line of credit as of March 31, 2000, was $0.

10.     COMMITMENTS AND CONTINGENCIES

In July 1998, the Company entered into a sub-lease for office space. The offices
consist of 17,000 square feet costing approximately $27,000 per month through
February 22, 2000. Simultaneously, the Company also entered into a lease
agreement for 4,100 contiguous square feet beginning January 1999 through
September 2003 at a rate of approximately $8,000 per month. In addition, the
Company entered into a lease agreement for the 17,000 square feet beginning
February 23, 2000 through September 2003 at a rate of approximately $41,000 per
month.

Minimum rental commitments under lease agreements at March 31, 2000 are as
follows:

<TABLE>
<CAPTION>
                                                    Non-cancelable
Year ending March 31,                              Operating Leases
                                                    (In thousands)
                                                   ---------------
<S>                                                <C>
         2001                                          $  820
         2002                                             820
         2003                                             612
         2004                                             467
         2005                                               1
                                                       ------

Total payments                                         $2,720
                                                       ======
</TABLE>


Rent expense for the years ended March 31, 2000, 1999 and 1998 totaled $502,982,
$387,710, and $200,000, respectively.

11.     SUBSEQUENT EVENTS

On May 21, 2000, the Company amended the lease agreement with its landlord. The
amendment increases the office space from 21,100 square feet to 43,349 square
feet beginning September 1, 2000 through August 2005 at a rate of approximately
$96,000 per month.

On June 12, 2000, the Company, through a wholly owned subsidiary, acquired all
of the outstanding common stock of Genitor Corporation in exchange for 341,866
of the Company's common stock valued at $2,000,000 and estimated cash
transaction costs of $200,000. The acquisition will be accounted for as a
purchase transaction and the purchase price is expected to be allocated
primarily to goodwill and other intangible assets.


                                       45
<PAGE>   46

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

On March 17, 1999, the Company dismissed PricewaterhouseCoopers LLP as its
independent accountants. There were no disagreements on any matter of accounting
principles or practices, financial statement disclosures, or auditing scope or
procedures.


                                       46
<PAGE>   47

                                    PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

EXECUTIVE OFFICERS AND DIRECTORS

The executive officers and directors of the Company and their ages are as
follows:

<TABLE>
<CAPTION>
NAME                                               AGE    POSITION(s)
----                                               ---    -----------
<S>                                                <C>    <C>
William R. Stow III (1)(2)                          55    Chief Executive Officer and Chairman of the Board
Donald R. Farrow (2)(4)                             54    Executive Vice President and Director
Alan D. Kucheck                                     48    Vice President, Engineering
Douglas S. Norman                                   36    Chief Financial Officer and Assistant Secretary
James H. Smith                                      44    Executive Vice President, Customer Group
Lydia J. Patterson                                  49    Vice President, Products Group
Thomas M. Brattvet                                  44    Vice President, Sales
Frank R. Caccamo (1)(3)                             60    Director
Daniel P. Ginns (3)(4)                              50    Director
Phillip E. Pearce (4)                               71    Director
John R. Snedegar (2)(3)                             50    Director
Barry W. Sullivan (1)                               58    Director
</TABLE>

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

(1)     Member of the Compensation Committee

(2)     Member of the Nominating Committee

(3)     Member of the Audit Committee

(4)     Member of the Merger and Acquisition Committee

The following is a brief summary of the background of each director:

WILLIAM R. STOW III founded Starbase in September 1991. Mr. Stow has served as
our Chief Executive Officer since September 1991 (exclusive of the period from
August 1996 to January 1997) and has served as our President since July 1998
and, prior to July 1998 from September 1991 to August 1996 (exclusive of the
period from April 1994 through July 1995). Mr. Stow has served as a member of
our board of directors since September 1991, our Co-Chairman of the Board from
October 1994 to August 1996 and our Chairman of the Board since August 1996. Mr.
Stow serves on the board of directors of OpenAvenue Inc. and Escrow.Com, both
private Internet companies. Mr. Stow holds a B.S. in Mathematics from Oregon
State University.

DONALD R. FARROW has served as our Executive Vice President since February 2000.
Mr. Farrow has held various positions within the Company including serving as
Vice Chairman from July 1998 to February 2000, President from January 1997 to
July 1998, Chief Operating Officer from February 1997 to July 1998, Vice
President, Sales and Marketing from August 1996 to January 1997, Vice President,
Sales from May 1996 to August 1996 and consultant from March 1996 to May 1996.
From January 1995 to May 1996, Mr. Farrow was an independent consultant in the
area of sales and marketing of software technology. Mr. Farrow has served as a
member of our board of directors since February 1997. Mr. Farrow holds a B.S. in
Industrial Management from Purdue University.


                                       47
<PAGE>   48

FRANK R. CACCAMO has served as a member of our board of directors since November
1998. Mr. Caccamo is a consultant. Mr. Caccamo was the Vice President and Chief
Information Officer of The Reynolds and Reynolds Company from January 1997
through November, 1999. Prior to joining Reynolds and Reynolds, Mr. Caccamo was
Vice President of Information Systems at Procter & Gamble from 1990 to January
1997. Mr. Caccamo holds a B.A. in Economics from St. Joseph's College and an
M.B.A. from the University of Chicago.

DANIEL P. GINNS has served as a member of our board of directors since January
1997. Since October 1996, Mr. Ginns has been Chairman of the Board and Chief
Executive Officer of Datametrics Corporation, a reporting company which designs,
develops and manufactures printers and computers. From 1989 to 1996, Mr. Ginns
was President of Belmont Capital, Inc., a management and financial advisory
firm. Mr. Ginns holds a B.A. in Economics from Harvard University and an M.B.A.
from The Harvard Business School.

PHILLIP E. PEARCE has served as a member of our board of directors since January
1996. Mr. Pearce is a consultant since 1986. Prior to that, he was Senior Vice
President and a member of the Board of Directors of E.F. Hutton & Co., from 1971
through 1983, a member of the Board of Governors of the New York Stock Exchange,
and Chairman of the Board of governors of the NASD. Mr. Pearce is a member of
the board of directors of China Premium, Mustang Software and Xybernaut
Corporation. Mr. Pearce holds a B.S. degree in Retail from the University of
South Carolina and graduated from the Wharton School of Investment Banking at
the University of Pennsylvania.

JOHN R. SNEDEGAR has served as a member of our board of directors since December
1991. Mr. Snedegar is President, Chief Executive Officer and a director of Micro
General Corporation, a software development telecommunications company. Mr.
Snedegar also serves as Chairman and CEO of Escrow.com, in Internet escrow
company founded by Micro General. From May 1990 through April 1999, Mr. Snedegar
served as President, Director and Chief Executive Officer of United Digital
Network Inc., a diversified telecommunications provider based in Irving, Texas.
Mr. Snedegar is a member of the board of directors of Micro General Corporation,
Star Communications, Inc., an international long distance wholesale provider,
and ShopNow.com, an electronic commerce shopping portal and TeleHub
Communications Corporation, a long distance technology company.. Mr. Snedegar
holds a B.A. degree in Business and Journalism from Kansas State University.

BARRY W. SULLIVAN has served as a member of our board of directors since
September 1998. Mr. Sullivan served Electronic Data Systems (EDS) from 1971
through 1998, most recently as Corporate Vice President in charge of managing
their Internet, New Media and Electronic Business. Mr. Sullivan holds a B.A.
degree in History from Allegheny College.


The following is a brief summary of the background of each executive officer of
the Company who is not also a director of the Company:

ALAN D. KUCHECK has served as our Vice President of Engineering since January
1995. From July 1993 to January 1995, Mr. Kucheck served as our Project
Director. Mr. Kucheck also served as Manager of Software Development for IMI,
Inc. and Manager of Product Development for SBT Corporation. Mr. Kucheck
attended the University of Illinois.

DOUGLAS S. NORMAN founded Starbase in September 1991. In February, 2000, Mr.
Norman was appointed to serve as our Chief Financial Officer. From September
1997 to February, 2000, Mr. Norman served as our Chief Accounting Officer. Mr.
Norman has served as our Assistant Secretary since February 1997, Director of
Finance from June 1996 to February 2000, and Financial Manager from 1991 to
1996. Douglas S. Norman is the son-in-law of William R. Stow III, our chief
executive officer. Mr. Norman holds a B.S in Business Administration from
California State University and an M.B.A. from Loyola Marymount.

JAMES H. SMITH has served as our Executive Vice President, Customer Group since
November, 1999. From June 1997 to November 1999, Mr. Smith served as Chief
Operating Officer and Executive Vice

                                       48
<PAGE>   49

President of Sales and Marketing at ObjectShare Inc., a developer of
objected-oriented tools and services. From October 1995 to April 1997, Mr. Smith
served as Chief Operating Officer for Select Software Tools, a provider of
object-oriented application development tools and services. From July 1988 to
September 1995, Mr. Smith was Executive Vice President of Sales and Marketing at
Meridian Software (now Rational Software). Mr. Smith holds a Bachelor of Science
in Business and Marketing from the University of Rhode Island.

LYDIA J. PATTERSON has served as our Vice President, Products Group since
November 1999. Prior to joining us, Ms. Patterson was a Director of Marketing at
Rational Software from March 1999 to November 1999. From 1993 to 1999, Ms.
Patterson held several positions at SELECT Software including Senior Vice
President, Technology from April 1997 to March 1999, Vice President, Product
Marketing from January to April 1997, Vice President, Technical Services from
November 1995 to December 1997, and Vice President, Technical Marketing from
October 1994 to November 1995. Ms. Patterson received a B.Sc. in Computer
Science from the University of Cheltenham & Gloucester (U.K) and a Bachelor of
Education from the University of Liverpool (U.K.)

THOMAS M. BRATTVET has served as our Vice President, Sales since September 1999.
Prior to that he served as Executive Director of Corporate Business since
October 1998. Prior to joining us, Mr. Brattvet was Regional Vice President at
Novadigm for a three year period from May 1995 through September 1998. Mr.
Brattvet also served as western region sales executive at GUPTA (now Centura
Software) from January 1994 to May 1995. Mr. Brattvet holds a B.S. in Business
Administration from Ramapo College of New Jersey.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Act of 1934, as amended, requires the Company's
directors and executive officers, and persons who own more than ten percent of
the Company's Common Stock, to file with the Securities and Exchange Commission
(the "SEC") initial reports of ownership and reports of changes in ownership of
the Common Stock and other equity securities of the Company. To the Company's
knowledge, based solely on a review of the copies of such written
representations from its Directors and Executive Officers, there were no late or
delinquent filings.

INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS

No director or officer of the Company has within the last five years prior to
the date hereof, been subject to any penalties or sanctions imposed by a court
or securities regulatory authority relating to trading in securities, promotion
or management of a publicly traded issuer, theft or fraud.

No director or officer of the Company has within the last five years prior to
the date hereof, been declared bankrupt or made a voluntary assignment in
bankruptcy, nor made a proposal or been subject to any proceedings under any
legislation relating to bankruptcy or insolvency.

ITEM 11. EXECUTIVE COMPENSATION

GENERAL AND SUMMARY COMPENSATION TABLE

The following table sets forth certain summary information regarding
compensation paid or accrued by the Company to, or on behalf of, the Company's
Chief Executive Officer and the other most highly compensated executive officers
of the Company (the "Named Executive Officers"), for services rendered in all
capacities to the Company during the fiscal years ended March 31, 1998, 1999,
and 2000. Except as otherwise noted, no Named Executive Officer received any
restricted stock award, stock appreciation right or payment under any long-term
incentive plan.


                                       49
<PAGE>   50

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                    LONG TERM
                                                                                  COMPENSATION
                                                                                     AWARDS
                                                                                   SECURITIES
                                                      ANNUAL COMPENSATION          UNDERLYING       ALL OTHER
    NAME AND                                       ---------------------------      OPTIONS (1)    COMPENSATION
PRINCIPAL POSITION                     YEAR          SALARY            BONUS        (SHARES)          (6)
------------------                   ---------     ----------        ---------     -----------    -------------
<S>                                  <C>           <C>               <C>          <C>             <C>
William R. Stow III (2)                2000         $150,000           $1,000         35,000        $-
Chief Executive Officer, President     1999         $150,000           $-            152,000        $-
Chairman of the Board and              1998         $150,000           $-            249,790        $-
Director

Thomas M. Brattvet                     2000         $130,000           $1,000        100,000        $ 100,557
Vice President, Sales                  1999         $ 65,000           $-            142,500        $  25,680
                                       1998         $-                 $-                 --        $-

Donald R. Farrow (3)                   2000         $135,307           $1,000         85,000        $-
Executive Vice President and           1999         $141,538           $-             60,000        $-
Director
                                       1998         $150,000           $-            297,447        $-

Alan D. Kucheck (4)                    2000         $130,000           $31,000        65,000        $-
Vice President, Engineering            1999         $130,000           $37,824        25,000        $-
                                       1998         $120,833           $-            245,075        $-

Douglas S. Norman (5)                  2000         $105,000           $16,000        80,000        $-
Chief Financial Officer and            1999         $ 92,850           $28,587        30,000        $-
Assistant Secretary                    1998         $ 72,100           $-             91,700        $-
</TABLE>

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

(1)     Amounts represent stock options granted and/or repriced for the period
        shown.

(2)     Options granted during fiscal year 1998 include options to purchase
        156,666 shares of the our common stock, originally granted in prior
        years, that were repriced.

(3)     Options granted during fiscal year 1998 include options to purchase
        206,250 shares of the our common stock, originally granted in prior
        years, that were repriced.

(4)     Options granted during fiscal year 1998 include options to purchase
        175,667 shares of the our common stock, originally granted in prior
        years, that were repriced.

(5)     Option granted during fiscal year 1998 include options to purchase
        54,590 shares of the our common stock originally granted in prior years,
        that were repriced.

(6)     Amounts listed as All Other Compensation represent commissions earned or
        consulting fees.


                                       50
<PAGE>   51


The following table sets forth information concerning stock option grants made
during the year ended March 31, 2000, to named executive officers. No stock
appreciation rights were granted to such individual during the fiscal year. In
addition, in accordance with the rules and regulations of the Securities and
Exchange Commission, the following table set forth the hypothetical gains that
would exist for the options based on the assumption that our stock price were to
appreciate annually by 5% and 10%, respectively. The rates do not represent out
estimate or projection of future common stock prices and no assurance can be
given that the share price will appreciate at the rate shown in the table.

            OPTION/SAR GRANTS IN THE FISCAL YEAR ENDED MARCH 31, 2000

<TABLE>
<CAPTION>                                        INDIVIDUAL GRANTS                          POTENTIAL REALIZABLE
                                           -----------------------------                       VALUE AT ASSUMED
                           NUMBER OF                                                            ANNUAL RATES
                           SECURITIES      PERCENT OF TOTAL                                    OF STOCK PRICE
                           UNDERLYING        OPTIONS/SARs      EXERCISE                       APPRECIATION FOR
                          OPTIONS/SARs        GRANTED TO        OR BASE                         OPTION TERM
                            GRANTED         EMPLOYEES IN        PRICE      EXPIRATION     -------------------------
NAME                   (# OF SHARES) (1)   FISCAL YEAR (2)    ($/SH) (3)      DATE           5%($)         10%($)
-------------------    -----------------   ---------------    ----------   ----------     ----------     ----------
<S>                    <C>                 <C>                 <C>         <C>              <C>           <C>
William R. Stow III         35,000              *                2.05        9/22/09         44,945        114,067

Donald R. Farrow            50,000              *                1.32        11/3/09         40,896        104,214
                            35,000              *                2.05        9/22/09         44,945        114,067

Alan D. Kucheck             65,000              *                1.32        11/3/09         53,165        135,479

Thomas M. Brattvet         100,000              *                1.32        11/3/09         81,792        208,429

Douglas S. Norman           80,000              *                1.32        11/3/09         65,434        166,743
</TABLE>

-------

*   Less than 1%

(1) Options granted to purchase common stock. Generally, twenty-five percent of
    the options granted vest one year from the date of grant with the remaining
    options vesting in equal monthly increments over the following thirty-six
    months. Fifty percent of both the 35,000 options granted to Mr. Stow and the
    35,000 options granted to Mr. Farrow vest immediately upon grant with the
    remaining shares vesting in equal monthly increments over the following
    twelve months. In addition, 100% of the 50,000 options granted to Mr. Farrow
    vested on May 3, 2000. All of the options shown have a maximum term of ten
    years, subject to earlier termination following the optionee's cessation of
    service with the Company.

(2) We granted options to purchase a total of 7,167,508 shares of our common
    stock to employees, consultants and Board members and assumed a Premia
    Corporation option plan which provided the equivalent to purchase 270,084
    shares of our common stock during the year ended March 31, 2000.

(3) The exercise price may be paid in cash or in shares of common stock valued
    at fair market value on the exercise date.


                                       51
<PAGE>   52

OPTION EXERCISES, HOLDINGS AND FISCAL YEAR-END VALUES

The following table sets forth information concerning the number of shares
covered by both exercisable and unexercisable options held by each of the Named
Executive Officers as of March 31, 2000.

                 AGGREGATED OPTION EXERCISES IN FISCAL YEAR 2000
                     AND OPTION VALUES AS OF MARCH 31, 2000

<TABLE>
<CAPTION>
                                                                  NUMBER OF SECURITIES
                               SHARES                            UNDERLYING UNEXERCISED            VALUE OF UNEXERCISED
                              ACQUIRED                          OPTIONS AT MARCH 31, 1999         IN-THE-MONEY OPTIONS AT
                                ON             VALUE                 (# OF SHARES)                 MARCH 31, 2000 ($) (1)
                              EXERCISE        REALIZED        -----------------------------    ------------------------------
      NAME                      (#)             ($)           EXERCISABLE     UNEXERCISABLE    EXERCISABLE      UNEXERCISABLE
--------------------          -------         --------        -----------     -------------    -----------      -------------
<S>                          <C>              <C>            <C>              <C>              <C>              <C>
William R. Stow  III               --               --          343,520          118,270        2,795,460          987,214

Donald R. Farrow              100,000          798,162          247,415          120,032        1,987,828          970,356

Alan D. Kucheck                10,000          130,350          202,535          122,540        1,640,485          995,227

Thomas M. Brattvet                 --               --           49,374          193,126          426,489        1,610,261

Douglas S. Norman               5,000           45,800           78,583          118,117          644,419          966,929
</TABLE>
---------

(1) Calculated based on the closing price of the Company's Common Stock as
    reported on the NASDAQ SmallCap Market on March 31, 2000 of $9.375 per
    share, less the applicable exercise price.

BOARD COMPENSATION

Directors who are not our employee receive $1,000 per month, $1,000 per in
person Board meeting, $500 per each telephonic meeting and $500 per each
committee meeting in addition to reimbursement of travel expenses. In addition,
directors receive non-qualified stock option grants for shares of our common
stock. All options awarded to non-employee directors have an exercise price per
share at least equal to the market price of our common stock on the date of
grant. The options have a ten-year term.

In addition, Mr. Sullivan performed certain consulting services for which he was
compensated $2,000 during fiscal year 2000.

CHANGE IN CONTROL AGREEMENTS

We have change in control agreements with Messrs. William R. Stow III, Alan D.
Kucheck and Douglas S. Norman, Donald R. Farrow, and Thomas M. Brattvet. In the
event of termination, as a result of change of control, the executive shall be
entitled to receive his salary and any benefits for a period of twelve months.
Furthermore, all vested options will remain exercisable through the twelve month
period following the date of termination. Should a conflict exist, the terms and
conditions of the Plan shall govern. For purposes of the agreement, "Change in
control" means: (i) the direct or indirect sale or exchange in a single series
of related transactions by our stockholders of more than fifty percent of our
voting stock; (ii) a merger or consolidation in which we are a party and are not
the surviving entity; (iii) the sale, exchange, or transfer of all or
substantially all of our assets; or (iv) we are liquidated or dissolved.


                                       52
<PAGE>   53


COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The members of the Compensation Committee participate in all deliberations
concerning executive compensation. The Compensation Committee consists of
Messrs. Frank R. Caccamo, William R. Stow III, and Barry W. Sullivan. None of
our executive officers serve as a member of the board of directors or
compensation committee of any entity which has one or more executive officers
serving as a member of our board of directors.

                     REPORT OF THE COMPENSATION COMMITTEE ON
                             EXECUTIVE COMPENSATION

OVERVIEW AND PHILOSOPHY

The Compensation Committee of the Board of Directors is responsible for
developing and making recommendations to the Board of Directors with respect to
the Company's executive compensation policies. In addition, the Compensation
Committee, pursuant to authority delegated by the Board of Directors, determines
the compensation to be paid to the Chief Executive Officer and each of the other
executive officers of the Company.

The objectives of the Company's executive compensation program are to:

        -   Support the achievement of desired Company performance

        -   Provide compensation that will attract and retain superior talent
            and reward performance

The executive compensation program provides an overall level of compensation
opportunity that is competitive within the technology and software industries,
as well as with a broader group of companies of comparable size and complexity.

EXECUTIVE OFFICER COMPENSATION PROGRAM

The Company's executive officer compensation program is comprised of base
salary, long-term incentive compensation in the form of stock options, specific
performance-based bonuses and various benefits, including medical and pension
plans generally available to employees of the Company.

BASE SALARY

Base salary levels for the Company's executive officers are competitively set
relative to companies in the software industry. In determining salaries, the
Committee also takes into account individual experience and performance and
specific issues particular to the Company.

STOCK OPTION PROGRAM

The stock option program is the Company's long-term incentive plan for providing
an incentive to officers, directors, employees and others.

The 1996 Stock Option Plan authorizes the Compensation Committee to award
officers, directors, employees and others stock options. Options granted under
the Plan may be granted containing terms determined by the Committee, including
exercise period and price; provided, however, that the Plan requires that
exercise price may not be less than the fair market value of the Common Stock on
the date of the grant and the exercise period may not exceed ten years, subject
to further limitations.

In addition, the Company issues non-qualified stock options outside the 1996
Stock Option Plan. These are issued to a broad-based group in which most of the
options are granted to non-officer employees.

                                       53
<PAGE>   54

BENEFITS

The Company provides to executive officers, medical and pension benefits that
are generally available to Company employees.

BONUS

The Company may provide to certain executive officers bonuses based on
performance.

CHIEF EXECUTIVE OFFICER COMPENSATION

See Summary Compensation Table.


                                           Frank R. Caccamo
                                           William R. Stow III
                                           Barry W. Sullivan

                                           Members of the Compensation Committee


                                       54
<PAGE>   55

STOCK PERFORMANCE COMPARISON

The following graph compares the cumulative total stockholder returns for our
common stock with the cumulative total return of the Nasdaq Composite Index: US
and the Computer & Data Processing Index. The presentation assumes $100 invested
on March 31, 1995 in our common stock, the Nasdaq Composite Index: US and the
Computer & Data Processing Index with all dividends reinvested. No cash
dividends were declared on our common stock during this period. Stockholder
returns over the indicated period should not be considered indicative of future
stockholder returns.

                               [PERFORMANCE GRAPH]

<TABLE>
<CAPTION>

 Measurement Period          STARBASE   NASDAQ COMPOSITE   COMPUTER & DATA
(Fiscal Year Covered)      CORPORATION     INDEX: US      PROCESSING INDEX
-------------------------  -----------  ----------------  ----------------
<S>                        <C>          <C>               <C>
Measurement Pt. - 3/31/95       $100          $100              $100
FYE 3/29/96                     $233          $136              $142
FYE 3/31/97                      $67          $151              $155
FYE 3/31/98                     $162          $229              $271
FYE 3/31/99                      $85          $309              $442
FYE 3/31/00                     $471          $572              $799
</TABLE>


Notwithstanding anything to the contrary set forth in our previous filings under
the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934,
as amended, that might incorporate future filings, including this 10-K, in whole
or in part, the Board Compensation Committee Report on Executive Compensation
and the Stock Performance Comparison graph shall not be incorporated by
reference into any such filings.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth as of June 23, 2000 certain information regarding
the ownership of our voting securities by each stockholder known to the
management to be (i) the beneficial owner of more than 5% of our outstanding
common stock (ii) each of our Directors, (ii) the executive officers named in
the Summary Compensation Table herein under "Executive Compensation" and (iv)
all executive officers and directors as a group. Except as otherwise noted, we
believe that the beneficial owners of the common stock listed below, based on
information furnished by such owners, have sole investment and voting power with
respect to such shares.

                                       55
<PAGE>   56

To our knowledge there are no known beneficial holders of more than 5% of our
outstanding common stock.

<TABLE>
<CAPTION>
                                                               NUMBER OF SHARES OF         PERCENTAGE OF
NAME (1)                                                          COMMON STOCK             COMMON STOCK
-----------------------------------------------------          -------------------         -------------
<S>                                                            <C>                            <C>
William R. Stow III                                               1,023,448  (2)               2.2%
Donald R. Farrow                                                    337,669  (3)                 *
Thomas M. Brattvet                                                   64,218  (4)                 *
Alan D. Kucheck                                                     230,531  (5)                 *
Douglas S. Norman                                                   113,721  (6)                 *
Frank R. Caccamo                                                     93,541  (4)                 *
Daniel P. Ginns                                                     287,241  (7)                 *
Phillip E. Pearce                                                   143,541  (4)                 *
John R. Snedegar                                                    256,985  (8)                 *
Barry W. Sullivan                                                    93,541  (9)                 *
Total:  All directors and executive officers                      2,704,728 (10)               5.6%
</TABLE>

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

 *   Less than 1%

(1)  Except as otherwise noted, the persons named in the above table have sole
     voting and investment power with respect to all shares shown as
     beneficially owned by them, subject to community property laws where
     applicable. The address of each person named in the above table is in care
     of StarBase Corporation, 4 Hutton Centre Drive, Suite 800 Santa Ana, CA
     92707-8713.

(2)  Includes 33,882 shares of common stock held by Mr. Stow. Also includes
     573,119 shares of common stock held by Mr. Stow as trustee of the Stow
     Family Trust, of which 568,124 shares are subject to a Performance Escrow
     Agreement. Also includes 383,118 shares of common stock and 33,329 shares
     of common stock issuable upon the exercise of currently exercisable stock
     options by Mr. Stow and Mrs. Stow, respectively. Mr. Stow disclaims
     beneficial ownership of the shares exercisable by Mrs. Stow.

(3)  Includes 15,000 shares of common stock held by Mr. Farrow. Also includes
     322,669 shares of common stock issuable upon the exercise of currently
     exercisable stock options.

(4)  Represents shares of common stock issuable upon the exercise of currently
     exercisable stock options.

(5)  Includes 9,434 shares of common stock held by Mr. Kucheck. Also includes
     219,210 shares of common stock issuable upon the exercise of currently
     exercisable stock options and 1,887 shares of common stock issuable upon
     the exercise of warrants.

(6)  Includes 24,220 shares of common stock held by Mr. Norman of which 13,786
     shares are subject to a Performance Escrow Agreement. Also includes 87, 614
     shares of common stock issuable upon the exercise of currently exercisable
     stock options and 1,887 shares of common stock issuable upon the exercise
     of warrants.

(7)  Includes 163,200 shares of common stock held by Mr. Ginns and 5,500 shares
     of common stock held by Mrs. Ginns. Also includes 118,541 shares of common
     stock issuable upon the exercise of currently exercisable stock options.
     Mr. Ginns disclaims beneficial ownership of the shares held by Mrs. Ginns.

(8)  Includes 13,753 shares of common stock held by Mr. Snedegar; 1,191 shares
     of common stock held by Mr. Snedegar as trustee for the Snedegar Revocable
     Living Trust; 1,667 shares held by Norexco Petroleum of which Mr. Snedegar
     is President; and 83,501 shares held by Access Financial Limited

                                       56
<PAGE>   57

     of which Mr. Snedegar is the general partner. Also includes 156,873 shares
     of common stock issuable upon the exercise of currently exercisable stock
     options.

(9)  Includes 7,000 shares of common stock held by Mr. Sullivan. Also includes
     86,541 shares of common stock issuable upon the exercise of currently
     exercisable stock options.

(10) Includes a total of 938,314 shares of common stock, 3,774 shares of common
     stock issuable upon the exercise of warrants and 1,762,640 shares of common
     stock issuable upon exercise of stock options held by all directors and
     executive officers of the Company as a group that are currently
     exercisable.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

CERTAIN TRANSACTIONS

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. Principal and
accrued interest aggregated $99,087 and $94,259, at March 31, 2000 and 1999,
respectively. The loan is evidenced by a promissory note and is collateralized
by shares of the Company's common stock, which are owned by Mr. Stow. The note
bears interest at a rate of 6.34% per annum, payable at maturity. The maturity
date was originally November 4, 1998, and during the year ended March 31, 1999,
the maturity date on the note was extended to November 4, 2000.


                                       57
<PAGE>   58

                                     PART IV

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

(a)     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>
        3.1    Amended and Restated Certificate of Incorporation of the Company       (A)

        3.2    Amended and Restated Bylaws of the Company                             (B)

        4.1    Form of Registration Rights Agreement                                  (C)

        10.1   Accounts Receivable Purchase Agreement with Silicon Valley Bank        (D)

        10.2   Intellectual Property Security Agreement with Silicon Valley Bank      (D)

        10.3   Form of Securities Purchase Agreement                                  (C)

        10.4   Form of Warrant                                                        (C)

        10.5   Form of Warrant (Kaufman Brothers L.P.)                                (E)

        10.6   Agreement and Plan of Merger dated as of November 3, 1999 among
               StarBase Corporation, OBJS                                             (F)

               Acquisition Corp. and ObjectShare, Inc.

        10.7   Secured Promissory Note, dated November 3, 1999, from
               ObjectShare, Inc. to StarBase                                          (F)

               Corporation.

        10.8   Employment Agreement, dated November 3, 1999, between StarBase
               Corporation and James H. Smith.                                        (F)

        10.9   Lease, dated October 3, 1997 between ParcPlace Digitalk, Inc. and
               Hale Property Ltd., L.P.                                               (F)

        10.10  SubLease, dated March 26, 1997, between ParcPlace Digitalk, Inc.
               and Carollo Engineers, an                                              (F)

               Arizona partnership.

        10.11  Form of Stock Option Agreement granted to Messrs. James H. Smith,
               Eugene L. Goda and specific                                            (F)

               employees of ObjectShare, Inc. in connection with the merger.

        10.12  Lock Up Letter dated as of November 3, 1999 from James H. Smith.       (F)

        10.13  Stock Purchase Agreement, dated as of March 8, 2000, among
               StarBase, Premia and each of                                           (G)

               stockholders of Premia

        10.14  First Amendment to Lease with Starwood O.C. Portfolio I, LLC

        10.15  Agreement and Plan of Merger (By and among StarBase Corporation,
               Genitor Acquisition Corp., and Genitor Corporation)

        23.1   Consent of Deloitte & Touche LLP, Independent Auditors

        23.2   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-Q (file
               number 0-25612) filed with the Commission on August 16, 1999.

        (D)    Incorporated herein by reference to the Company's Form S-3 (file
               number 333-72833) filed with the Commission on April 19, 1999.

        (E)    Incorporated herein by reference to the Company's Form S-3 (file
               number 333-89687) filed with the Commission on October 26, 1999.

        (F)    Incorporated herein by reference to the Company's Form S-4 (file
               number 333-30260) filed with the Commission on February 11, 2000.

        (G)    Incorporated herein by reference to the Company's Form 8-K (file
               number 0-25612) filed with the Commission on March 23, 2000.


                                       58
<PAGE>   59

(b)     REPORTS ON FORM 8-K

In a report filed on Form 8-K, dated March 23, 2000, the Company reported the
acquisition of Premia Corporation.

In a report filed on Form 8-K, dated April 27, 2000, the Company reported the
acquisition of ObjectShare, Inc.


                                       59
<PAGE>   60

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 29th day of June,
2000.

                                               STARBASE CORPORATION

                                               By: /s/ Douglas S. Norman
                                                   -----------------------------
                                                       Douglas S. Norman
                                                       Chief Financial 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,                   June 29, 2000
-------------------------------                Chief Executive Officer,
    William R. Stow III                             and President
                                            (principal executive officer)


/s/ Donald R. Farrow                           Executive Vice President                  June 29, 2000
-------------------------------
    Donald R. Farrow


/s/ Phillip E. Pearce                                  Director                          June 29, 2000
-------------------------------
    Phillip E. Pearce


/s/ Daniel P. Ginns                                    Director                          June 29, 2000
-------------------------------
    Daniel P. Ginns


/s/ John R. Snedegar                                   Director                          June 29, 2000
-------------------------------
    John R. Snedegar


/s/ Frank R. Caccamo                                   Director                          June 29, 2000
-------------------------------
    Frank R. Caccamo


/s/ Barry W. Sullivan                                  Director                          June 29, 2000
-------------------------------
    Barry W. Sullivan
</TABLE>


                                       60
<PAGE>   61

                                 EXHIBIT INDEX

        10.14  First Amendment to Lease with Starwood O.C. Portfolio I, LLC

        10.15  Agreement and Plan of Merger (By and among StarBase Corporation,
               Genitor Acquisition Corp., and Genitor Corporation)

        23.1   Consent of Deloitte & Touche LLP, Independent Auditors

        23.2   Consent of PricewaterhouseCoopers LLP, Independent Accountants

        27     Financial data schedule