##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, DC 20549


Form 10-K

|                                |  |                                                                                   
|------------------------------- |  | ----------------------------------------------------------------------------------
|þ                               |  | ANNUAL REPORT UNDER SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
|                               
|                                |  | For the Fiscal Year Ended March 31,
    2002                                      
|                               
|Commission File Number: 0-25612

Starbase Corporation


(Exact name of Registrant as specified in its
charter)


|                                                                   |  |                                            
|------------------------------------------------------------------ |  | -------------------------------------------
|Delaware                                                           |  | 33-0567363                                 
|(State or Other Jurisdiction of
    Incorporation or Organization) |  | (I.R.S. Employer
    Identification Number)
|                                                                  
|4 Hutton Centre Drive, Suite 900
    Santa Ana, California         |  | 92707                                      
|(Address of principal executive
    offices)                       |  | (Zip code)                                 

(714) 445-4400

(Registrants telephone number, including
area code)


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 þ          No o

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.     o

The registrants revenues for its most
recent fiscal year: $45,371,000.

The aggregate market value of the voting stock
held by non-affiliates of the registrant as of May 31,
2002, based on the closing price as reported by Nasdaq was
$19,852,271.

Number of shares outstanding as of May 31,
2002: Common Stock: 87,371,444

DOCUMENTS INCORPORATED BY REFERENCE:

None.



---






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TABLE OF CONTENTS



|              |                                                                                               |                                                     |  |  |  |  |  | 
|------------- | --------------------------------------------------------------------------------------------- | --------------------------------------------------- |  |  |  |  |  | 
|PART I       
|              | Item 1. Business                                                                             
|              | Item 2. Properties                                                                           
|              | Item 3. Legal Proceedings                                                                    
|              | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II      
|              | Item 5. Market for Registrants Common Equity                                                
|              | Item 6. Selected Financial Data                                                              
|              | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|              | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                          
|              | Item 8. Financial Statements and Supplementary Data                                          
|              |                                                                                               | INDEPENDENT AUDITORS REPORT                       
|              |                                                                                               | CONSOLIDATED BALANCE SHEETS                        
|              |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS              
|              |                                                                                               | CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
|              |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS              
|              |                                                                                               | CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY    
|              |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS         
|              | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|PART III     
|              | Item 10. Directors and Executive Officers of the Registrant                                  
|              | Item 11. Executive Compensation                                                              
|              | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|              | Item 13. Certain Relationships and Related Transactions                                      
|PART IV      
|              | Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                    
|SIGNATURES   
|EXHIBIT INDEX
|EXHIBIT 10.11
|EXHIBIT 10.12
|EXHIBIT 10.13
|EXHIBIT 10.14
|EXHIBIT 21.1 
|EXHIBIT 23.1 



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TABLE OF CONTENTS

|         |  |                                                                                           |  |      |    | 
|-------- |  | ----------------------------------------------------------------------------------------- |  | ---- | -- | 
|         |  |                                                                                           |  | Page
|         |  |                                                                                           |  |     
|PART I  
|Item 1.  |  | Business                                                                                  |  |      | 2  | 
|Item 2.  |  | Properties                                                                                |  |      | 7  | 
|Item 3.  |  | Legal Proceedings                                                                         |  |      | 7  | 
|Item 4.  |  | Submission of Matters to a Vote of Security
    Holders                                   |  |      | 8  | 
|PART II 
|Item 5.  |  | Market for Registrants Common Equity                                                     |  |      | 8  | 
|Item 6.  |  | Selected Financial Data                                                                   |  |      | 9  | 
|Item 7.  |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |  |      | 11 | 
|Item 7A. |  | Quantitative and Qualitative Disclosures About
    Market Risk                            |  |      | 24 | 
|Item 8.  |  | Financial Statements and Supplementary Data                                               |  |      | 25 | 
|Item 9.  |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure  |  |      | 56 | 
|PART III
|Item 10. |  | Directors and Executive Officers of The Registrant                                        |  |      | 56 | 
|Item 11. |  | Executive Compensation                                                                    |  |      | 58 | 
|Item 12. |  | Security Ownership of Certain Beneficial Owners
    and Management                        |  |      | 65 | 
|Item 13. |  | Certain Relationships and Related Transactions                                            |  |      | 66 | 
|PART IV 
|Item 14. |  | Exhibits, Financial Statement Schedules, and
    Reports on Form 8-K                      |  |      | 67 | 

1



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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 us on the
date hereof, and we assume 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 provide software management tools and
professional consulting services to assist our customers in
managing their software development projects from beginning to
end (Application Lifecycle Management) and to allow them to
develop their software solutions and applications in a more
efficient manner. Our tools enable geographically dispersed
software developers to work as a team over corporate intranets
and the Internet. Our flagship product, StarTeam, focuses
primarily on supporting joint development efforts regardless of
the developers location. Our Caliber products provide
requirements management capabilities that help customers define
their software project and meet end-user needs. Our CodeWright
product helps our customers developers edit their software
code with ease. In addition, we provide or resell other products
to assist our customers with their software projects. Our
customers include management information systems executives,
software developers, sales and marketing personnel, graphic
designers and Webmasters.

Our address is 4 Hutton Centre Drive,
Suite 900, Santa Ana, CA 92707. Our registered office is in
the City of Wilmington, County of New Castle, Delaware. Our main
telephone number is (714) 445-4400. Our corporate Web site
is http://www.starbase.com. Our federal tax identification
number is 33-0567363.

Industry Overview



| |                                                      
| | -----------------------------------------------------
| | The Emergence of Application Lifecycle
    Management

As more and more businesses seek to become more
productive by running their companies utilizing software
applications, the nature of software applications has changed
from nice to have to mission or business critical.
Modern software applications have to meet many demands such as
reliability and availability for its users. They need to be
flexible enough to change when market conditions demand it. In
the past, software developers would simply design, code and
deploy the software with the majority of their time spent fixing
the implementation because it was neither designed properly up
front, coded for the task, nor tested adequately to ensure that
it was ready for deployment. In fact, many projects never were
completed. Properly implemented, a modern application lifecycle
management solution solves this problem.

2



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By combining the development disciplines of
software modeling, project requirements definition,
configuration management and version control along with testing
into a single cohesive implementation strategy, companies can
achieve significant benefits and return on investment. First,
software is delivered as specified based on a customers
initial input. This is often called the requirement definition
phase. Second, they can now create the application or service
needed and not create unnecessary software as part of their
project because the development teams have access to the
specified requirements. They can even be locked into developing
the required functionality and nothing more. Third, the product
or service being built is also being tested at every phase of
the project. This ensures that the end result will be an
efficient and reliable software product. Companies that have
chosen to implement an application lifecycle management solution
to their growing software needs reap the benefits of a true
lower cost of ownership for their software project. The savings
can be significant.

Companies are continually searching for ways to
improve their revenue and net income. Getting the most out of a
software investment, return on investment, is critical to every
business. Software projects that can be defined, developed,
deployed and tested on time with minimal disruption to an
organization can succeed where other approaches simply do not.



| |                                             
| | --------------------------------------------
| | The Challenges of Enterprise
    Development

The parameters for enterprise wide software
application development have changed. Developing applications
today is very different from developing traditional
client/server and mainframe software applications. There is an
overriding competitive need to bring applications to market
faster and to ensure the highest level of quality. Most
businesses now operate in several different locations and also
support remote workers. Development teams can be comprised of
several hundred contributors; many more than the traditional
software development team. In addition to the size and location
of team members, there is often a usability challenge to support
varying levels of technical skill.

Successfully addressing these challenges is the
critical factor in determining an enterprises success or
failure in building robust, maintainable systems in a
competitive timeframe. The skills, technology, dispersed teams,
deliverables, changes and variety of tools all have to be
managed.

The Starbase Solution

Our mission is simple: making development
successful for our customer base. To support this, we provide
enterprise management solutions that address the definition,
development and management of software applications. Our
combined approach of providing leading technology and
professional services enables our customers to speed the
application development lifecycle and to enhance the quality of
their applications.

Products

We provide teams and individuals with a solution
for managing the key stages in the software development
lifecycle: requirements management, analysis and design,
development, change & configuration management, build
management, testing and deployment. By providing this integrated
solution, we are able to support our customers need for
achieving fast adoption of our tools without impacting the
development process or forcing organizational changes.

Our proprietary products include: StarTeam,
CaliberRM, CaliberRM Professional, eXpressroom, CodeWright, as
well as partner products that we resell: Mercury Interactive
TestDirector, Embarcadero Describe, Software Productivity Center
Estimate Professional and Catalyst Openmake.

StarTeamis a fully
integrated configuration and change management system which
supports:



| |   |                           
| | - | --------------------------
| |  | File management including:



| |   |                 
| | - | ----------------
| |  | version control;
|
| |  | labels;         

3



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| |   |                   
| | - | ------------------
| |  | branching/merging;
|
| |  | rollback features;



| |   |                                                          
| | - | ---------------------------------------------------------
| |  | Change management (change requests);                     
|
| |  | Requirements management (integration with
    CaliberRM);
|
| |  | Topics and threaded discussion;                          
|
| |  | Project task management including:                       



| |   |                                                               
| | - | --------------------------------------------------------------
| |  | resource allocation;                                          
|
| |  | integration with Microsoft Project;                           
|
| |  | customizable workflow and process management
    capabilities.

StarTeam has an open Application Program
Interface (API) supporting both Java and COM scripting.

CaliberRMis a
web-based requirements management system that manages each
requirement as an object. This enables priorities, owners,
dependencies, versioning, requirements status and traceability
to other deliverables such as test cases, use cases design and
code to be achieved. The product also provides collaboration
capabilities such as group discussion, email notification, and
glossaries. It has an open Application Program Interface
(API) supporting both Java and COM scripting.

CaliberRM Professionalis a superset of CaliberRM, the most
significant difference being the integrated ad-hoc query,
reporting and online analytical processing capability.
Statistics can be created from within a single Caliber project
or across several different projects. The technology used to
achieve this is from Business Objects and is embedded as an
integral part of CaliberRM Professional. The current licensing
arrangement between Starbase and Business Objects enables the
technology to be used in conjunction with other application
lifecycle tools, as an example, collecting statistics and
analyzing data from StarTeam.

eXpressroomis a
Java, XML-based Web content management system. It separates
presentation from content from code using XML tagging. This
provides numerous benefits including write
once  deploy anywhere enabling rapid
re-branding and re-purposing of content to multiple devices
without rework. Integration with popular authoring environments
such as Word and Quark Express enable content contributors to
submit content from familiar environments without the need for
webmaster involvement. Processes can progress in parallel
avoiding bottlenecks.

CodeWrightis an
editing system for programmers that allows users to standardize
their development environment and alleviate the need to
continually learn the idiosyncrasies of a variety of development
graphical user interfaces (GUIs) and integrated development
environments (IDEs).

Roundtable Total Software Management Systemis 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 following is a list of our partners
products that we resell:

Mercury Interactive TestDirectoris an integrated management tool for
organizing and managing the testing process. It combines
planning, execution, defect tracking with a central repository
to manage the complete test process and determine application
readiness.

Embarcadero Describeis a visual modeling, object-oriented
analysis and design tool supporting the unified modeling
language (UML). Starting with existing source code,
Describes reverse engineering capabilities allow one to
create UML models that give you insight into what you currently
have, mapping

4



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relationships, objects, methods and properties.
Describe can be used to design a system starting from scratch,
followed by automatically generating code from the new UML-based
models.


Software Productivity Center Estimate
Professionalis a project estimation
tool. This tool uses a combination of COCOMO 2.0 and Putnam
estimation methodologies together with the Monte Carlo
simulation method to generate a range of possible schedule and
effort options. It builds a historical database to help predict
future estimates and uses industry data when users do not have
historical data. It also supports what-if scenarios
to examine the tradeoffs between different manpower, schedule,
features or cost options.

Catalyst Openmakeautomates the creation of applications
through the use of a repeatable build process. Openmake
integrates into the development process, ensuring that
executables are created the same way every time.

Professional Services

It is critical for any development organization
to deliver projects in a timely manner. Our Professional
Services improve our customers ability to repeatedly
deliver quality products on a faster timetable. By offering a
complete solution encompassing both product and services, we
believe we can improve the success of our customers
development efforts. Our Professional Services provide solutions
including:



| |                   
| | ------------------
| | General Consulting

We offer general consulting services to our
customer to assist them in crafting a full software development
process. Our expertise in project development and management
allows us to define processes for our customers whether they
have started to implement processes, or not had the opportunity
to do so.



| |         
| | --------
| | Training

We offer educational courses as part of our
comprehensive solution. We provide hands-on training and
real-world expertise surrounding our product and process
solutions. Our team of training experts also takes the time to
tailor our training specifically to the requirements of a
customers staff, workflow and Web strategy.

Our customers can receive training at their
offices, in public classes or electronically. We also train our
customers employees to become certified instructors by
using customized courseware development.

Worldwide Customer Support

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.

Sales and Marketing

We license and sell our product and services
through a direct corporate sales team organization. Each sales
team consists of an inside, telephone-based account executive
and an outside regional manager. Each sales team is also
assigned a local sales engineer that works with the team to
provide pre-sales technical support. Indirect sales channels,
consisting of our distributors, systems integrators, original
equipment manufacturers and value added resellers, enhance our
sales efforts.

We have an installed base of over 4,000 customers
who use our products for the development and management of
enterprise and web-based software applications. We have the
opportunity to leverage our existing customer base by cross
selling the combined solution of StarTeam and CaliberRM as well
as our entire family of products: CaliberRM Professional;
eXpressroom; and CodeWright; as well as partner products that we
resell: Mercury TestDirector; Embarcadero Describe; Software
Productivity Center Estimate professional; and Catalyst Openmake.

5



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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. 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 sales and distributor program
is firmly established and targets a wide variety of
dealers/distributors. We have established a European office in
the United Kingdom enabling us to provide more than 600 European
customers and 20 distributors with telephone support during
normal European business hours. We currently have a distributor
network that covers 25 countries throughout the world.
Annual sales targets, discounts, territorial coverage and
overall commitment vary by category and geographical region.

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, and public relations including press
and industry analysts. Our target audience includes software
development and MIS executives, software developers, business
executives, business analysts, project managers, sales and
marketing personnel, graphic designers and webmasters. Our
marketing strategy includes initiatives to increase our presence
and visibility in both the software development and business
community. Such initiatives include Internet and software
development 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 to 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 application
lifecycle management. Our research and development efforts are
focused on closer integrations between our StarTeam and Caliber
products, expanding our support for the .NET platform as well as
integrations with other products such as integrated development
environments and customer relationships management tools. Our
research and development expenses were $4.6 million,
$12.3 million and $14.5 million for the years ended
March 31, 2000, 2001 and 2002, respectively.

Competition

The market for enterprise application 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. Our primary sources of competition
are vendors of software that address code-based development,
such as Rational Software, MERANT, Perforce, Mortice Kern
Systems, Inc., Telelogic Corp. and Microsoft.

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

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



| |   |                                                                                     
| | - | ------------------------------------------------------------------------------------
| |  | the ability to access all application lifecycle
    assets from a single repository;
|
| |  | the ability to deliver custom workflow and data
    entry forms;                    
|
| |  | the ability to enforce development processes and
    rules;                         
|
| |  | the quality, security and reliability of the
    software product;                  
|
| |  | the ability of a geographically diverse team to
    collaborate on a project;       

6



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##### Table of Contents





| |   |                                                          
| | - | ---------------------------------------------------------
| |  | 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 patents
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, 2002, we had 247 full-time
employees. Of these employees, 30 were in Professional Services,
72 were in Research and Development, 33 were in Administration
and 112 were in Sales and Marketing. Our workforce is not
unionized and management believes that our relations with
employees are good.






|        |           
|------- | ----------
|Item 2. | Properties

Our principal administrative, sales, marketing,
support, and research and development facility is currently
located in approximately 43,000 square feet of space in Santa
Ana, California, under a lease that expires in September 2005.
We also lease 16,000 square feet in Beaverton, Oregon, under a
lease that expires in June 2003, which was assumed in the
acquisition of Premia Corporation, and 41,000 square feet in
Atlanta, Georgia, under a lease that expires in August 2005,
which was assumed in the acquisition of Technology Builders, Inc.

We also lease sales offices throughout the United
States including, Texas, Colorado, and Virginia. Our UK
subsidiary leases sales office space in the London metropolitan
area.






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

We are involved from time to time in a variety of
legal and administrative proceedings and claims that arise in
the ordinary course of business. While the outcome of these
claims cannot be predicted with certainty, we do not believe
that the outcome of any currently pending legal matters will
have a material adverse effect on us.

7



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##### Table of Contents








|        |                                                        
|------- | -------------------------------------------------------
|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 2002.




PART II






|        |                                          
|------- | -----------------------------------------
|Item 5. | Market for Registrants Common
    Equity

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.

|                 |                                  |      |   |       |  |  |   |      | 
|---------------- | -------------------------------- | ---- | - | ----- |  |  | - | ---- | 
|                 |                                  | High |   | Low  
|                 |                                  |      |   |      
|Fiscal Year 2001 |                                  |      |   |       |  |  |   |     
|                 | Quarter Ended June 30, 2000      |      | $ | 10.87 |  |  | $ | 2.18 | 
|                 | Quarter Ended September 30, 2000 |      | $ | 11.62 |  |  | $ | 4.59 | 
|                 | Quarter Ended December 31, 2000  |      | $ | 6.12  |  |  | $ | 1.93 | 
|                 | Quarter Ended March 31, 2001     |      | $ | 4.62  |  |  | $ | 1.97 | 
|Fiscal Year 2002 |                                  |      |   |       |  |  |   |     
|                 | Quarter Ended June 30, 2001      |      | $ | 3.65  |  |  | $ | 1.59 | 
|                 | Quarter Ended September 30, 2001 |      | $ | 3.59  |  |  | $ | 0.55 | 
|                 | Quarter Ended December 31, 2001  |      | $ | 0.78  |  |  | $ | 0.45 | 
|                 | Quarter Ended March 31, 2002     |      | $ | 0.75  |  |  | $ | 0.27 | 

As of March 31, 2002, based on information
received from the transfer agent of our common stock, the number
of stockholders of record was 1,310. We believe that there are
approximately 24,550 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 our common stock, if any, would be subject to the discretion
of the Board of Directors, which may consider factors such as,
but not limited to, our results of operations, financial
condition, capital needs and acquisition strategy. 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, 2002, our balance sheet
reflected an accumulated deficit of $179,770,000.

On February 14, 2002, we received a 30-day
deficiency notice from The Nasdaq Stock Market, Inc., for
failure to comply with the $1.00 minimum bid price per share for
the last 30 consecutive trading days. We transferred to the
Nasdaq SmallCap Market on May 28, 2002, in order to take
advantage of the longer 180-day cure period. If the price
deficiency is cured during the 180-day period, and we otherwise
continue to comply with the Nasdaq National Market maintenance
standards, we could then transfer back to the Nasdaq National
Market by February 10, 2003. If we do not comply with the
$1.00 minimum bid price at the end of the 180-day cure period,
we may also be eligible for an additional 180 calendar day
grace period provided we meet the initial listing criteria for
the Nasdaq SmallCap Market.

In November 2001, we entered into a convertible
debenture and warrant purchase agreement with various investors.
Pursuant to this agreement, the investors purchased an aggregate
of $3.0 million in 7% convertible debentures and warrants.
The purchase of the convertible debentures and warrants took
place in two tranches. The first tranche closed on
November 21, 2001 and the second tranche closed on
December 18, 2001. On December 21, 2001, we filed a
Form S-3 (file no. 333-75846) with the SEC, which was
declared effective on January 10, 2002, to register
19,672,983 share of our common stock that may be issued upon the
conversion of the convertible debentures and warrants and
incorporate this filing by reference. The issuance of convertible

8



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debentures was not registered under the
Securities Act of 1933 in reliance upon the exemption set forth
in Section 4(2) of that Act relating to transactions by an
issuer not involving a public offering.


In November 2001, we issued 120,759 shares of our
common stock to Worldweb LLC for settlement of litigation
resulting from our purchase of worldweb.net, Inc. These shares
are not registered.

On January 22, 2002, we filed a
Form S-3 (file no. 333-81206) with the SEC to register
5,637,138 shares of our common stock issued for satisfaction of
$2.5 million of liabilities. On May 24, 2002, we filed
Amendment No. 1 to Form S-3. As of the date of this
Report, the Form S-3 has not been declared effective.
Listed below are the names, issue dates and number of shares
related to this filing:

|                        |  |            |          |                  |  |  |           | 
|----------------------- |  | ---------- | -------- | ---------------- |  |  | --------- | 
|Name                    |  | Issue Date |          | Number of Shares
|                        |  |            |          |                 
|SG Cowen                |  |            | 12/10/01 |                  |  |  | 2,791,235 | 
|DHR International, Inc. |  |            | 12/21/01 |                  |  |  | 271,387   | 
|James R. Azar           |  |            | 12/28/01 |                  |  |  | 158,533   | 
|UBS Warburg LLC         |  |            | 1/22/02  |                  |  |  | 1,660,156 | 
|eRunway, Inc.           |  |            | 1/22/02  |                  |  |  | 400,473   | 
|Kurt Motamedi           |  |            | 1/22/02  |                  |  |  | 118,012   | 
|Jacob Sheftel           |  |            | 1/22/02  |                  |  |  | 189,873   | 
|                        |  |            |          |                  |  |  |           | 
|Total                   |  |            |          |                  |  |  | 5,589,669 | 




Item 6.     Selected
Financial Data

Our consolidated statements of operations data
for the years ended March 31, 1999, 2000, 2001 and 2002 and
the consolidated balance sheet data as of March 31, 1999,
2000, 2001 and 2002 have been derived from our consolidated
financial statements that have been audited by
Deloitte & Touche LLP, independent auditors, of which
March 31, 2000 (excluding balance sheet), 2001 and 2002 are
included herein. Our statements of operations data for the year
ended March 31, 1998 and the balance sheet data as of
March 31, 1998 have been derived from our financial
statements for those periods that have been audited by
PricewaterhouseCoopers LLP, independent accountants, and are not
included herein. The information set

9



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forth below in not necessarily indicative of the
results of future operations and should be read in conjunction
with the consolidated financial statements and the notes thereto.


|                                                                     |                                            |                                       |        |       |       |      |        |       |        |      |        |        |        |   |         |        |        |   |          |        |         | 
|-------------------------------------------------------------------- | ------------------------------------------ | ------------------------------------- | ------ | ----- | ----- | ---- | ------ | ----- | ------ | ---- | ------ | ------ | ------ | - | ------- | ------ | ------ | - | -------- | ------ | ------- | 
|                                                                     |                                            |                                      
|                                                                     |                                            | Year Ended March 31,                 
|                                                                     |                                            |                                      
|                                                                     |                                            | 1998                                  |        | 1999  |       | 2000 |        | 2001  |        | 2002
|                                                                     |                                            |                                       |        |       |       |      |        |       |        |     
|                                                                     |                                            |                                      
|                                                                     |                                            | (In thousands, except per share data)
|Consolidated Statement of Operations
    Data:                       |                                            |                                       |        |       |       |      |        |       |        |      |        |        |        |   |         |        |        |   |          |       
|Revenues:                                                            |                                            |                                       |        |       |       |      |        |       |        |      |        |        |        |   |         |        |        |   |          |       
|                                                                     | License                                    |                                       | $      | 1,863 |       |      | $      | 5,964 |        |      | $      | 14,486 |        |   | $       | 31,735 |        |   | $        | 26,601 |        
|                                                                     | Maintenance                                |                                       |        | 263   |       |      |        | 766   |        |      |        | 2,012  |        |   |         | 6,183  |        |   |          | 10,478 |        
|                                                                     | Service                                    |                                       |        | 13    |       |      |        | 102   |        |      |        | 1,034  |        |   |         | 3,722  |        |   |          | 8,292  |        
|                                                                     |                                            |                                       |        |       |       |      |        |       |        |      |        |        |        |   |         |        |        |   |          |       
|                                                                     |                                            | Total revenues                        |        |       | 2,139 |      |        |       | 6,832  |      |        |        | 17,532 |   |         |        | 41,640 |   |          |        | 45,371  | 
|Cost of revenues:                                                    |                                            |                                       |        |       |       |      |        |       |        |      |        |        |        |   |         |        |        |   |          |       
|                                                                     | License                                    |                                       |        | 162   |       |      |        | 508   |        |      |        | 1,042  |        |   |         | 1,330  |        |   |          | 5,160  |        
|                                                                     | Service                                    |                                       |        |      |       |      |        |      |        |      |        | 1,480  |        |   |         | 4,560  |        |   |          | 6,202  |        
|                                                                     | Amortization and write-down of intangibles |                                       |        |      |       |      |        |      |        |      |        | 94     |        |   |         | 2,426  |        |   |          | 8,844  |        
|                                                                     |                                            |                                       |        |       |       |      |        |       |        |      |        |        |        |   |         |        |        |   |          |       
|                                                                     |                                            | Total cost of revenues                |        |       | 162   |      |        |       | 508    |      |        |        | 2,616  |   |         |        | 8,316  |   |          |        | 20,206  | 
|                                                                     |                                            |                                       |        |       |       |      |        |       |        |      |        |        |        |   |         |        |        |   |          |       
|Gross margin                                                         |                                            |                                       | 1,977  |       |       |      | 6,324  |       |        |      | 14,916 |        |        |   | 33,324  |        |        |   | 25,165   |       
|Operating expenses:                                                  |                                            |                                       |        |       |       |      |        |       |        |      |        |        |        |   |         |        |        |   |          |       
|                                                                     | Research and development                   |                                       |        | 2,762 |       |      |        | 4,437 |        |      |        | 4,552  |        |   |         | 12,327 |        |   |          | 14,529 |        
|                                                                     | Sales and marketing                        |                                       |        | 3,423 |       |      |        | 7,638 |        |      |        | 9,097  |        |   |         | 21,888 |        |   |          | 27,498 |        
|                                                                     | General and administrative                 |                                       |        | 1,947 |       |      |        | 2,786 |        |      |        | 3,898  |        |   |         | 7,231  |        |   |          | 8,145  |        
|                                                                     | Non-cash equity based compensation         |                                       |        |      |       |      |        | 177   |        |      |        | 629    |        |   |         | 1,502  |        |   |          | 1,259  |        
|                                                                     | In-process research and development        |                                       |        |      |       |      |        |      |        |      |        | 2,130  |        |   |         | 1,200  |        |   |          |       |        
|                                                                     | Amortization and write-down of intangibles |                                       |        |      |       |      |        |      |        |      |        | 377    |        |   |         | 6,686  |        |   |          | 76,732 |        
|                                                                     |                                            |                                       |        |       |       |      |        |       |        |      |        |        |        |   |         |        |        |   |          |       
|                                                                     |                                            | Total operating expenses              |        |       | 8,132 |      |        |       | 15,038 |      |        |        | 20,683 |   |         |        | 50,834 |   |          |        | 128,163 | 
|                                                                     |                                            |                                       |        |       |       |      |        |       |        |      |        |        |        |   |         |        |        |   |          |       
|Operating loss                                                       |                                            |                                       | (6,155 | )     |       |      | (8,714 | )     |        |      | (5,767 | )      |        |   | (17,510 | )      |        |   | (102,998 | )     
|Interest and other income (expense)                                  |                                            |                                       | (877   | )     |       |      | 32     |       |        |      | 50     |        |        |   | 980     |        |        |   | (1,787   | )     
|                                                                     |                                            |                                       |        |       |       |      |        |       |        |      |        |        |        |   |         |        |        |   |          |       
|Loss before income taxes                                             |                                            |                                       | (7,032 | )     |       |      | (8,682 | )     |        |      | (5,717 | )      |        |   | (16,530 | )      |        |   | (104,785 | )     
|Provision for income taxes                                           |                                            |                                       | 1      |       |       |      | 1      |       |        |      | 1      |        |        |   | 22      |        |        |   | 128      |       
|                                                                     |                                            |                                       |        |       |       |      |        |       |        |      |        |        |        |   |         |        |        |   |          |       
|Net loss                                                             |                                            |                                       | (7,033 | )     |       |      | (8,683 | )     |        |      | (5,718 | )      |        |   | (16,552 | )      |        |   | (104,913 | )     
|Non-cash dividend and accretion of beneficial
    conversion feature |                                            |                                       | 2,832  |       |       |      | 1,277  |       |        |      | 549    |        |        |   |        |        |        |   |         |       
|                                                                     |                                            |                                       |        |       |       |      |        |       |        |      |        |        |        |   |         |        |        |   |          |       
|Net loss applicable to common stockholders                           |                                            | $                                     | (9,865 | )     |       | $    | (9,960 | )     |        | $    | (6,267 | )      |        | $ | (16,552 | )      |        | $ | (104,913 | )     
|                                                                     |                                            |                                       |        |       |       |      |        |       |        |      |        |        |        |   |         |        |        |   |          |       
|Basic and diluted net loss per share                                 |                                            | $                                     | (0.70  | )     |       | $    | (0.49  | )     |        | $    | (0.19  | )      |        | $ | (0.34   | )      |        | $ | (1.49    | )     
|Basic and diluted weighted average common shares
    outstanding     |                                            |                                       | 14,126 |       |       |      | 20,526 |       |        |      | 33,412 |        |        |   | 49,107  |        |        |   | 70,589   |       

|                           |  |                |       |      |  |      |       |      |  |      |        |  |  |   |         |  |  |   |        |  
|-------------------------- |  | -------------- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ------ |  |  | - | ------- |  |  | - | ------ | -
|                           |  |               
|                           |  | March 31,     
|                           |  |               
|                           |  | 1998           |       | 1999 |  | 2000 |       | 2001 |  | 2002
|                           |  |                |       |      |  |      |       |      |  |     
|                           |  |               
|                           |  | (In thousands)
|Balance Sheet Data:        |  |                |       |      |  |      |       |      |  |      |        |  |  |   |         |  |  |   |        |  
|Cash and cash equivalents  |  | $              | 4,167 |      |  | $    | 1,363 |      |  | $    | 11,448 |  |  | $ | 14,075  |  |  | $ | 1,530  |  
|Working capital (deficit)  |  |                | 3,632 |      |  |      | 2,308 |      |  |      | 11,429 |  |  |   | 1,381   |  |  |   | (3,007 | )
|Intangible assets, net     |  |                |      |      |  |      | 971   |      |  |      | 21,074 |  |  |   | 107,628 |  |  |   | 20,956 |  
|Total assets               |  |                | 5,682 |      |  |      | 6,605 |      |  |      | 42,213 |  |  |   | 149,038 |  |  |   | 36,487 |  
|Long-term liabilities      |  |                | 38    |      |  |      | 116   |      |  |      | 584    |  |  |   | 359     |  |  |   | 1,674  |  
|Total stockholders equity |  |                | 4,430 |      |  |      | 4,462 |      |  |      | 34,270 |  |  |   | 118,194 |  |  |   | 21,507 |  

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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 consolidated financial statements and the
notes thereto, included elsewhere in this Report. Certain
statements in this report, including statements regarding our
business strategies, operations, financial conditions and
prospects, are forward-looking statements. Use of the words
believe, expect, anticipate,
will, contemplate, would and
similar expressions that contemplate future events may identify
forward-looking statements.

Numerous important factors, risks and
uncertainties affect our operations and could cause actual
results to differ materially from those expressed or implied by
these or any other forward-looking statements made by us or on
our behalf. Readers are urged to carefully review and consider
the various disclosures made in this report, including those
described under Risk Factors, and in other filings
with the SEC, that attempt to advise interested parties of
certain risks and factors that may affect our business. Readers
are cautioned not to place undue reliance on these
forward-looking statements, which are based on current
expectations and reflect managements opinions only as of
the date thereof. We do not assume any obligation to revise or
update forward-looking statements except as may be required by
securities laws. Finally, our historic results should not be
viewed as indicative of future performance.

Critical Accounting Policies and
Estimates

The discussion and analysis of our financial
condition and results of our operations are based upon our
consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial
statements requires us to make estimates and judgments that
affect our reported assets, liabilities, revenues and expenses.
On an on-going basis, we evaluate our estimates, including those
related to revenue recognition, accounts receivable and
intangible assets. We base our estimates on historical
experience and on various other assumptions that are believed to
be reasonable under the circumstances. This forms the basis of
judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or
conditions. Our significant accounting policies are more fully
described in Note 1 to the consolidated financial
statements included elsewhere in this Report.

We believe the following critical accounting
policies and the related judgments and estimates affect the
preparation of our consolidated financial statements.



| |                    
| | -------------------
| | Revenue Recognition

Revenue is recognized if the criteria of
Statement of Position (SOP) 97-2, Software Revenue
Recognition,as amended, are met. If the arrangement does
not require significant production, modification, or
customization of software, revenue is recognized when all of the
following criteria are met:



| |   |                                              
| | - | ---------------------------------------------
| |  | Persuasive evidence of an arrangement exists.
|
| |  | Delivery (passage of title) has occurred.    
|
| |  | The vendors fee is fixed or determinable.   
|
| |  | Collectibility is probable.                  

License revenues from sales of software licenses
are recognized upon shipment of the related products and
transfer of title. Maintenance revenue is deferred and
recognized ratably over the contractual maintenance period,
generally one year. Service revenue from training and consulting
is recognized after the related services have been performed.

If the requirements of SOP 97-2, including
evidence of an arrangement, delivery, fixed or determinable fee,
collectibility, or vendor-specific objective evidence about the
value of an element are not met at the date of shipment, revenue
recognition is deferred until such elements are known or
resolved.

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License revenues from sales of software licenses
through indirect channels are recorded upon shipment when an
end-user purchase order has been obtained and collectibility is
assured on standard payment terms. No provision for estimated
returns is recorded, as historically such returns have been
minimal.



| |                    
| | -------------------
| | Accounts Receivable

We sell our products worldwide. We perform
ongoing credit evaluations of our customers and generally do not
require collateral. We maintain allowances for doubtful accounts
for estimated losses resulting from the inability of our
customers to make required payments. The amount of our reserves
is based on historical experience and our analysis of the
accounts receivable balances outstanding. If the financial
condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional
allowances may be required which would result in an additional
sales and marketing expense in the period such determination was
made. While such credit losses have historically been within our
expectations and the provisions established, we cannot guarantee
that we will continue to experience the same credit loss rates
that we have in the past.

During each quarterly fiscal period, we analyze
our accounts receivable and, more specifically, any accounts
that are past due, to determine their collectiblility. During
the six months ended September 30, 2001, our past due
accounts receivable increased as our customers payments
slowed due to the general softness in the economy and the
uncertainty following the events in September. As a result, we
increased our accounts receivable reserve by $910,000.

As of December 31, 2001, we experienced an
improvement in the timing of our customers payments, as
the general economy showed signs of recovery and our previously
noted past due accounts began to be repaid. As a result, we
decreased our accounts receivable reserve by $600,000.



| |                  
| | -----------------
| | Intangible Assets

We record goodwill arising from acquisition as
the excess of the purchase price over the fair value of the net
assets acquired and amortize the resulting goodwill on a
straight-line basis over five years. Developed technology,
assembled workforce and customer lists are recorded at appraised
value and amortized on a straight-line basis over two to five
years. In June 2001, the Financial Accounting Standards Board
(FASB) issued two new pronouncements: Statement of Financial
Accounting Standards (SFAS) No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 141 requires that the
purchase method of accounting be used for all business
combinations initiated after June 30, 2001. Goodwill and
certain intangible assets with indefinite lives will remain on
the balance sheet and not be amortized. On an annual basis, and
when there is reason to suspect that their values have been
diminished or impaired, these assets must be tested for
impairment, and write-downs may be necessary. We implemented
SFAS No. 141 on July 1, 2001. SFAS No. 142
changes the accounting for goodwill from an amortization method
to an impairment-only approach. Amortization of goodwill,
including goodwill recorded in past business combinations, will
cease upon adoption of this statement. We adopted SFAS
No. 142 on April 1, 2002. As a result, we have ceased
amortization of goodwill and assembled workforce, reducing
annual amortization expense by approximately $10.4 million.
We will continue to amortize developed technology and customer
lists over their remaining lives. We are evaluating the full
impact of adopting the new standards and we expect to complete
the transition impairment test for goodwill before
September 30, 2002. In addition, future impairment reviews
may result in charges against earnings to write-down the value
of intangible assets.

Due to the recent deterioration of the economy,
the decrease in IT spending, the lack of demand for the products
obtained in the worldweb.net acquisition and the significant
reduction in headcount during the 2000 fiscal year, we
determined that amounts recorded for goodwill, assembled
workforce and customer list were impaired and recognized
significant impairment charges in fiscal 2002. See Note 13
to the consolidated financial statements included elsewhere in
this Report for further discussion.

12



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Overview

We provide software management tools and
professional consulting services to assist our customers in
managing their development projects from beginning to end
(Application Lifecycle Management) and allowing them to develop
their software solutions and applications in a more efficient
manner. Our tools enable geographically dispersed software
developers to work as a team over corporate intranets and the
Internet. Information about our various products is provided
above under Item 1. Business.

Results of Operations

The following table summarizes our results of
operations as a percentage of total revenues for the years ended
March 31, 2000, 2001 and 2002.

|                                                                     |                                            |                          |       |      |       |      |       |      |       |  |        |       |       | 
|-------------------------------------------------------------------- | ------------------------------------------ | ------------------------ | ----- | ---- | ----- | ---- | ----- | ---- | ----- |  | ------ | ----- | ----- | 
|                                                                     |                                            |                         
|                                                                     |                                            | Year Ended March 31,    
|                                                                     |                                            |                         
|                                                                     |                                            | 2000                     |       | 2001 |       | 2002
|                                                                     |                                            |                          |       |      |       |     
|Revenues:                                                            |                                            |                          |       |      |       |      |       |      |       |  |        |      
|                                                                     | License                                    |                          |       | 82.6 | %     |      |       | 76.2 | %     |  |        | 58.6  | %    
|                                                                     | Maintenance                                |                          |       | 11.5 |       |      |       | 14.9 |       |  |        | 23.1  |      
|                                                                     | Service                                    |                          |       | 5.9  |       |      |       | 8.9  |       |  |        | 18.3  |      
|                                                                     |                                            |                          |       |      |       |      |       |      |       |  |        |      
|                                                                     |                                            | Total revenues           |       |      | 100.0 |      |       |      | 100.0 |  |        |       | 100.0 | 
|Cost of revenues:                                                    |                                            |                          |       |      |       |      |       |      |       |  |        |      
|                                                                     | License                                    |                          |       | 6.0  |       |      |       | 3.2  |       |  |        | 11.4  |      
|                                                                     | Service                                    |                          |       | 8.4  |       |      |       | 11.0 |       |  |        | 13.7  |      
|                                                                     | Amortization and write-down of intangibles |                          |       | 0.5  |       |      |       | 5.8  |       |  |        | 19.4  |      
|                                                                     |                                            |                          |       |      |       |      |       |      |       |  |        |      
|                                                                     |                                            | Total cost of revenues   |       |      | 14.9  |      |       |      | 20.0  |  |        |       | 44.5  | 
|                                                                     |                                            |                          |       |      |       |      |       |      |       |  |        |      
|Gross profit                                                         |                                            |                          | 85.1  |      |       |      | 80.0  |      |       |  | 55.5   |      
|Operating expenses:                                                  |                                            |                          |       |      |       |      |       |      |       |  |        |      
|                                                                     | Research and development                   |                          |       | 26.0 |       |      |       | 29.6 |       |  |        | 32.0  |      
|                                                                     | Sales and marketing                        |                          |       | 51.9 |       |      |       | 52.6 |       |  |        | 60.6  |      
|                                                                     | General and administrative                 |                          |       | 22.2 |       |      |       | 17.4 |       |  |        | 18.0  |      
|                                                                     | Non-cash equity based compensation         |                          |       | 3.6  |       |      |       | 3.6  |       |  |        | 2.8   |      
|                                                                     | In-process research and development        |                          |       | 12.1 |       |      |       | 2.9  |       |  |        |      |      
|                                                                     | Amortization and write-down of intangibles |                          |       | 2.2  |       |      |       | 16.0 |       |  |        | 169.1 |      
|                                                                     |                                            |                          |       |      |       |      |       |      |       |  |        |      
|                                                                     |                                            | Total operating expenses |       |      | 118.0 |      |       |      | 122.1 |  |        |       | 282.5 | 
|                                                                     |                                            |                          |       |      |       |      |       |      |       |  |        |      
|Operating loss                                                       |                                            |                          | (32.9 | )    |       |      | (42.1 | )    |       |  | (227.0 | )    
|Interest and other income (expense)                                  |                                            |                          | 0.3   |      |       |      | 2.4   |      |       |  | (3.9   | )    
|                                                                     |                                            |                          |       |      |       |      |       |      |       |  |        |      
|Loss before income taxes                                             |                                            |                          | (32.6 | )    |       |      | (39.7 | )    |       |  | (230.9 | )    
|Provision for income taxes                                           |                                            |                          | 0.0   |      |       |      | 0.1   |      |       |  | 0.3    |      
|                                                                     |                                            |                          |       |      |       |      |       |      |       |  |        |      
|Net loss                                                             |                                            |                          | (32.6 | )    |       |      | (39.8 | )    |       |  | (231.2 | )    
|Non-cash dividend and accretion of beneficial
    conversion feature |                                            |                          | 3.1   |      |       |      |      |      |       |  |       |      
|                                                                     |                                            |                          |       |      |       |      |       |      |       |  |        |      
|Net loss applicable to common stockholders                           |                                            |                          | (35.7 | )%   |       |      | (39.8 | )%   |       |  | (231.2 | )%   
|                                                                     |                                            |                          |       |      |       |      |       |      |       |  |        |      



| |                                              
| | ---------------------------------------------
| | Years Ended March 31, 2000, 2001 and
    2002



| |         
| | --------
| | Revenues

Revenues were $17.5 million,
$41.6 million and $45.4 million for 2000, 2001 and
2002, respectively, representing increases of
$24.1 million, or 137.5%, from 2000 to 2001, and
$3.8 million, or 9.0%, from 2001 to

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2002. One customer accounted for 11% of total
revenues for 2000, and no one customer accounted for 10% or more
of total revenues for 2001 and 2002. International revenues
accounted for less than 10% of total revenues in 2000, 2001 and
2002.


License
License revenues were $14.5 million, $31.7 million and
$26.6 million in 2000, 2001 and 2002, respectively,
representing an increase of $17.2 million, or 119.1%, from
2000 to 2001, and a decrease of $5.1 million, or 16.1%,
from 2001 to 2002. License revenues represented 82.6%, 76.2% and
58.6% of total revenues in 2000, 2001 and 2002, respectively.
The increase in license revenues from 2000 to 2001 was due to an
increase in market acceptance of our StarTeam product, an
expansion in our sales force along with the availability of new
products through the Premia, worldweb.net and Technology
Builders acquisitions. The main acquired products were
CodeWright, CaliberRM and eXpressroom. The decrease in license
revenues from 2001 to 2002 was due to decreased demand for our
StarTeam, CodeWright and eXpressroom products partially offset
by a full year of revenues from the sales of our CaliberRM
product and the third party products we resell, mainly the
Mercury products.

Maintenance
Maintenance revenues were $2.0 million, $6.2 million
and $10.5 million in 2000, 2001 and 2002, respectively,
representing increases of $4.2 million, or 207.3% from 2000
to 2001, and $4.3 million or 69.5% from 2001 to 2001.
Maintenance revenues represented 11.5%, 14.9% and 23.1% of total
revenues in 2000, 2001 and 2002, respectively. Maintenance
revenues entitle customers to technical support services and
product updates when and if available. Maintenance revenues are
recognized ratably over the contract period, typically one year.
The increase in maintenance revenues from 2000 to 2001 was due
to an increase in first year maintenance contracts associated
with the growth in product license sales along with maintenance
contract renewals paid by existing StarTeam and CodeWright
customers. The increase in maintenance revenues from 2001 to
2002 was due to the maintenance contract renewals paid by
StarTeam and CodeWright customers along with renewals from
customers for our acquired CaliberRM product.

Services
Services revenues were $1.0 million, $3.7 million and
$8.3 million in 2000, 2001 and 2002, respectively,
representing increases of $2.7 million, or 260.0%, from
2000 to 2001, and $4.6 million, or 122.8%, from 2001 to
2002. Services revenues represented 5.9%, 8.9% and 18.3% of
total revenues in 2000, 2001 and 2002, respectively. The
increases in services revenues were due to an increase in demand
for our training and consulting service from new and existing
customers. With our acquisition of TBI in February 2001, the
headcount of our services organization increased from twenty-one
to forty-seven. We also assumed $2.2 million of unperformed
services backlog. Both of these factors contributed to the
increase in services revenue from 2001 to 2002.



| |                 
| | ----------------
| | Cost of Revenues

License
License cost of revenues consists primarily of manufacturing and
related costs such as media, documentation, product assembly and
royalties. License cost of revenues was $1.0 million,
$1.3 million and $5.2 million in 2000, 2001 and 2002,
respectively, representing increases of $300,000, or 27.6%, from
2000 to 2001, and $3.9 million, or 288.0%, from 2001 to
2002. License cost of revenues as a percentage of license
revenues was 7.2%, 4.2% and 19.4% for 2000, 2001 and 2002,
respectively. The increase in license cost of revenues from 2001
to 2002 was due to royalty expenses relating to the acquired
Caliber product line along with the higher cost of third party
products, mainly Mercury, that we now resell. The decrease in
percentage from 2000 to 2001 was due to an increase in the
average size of our sales, thus requiring a fewer number of
manuals and media to be shipped.

Service
Service cost of revenues consists of costs associated with
performing training and consulting services. Service cost of
revenues was $1.5 million, $4.6 million and
$6.2 million in 2000, 2001 and 2002, respectively,
representing increases of $3.1 million, or 208.1%, from
2000 to 2001, and $1.6 million, or 36.0%, from 2001 to
2002. Service cost of revenues as a percentage of service
revenue was 143.1%, 122.5% and 74.8% for 2000, 2001 and 2002,
respectively. The increases in service costs were due to the
headcount increases in the training and consulting organization
along with costs related to the increase in personnel.

Amortization and write-down of
intangibles Amortization
and write-down of intangibles consist of the amortization of
developed technology associated with the Premia, Genitor,
worldweb.net and Technology

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Builders acquisitions. Amortization and
write-down of intangibles was $94,000, $2.4 million and
$8.8 million in 2000, 2001 and 2002, respectively,
representing increases of $2.3 million, or 2,480.1%, from
2000 to 2001, and $6.4 million, or 264.6% from 2001 to
2002. Amortization and write-down of intangibles as a percentage
of total revenue was 0.5%, 5.8% and 19.4% for 2000, 2001 and
2002, respectively. See Note 9 to consolidated financial
statements included elsewhere in this Report for more
information concerning the purchase price allocation associated
with acquisitions. As a result of the continuing deterioration
of the economy, the resulting decrease in IT spending and the
lack of demand for the products obtained in the worldweb.net
acquisition, during the quarter ended September 30, 2001,
we evaluated the recoverablility of the amounts recorded for
developed technology acquired in the worldweb.net acquisition.
We compared the carrying amounts of intangible assets to current
cash flow forecasts and the original cash flow forecasts at the
date of acquisition and determined that the amounts recorded for
developed technology were impaired. As a result, during the
quarter ended September 30, 2001 we wrote down the value of
developed technology by $2.7 million. The remaining amount
related to developed technology acquired in the worldweb.net
acquisition at March 31, 2002 is $298,000.




| |                   
| | ------------------
| | Operating Expenses

Research and
development Research and
development expenses were $4.6 million, $12.3 million
and $14.5 million in 2000, 2001 and 2002, respectively,
representing increases of $7.7 million, or 170.8%, from
2000 to 2001, and $2.2 million, or 17.9%, from 2001 to
2002. The increases for these periods were related to an
increase in headcount and related expenses associated with an
increase in software developers and quality assurance personnel
as a result of our acquisitions, along with the cost of hiring
outside contractors to support product development activities.
Research and development expenses for 2001 include a one-time
expense of $1.7 million associated with technology purchase
from a related party, eCollaboratory.

Sales and
marketing Sales and
marketing expenses were $9.1 million, $21.9 million
and $27.5 million in 2000, 2001 and 2002, respectively,
representing increases of $12.8 million, or 140.6%, from
2000 to 2001, and $5.6 million, or 25.6%, from 2001 to
2002. The increases for these periods were related to the
increase in headcount and related expenses incurred in expanding
our sales teams through acquisitions and new hires.

General and
administrative General and
administrative expenses were $3.9 million,
$7.2 million and $8.1 million in 2000, 2001 and 2002,
respectively, representing increases of $3.3 million, or
85.5%, from 2000 to 2001, and $900,000, or 12.6%, from 2001 to
2002. The increases for these periods were related to the
increase in headcount and related expenses incurred as a result
of our acquisitions. General and administrative expenses for
2002 include $150,000 notes receivable allowance for the loan
made to Mr. Phillip Pearce, a member of our Board of
Directors.

Headcount
reductions In October
2001, we implemented a reduction in headcount because our
revenues and operating results had decreased dramatically. Our
second quarter revenue was down 13% sequentially and our
operating loss before impairment charges was $5.4 million.
We experienced the continuing deterioration of the economy, the
resulting decrease in IT spending and the lack of demand for the
products obtained in the worldweb.net acquisition. Since our
expenses related to personnel are approximately 60% to 65% of
our total expenses, we realized that we had to reduce the
workforce in order to reduce our overall expenses. Accordingly,
we eliminated all worldweb.net related personnel costs except
for the costs associated with a small group of engineers who are
located in Virginia. The October headcount reduction resulted in
a reduction of 67% of the eXpressroom product line related
personnel and 60% of their salary expenses. In addition, we also
analyzed the operations of the entire company to determine if we
had any redundant operations that could be eliminated in order
to further reduce our expenses. We estimate that we will save
approximately $3.6 million on an annualized basis as a
result of the October reduction in workforce.

For the quarter ended December 31, 2001, we
continued to experience operating losses. Therefore, we
determined that further organizational restructuring was
necessary, that resulted in the termination of an additional 34
positions in January 2002. Most of the reductions were in the
sales and research and development departments. In addition, we
consolidated our marketing departments so that all marketing was

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performed from our headquarters in Santa Ana,
California. We will save approximately $3.2 million on an
annualized basis as a result of the January 2002 reduction.


In both the October 2001 and January 2002
reductions, we paid out severance based on the employees
length of service. The severance payout for the October
reduction was approximately $188,000 and the January reduction
was approximately $107,000. The severance was paid out of cash
from our savings account.

These actions had the immediate effect of
reducing on-going expenses and such expenses reductions are
expected to continue throughout at least the remainder of fiscal
2003. In addition, since the revenues generated from the
individuals that were terminated have not been significant, we
do not believe that these reductions will have a material effect
on our future operating results.

Non-cash equity based
compensation Non-cash
equity based compensation was $629,000, $1.5 million and
$1.3 million in 2000, 2001 and 2002, respectively,
representing an increase of $900,000, or 138.8%, from 2000 to
2001, and a decrease of $200,000, or 16.2%, from 2001 to 2002.
Non-cash equity based compensation expense represents the fair
market value of stock options and warrants granted to
non-employees of our common stock at the date of the grant
amortized over the vesting period.

In-process research and
development In-process
research and development was $2.1 million and
$1.2 million for 2000 and 2001, respectively, representing
a decrease of $900,000, or 43.7%. In-process research and
development was based upon the discounted expected future net
cash flows of the products over the products expected
lives, reflecting the estimated state of completion of the
projects and the estimate of the costs to complete the projects.
In-process research and development projects for 2001 were a
result of the Technology Builders acquisition. New project
developments underway at Technology Builders at the time of
acquisition included, among other things, CaliberRM 4.0 and
eCaliber. We estimated that the percent of completion of these
projects at the date of acquisition was 41% and 54%
respectively, and that the cost to complete these projects will
aggregate approximately $650,000 and will be incurred over a
two-year period. At March 31, 2002, we estimated the
completion of these projects was 100% and 54% respectively. Due
to market conditions and our current operating performance, we
stopped further development of eCaliber and may ultimately
terminate further development. In-process research and
development projects for 2000 were a result of Premia
acquisition. 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 of
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. At March 31,
2002, the Company estimated the completion of these projects was
100%, 100%, 55% and 69%, respectively. Due to market conditions
and our current operating performance, we stopped further
development of DocWright 4.5 and TrackWright 1.0 and
may ultimately terminate further development.

Amortization and write-down of
intangibles Amortization
and write-down of intangibles was $373,000, $6.7 million
and $76.7 million for 2000, 2001 and 2002, respectively.
This included amortization of goodwill, customer list and
assembled workforce associated with the SITE, Premia,
ObjectShare, worldweb.net, and Technology Builders acquisitions.
See Note 9 to the consolidated financial statements
included elsewhere in this Report for more information
concerning the purchase price allocation associated with the
acquisitions.

As a result of the continuing deterioration of
the economy, the resulting decrease in IT spending and the lack
of demand for the products obtained in the worldweb.net
acquisition, during the quarter ended September 30, 2001,
we compared the carrying amounts of goodwill acquired in the
worldweb.net and ObjectShare acquisitions to current cash flow
forecasts and the original cash flow forecasts at the date of
acquisitions and determined that the amounts recorded for
goodwill were impaired. As a result, we wrote-down the value of
goodwill related to worldweb.net by $23.4 million and the
value of goodwill related to ObjectShare by $7.7 million.
We compared the carrying amount of customer lists acquired in
the TBI acquisition to current cash flow forecasts and the
original cash flow forecasts at the date of acquisition and
determined that the amount recorded for customer lists was
impaired. As a result, we wrote down the value of customer lists
related to TBI by $792,000. We also wrote-down the values
recorded for assembled workforce

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related to worldweb.net and TBI by $859,000 and
$838,000, respectively, to reflect the substantial reduction in
workforce.


Prior to December 31, 2001, all of our
goodwill was specifically related to a particular acquisition.
Subsequent to December 31, 2001, we reorganized our
operations for all acquired companies and any remaining goodwill
became enterprise level goodwill, as the operations for the
acquisitions were integrated and no longer separately tracked.
During the quarter ended March 31, 2002, we evaluated
whether an impairment of this enterprise goodwill existed by
comparing the book value of our stockholders equity to the
product of (i) the number of shares of our common stock
issued and outstanding at the end of the quarter and
(ii) the market price of our common stock at the end of the
quarter (market approach). If the product of shares and market
price exceeds the book value, impairment does not exist. If the
product of shares and market price is less than book value, we
would evaluate whether the condition is other than temporary
based primarily on fluctuations in our stock price. If we
determine that the indicated goodwill impairment is other than
temporary, an impairment charge is recorded for the excess of
book value over fair value. As a result of this analysis, we
determined that enterprise goodwill was impaired and recorded an
additional goodwill impairment charge of $26.8 million. In
addition, during the quarter ended March 31, 2002, we wrote
down the value recorded for assembled workforce related to TBI
by $264,000 to reflect the further reduction in workforce.

Interest and other income
(expense) Interest and
other income (expense) was $50,000, $980,000 and
$(1.8 million) in 2000, 2001 and 2002, respectively,
representing an increase of $930,000 from 2000 to 2001, and a
decrease of $2.8 million from 2001 to 2002. The increase
from 2000 to 2001 is due to higher interest income resulting
from more cash being available to invest. Interest and other
income in 2000 includes an expense of $250,000 as a result of
equity loss from investee (OpenAvenue Inc.). The decrease from
2001 to 2002 is due to lower interest income resulting from less
cash being available to invest along with the interest expense
related to the convertible debentures issued during fiscal 2002.

Provision for income
taxes We have incurred
minimal income taxes in 2000, 2001 and 2002 due to our
cumulative losses. As of March 31, 2002, we have net
operating loss (NOL) carryforwards of approximately
$170 million and $42 million for federal and state
income tax purposes. The NOL carryforwards are available to
offset future taxable income at varying amounts through the year
2022. At March 31, 2002, a 100% valuation allowance has
been provided on the net deferred tax assets since we cannot
determine that such amounts 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, 2000 was $6.3 million, consisting of our net
loss for the year of $5.8 million and $549,000 of non-cash
dividends and accretion of the beneficial conversion feature of
preferred stock. Net loss applicable to common stockholders for
the year ended March 31, 2001 was $16.6 million,
consisting of our net loss for the period. Net loss applicable
to common stockholders for the year ended March 31, 2002
was $104.9 million, consisting of our net loss for the
period.



| |          
| | ---------
| | Inflation

Inflation has not had a significant effect on our
results of operations or financial position for the years ended
March 31, 2000, 2001 and 2002.

Liquidity and Capital Resources

We have funded our business, to date, primarily
from the issuance of equity and debt securities. Cash and cash
equivalents as of March 31, 2002 were $1.5 million. At
March 31, 2002, we had negative working capital of
$3.0 million.



| |                                        
| | ---------------------------------------
| | Years Ended March 31, 2001 and
    2002

Net cash used in operating activities was
$4.4 million and $15.6 million in 2001 and 2002,
respectively. The increase was due to an increase in loss from
operations and a decrease in accounts payable and accrued

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liabilities, offset by an increase in write-down
of intangible assets, depreciation and amortization expense and
a decrease in accounts receivable.


Net cash provided by (used in) investing
activities was $(8.8 million) and $186,000 in 2001 and
2002, respectively. The increase in cash provided by investing
activities was due to a decrease in capital expenditures,
restricted cash, and cash paid for acquisitions, net of cash
received.

Net cash provided from financing activities was
$15.8 million and $2.9 million in 2001 and 2002,
respectively. In 2001, we raised $17.5 million from the
sale of common stock, $2.6 million from the exercise of
stock options and $428,000 from the exercise of warrants. In
2002, we raised $3.0 million from the sale of convertible
debentures and $700,000 from the exercise of stock options.

On June 29, 2001, we entered into a Loan and
Security Agreement with Silicon Valley Bank with a committed
revolving line of up to $5.0 million at an interest rate
equal to one-half percentage point above the Prime Rate, but
never lower than seven percent. The line of credit requires that
we maintain the following financial covenants: on a monthly
basis, a ratio of quick assets to current liabilities less
deferred revenue of at least 1.00; and a loss, based on earnings
before interest, taxes, depreciation and other non-cash
amortization expenses (EBITDA) of no greater than
$2.0 million for the fiscal quarter ended June 30,
2001, and of no greater than $500,000 for each fiscal quarter
thereafter, provided that we shall attain positive EBITDA for
the fiscal year ending March 31, 2002. During the three
months ended December 31, 2001, we paid off and terminated
the line of credit agreement.

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

On November 20, 2001, we entered into a
convertible debenture and warrant purchase agreement with
various investors. Pursuant to this agreement, the investors
purchase an aggregate of $3,000,000 in 7% convertible
debentures and warrants. The purchase of the convertible
debentures and the warrants took place in two tranches. The
first tranche closed on November 21, 2001 and the second
tranche closed on December 18, 2001. The convertible
debentures are due three years from the date of issuance and are
convertible into shares of our common stock at a conversion rate
equal to the lesser of $0.594 or 80% of the average of the five
lowest closing bid prices of the common stock as traded on the
Nasdaq National Market System for the ten trading days ending on
the trading day immediately before the day the notice of
conversion is submitted. Such conversion feature represents a
beneficial conversion as such conversion amounts are less than
the fair market value of our common stock at the date of
issuance. The intrinsic value of the beneficial conversion
feature was $1,584,734 based on the relative beneficial
conversion amounts and was immediately expensed as interest
expense. We also issued warrants to the investors to purchase
2,199,074 shares of common stock that are exercisable at $0.65
per share and expire on November 20, 2006. The fair value
of these warrants, using the Black-Scholes model at the date of
grant, was $1,287,605 and was recorded as non-cash equity
compensation during the three months ended December 31,
2001. The assumptions used in the Black-Scholes model were as
follows: no dividend yield; 3.97% interest rate; five years
expected life; and volatility of 110%.

Also in connection with the issuance of the
convertible debentures, we paid $190,000 in cash and issued an
additional $150,000 of convertible debentures on the same terms
as described above and issued 578,703 warrants to purchase
additional shares of common stock for placement agent fees.
These fees are recorded in other non-current assets and will be
amortized over the term of the debentures. The warrants are
exercisable at $0.65 per share and expire on December 17,
2006. The fair value of these warrants, using the Black-Scholes
model at the date of grant, was $127,661 and was recorded in
other non-current assets and will be amortized over the term of
the debentures. The assumptions used in the Black-Scholes model
were as follows: no dividend yield; 3.97% interest rate; five
years expected life; and volatility of 110%.

Management believes, based upon projected
operating needs, that our working capital is insufficient for us
to maintain our current level of operating activities through
March 31, 2003. We have also experienced recurring losses
from operations and have negative working capital at
March 31, 2002. These factors, among

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others, raise substantial doubt about our ability
to continue as a going concern. On May 22, 2002, we entered
into a definitive agreement to raise approximately
$12.0 million through the sale of convertible preferred
stock and warrants to institutional investors in a private
placement. We filed a Proxy Statement on June 29, 2002, and
will seek stockholder approval for the financing, which also
requires that stockholders approve a one-for-ten reverse stock
split at a special meeting of stockholders, to be held on
July 29, 2002, and called for those purposes. In connection
with the financing and giving effect to the reverse stock split,
we have agreed to issue to the investor group new preferred
stock, convertible into between 4.8 and 6.0 million shares
of our common stock, and 5-year warrants to purchase
2.4 million shares of our common stock at $2.50 per share.
The funding is contingent on the approval of the private
placement by stockholders and consummation of the reverse split.
Proceeds of the financing will be used for working capital.
Management believes that with the completion of the
$12 million financing, we will have sufficient working
capital to fund our operations through at least March 31,
2003. While we have successfully raised equity capital in the
past, there can be no assurance that we will be successful in
our efforts to obtain additional financing in the future.


New Accounting Pronouncements

In June 2001, the Financial Accounting Standards
Board (FASB) issued two new pronouncements: Statement of
Financial Accounting Standards (SFAS) No. 141,
Business Combinations,and SFAS No. 142, Goodwill
and Other Intangible Assets.SFAS No. 141 requires that
the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. Goodwill and
certain intangible assets will remain on the balance sheet and
not be amortized. On an annual basis, and when there is reason
to suspect that their values have been diminished or impaired,
these assets must be tested for impairment, and write-downs may
be necessary. We implemented SFAS No. 141 on July 1,
2001. Such adoption had no impact on our consolidated financial
position or results of operations though March 31, 2002.
SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001 and changes the accounting for goodwill
from an amortization method to an impairment-only approach.
Amortization of goodwill, including goodwill recorded in past
business combinations, will cease upon adoption of this
statement. We adopted SFAS No. 142 on April 1, 2002.
As a result, we have ceased amortization of goodwill and
assembled workforce, reducing annual amortization expense by
approximately $10.4 million. We will continue to amortize
developed technology and customer lists over their remaining
lives. We are evaluating the full impact of adopting the new
standards and expect to complete the transition impairment test
for goodwill before September 30, 2002. In addition, future
impairment reviews may result in charges against earnings to
write-down the value of intangible assets.

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

Risk Factors

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

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

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Risks Associated with the Company



| |                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We Have a History of Losses and We Expect
    to Incur Future Losses If We Are Unable to Successfully and Cost
    Effectively Develop, Market and Distribute Our
    Products

Since our inception, we have had a history of
losses and, as of March 31, 2002, we had an accumulated
deficit of $179,770,000. Further, the cash requirements to run
our business have been and will continue to be significant. In
the past, we had negative cash flow from operations. We
anticipate incurring additional losses until we can successfully
develop, market and distribute our products. Developing our
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. If
our personnel and third parties are unable to work together and
coordinate their efforts in order to quickly and
cost-efficiently develop our products, the development process
may encounter delays, which could lead to increased operating
expenses and future losses. The likelihood of the success of our
business must be considered in light of the problems, expenses,
difficulties, complications and unforeseen delays frequently
encountered in connection with the development of new software
technologies. Further, our ability to achieve or sustain our
revenue or profit goals depends on a number of factors outside
of our control, including the extent to which:



| |   |                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------
| |  | there is market acceptance of commercial services
    utilizing our products;                       
|
| |  | our competitors announce and develop competing
    products or significantly lower their prices; and
|
| |  | our customers promote our product.                                                                  



| |                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If We Are Unable to Achieve Positive
    Operating Results, We May Need to Raise Additional Capital and
    May Not Be Able to Continue to Operate as a Going
    Concern

In the past, we have used cash from outside
financing to fund our operations. If we cannot achieve positive
operating results and positive cash flow, we may need to raise
additional funds. There can be no assurances that funds may be
raised on acceptable terms or when needed, 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. If we are unable to achieve positive operating
results and are unable to raise additional funds, we may need,
among other things, to sell our assets, to further reduce our
workforce or to close facilities.

At March 31, 2002, our current capital
resources were $9.5 million and consisted of
$1.5 million of cash and $8.0 million of accounts
receivable. We also had $6.7 million in liabilities that
will need to be paid with cash and negative working capital of
$3.0 million.

Management believes, based upon projected
operating needs, that our working capital is insufficient to
maintain our current level of operating activities through
March 31, 2003. We have also experienced recurring losses
from operations and have negative working capital at
March 31, 2002. These factors, among others, raise
substantial doubt about our ability to continue as a going
concern. On May 22, 2002, we entered into a definitive
agreement to raise approximately $12.0 million through the
sale of convertible preferred stock and warrants to
institutional investors in a private placement. We filed a Proxy
Statement on June 29, 2002, and will seek stockholder
approval for the financing, which also requires that
stockholders approve a one-for-ten reverse stock split at a
special meeting of stockholders, to be held on July 29,
2002, and called for those purposes. In connection with the
financing and giving effect to the reverse stock split, we have
agreed to issue to the investor group new preferred stock,
convertible into between 4.8 and 6.0 million shares of our
common stock, and 5-year warrants to purchase 2.4 million
shares of our common stock at $2.50 per share. The funding is
contingent on the approval of the private placement by
stockholders and consummation of the reverse split. Proceeds of
the financing will be used for working capital.

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| |                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We Have Previously Incurred and May Incur
    Future Impairment Losses Related to Intangible Assets from Prior
    Acquisitions Which Could Negatively Affect Our Future Operating
    Results

During the year ended March 31, 2002, we had
an impairment write-down of $64.8 million related to intangible
assets from prior acquisitions. If our operating performance and
the overall market environment do not improve, we may incur
additional write-downs of our remaining intangible assets that
could adversely affect our financial position, our operating
results and our ability to raise additional financing.



| |                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------
| | We Rely Heavily on Sales of StarTeam and If
    It Does Not Sustain Market or It Decreases in Acceptance, We Are
    Likely to Experience Larger Losses

For the year ended March 31, 2002, we
generated 42% of our total revenues and 52% 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.



| |                                                                                                          
| | ---------------------------------------------------------------------------------------------------------
| | 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.



| |                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If We Are Unable to Further Integrate the
    Operations of Technology Builders, Inc., We May Not Be Able to
    Successfully Continue to Develop and Market Technology
    Builders Products and Our Revenues May
    Suffer

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



| |   |                                                                                               
| | - | ----------------------------------------------------------------------------------------------
| |  | successfully integrate and manage its technology
    and operations;                          
|
| |  | retain its software developers;                                                               
|
| |  | develop and market new products and enhance
    existing products based on its technology; and
|
| |  | retain its customer base.                                                                     

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

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Risks Associated With the Industry



| |                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We Face Intense Competition for Application
    Software Which Could Make It Difficult for Us to Acquire and
    Retain Customers and Adversely Affect Our Operating
    Results

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

Competitive pressures may make it difficult for
us to acquire and retain customers and may require us to reduce
the price of our software in order to attract new customers and
keep existing customers. If we have to reduce the purchase price
of our software, our revenues may decrease. 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.



| |                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------
| | If We Fail to Establish and Maintain
    Strategic Relationships, the Market Acceptance of Our Products
    and Our Financial Performance May Suffer

To date, the majority of our revenue came from
our direct sales efforts. 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 Have Limited Experience Conducting
    Operations Internationally, Which May Make Overseas Expansion
    More Difficult and Costly

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



| |   |                                                                                          
| | - | -----------------------------------------------------------------------------------------
| |  | costs of customizing products for foreign
    countries;                                 
|
| |  | foreign currency risks;                                                                  
|
| |  | dependence on local vendors;                                                             
|
| |  | compliance with multiple, conflicting and
    changing governmental laws and regulations;
|
| |  | longer sales cycles; and                                                                 
|
| |  | import and export restrictions and tariffs.                                              

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

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| |                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------
| | If We Fail to Effectively Manage and
    Support Our Anticipated Growth in Operations, We May Not Achieve
    Future Revenue Growth and Profitability

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



| |   |                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------
| |  | continue to implement and improve our
    operational, financial and management information systems;              
|
| |  | hire, train and retain qualified personnel;                                                                       
|
| |  | continue to expand and upgrade core technologies;
    and                                                         
|
| |  | effectively manage multiple relationships with
    our customers, applications developers and other third parties.

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



| |                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We May Be Unable to Adequately Protect Our
    Intellectual Property Rights, Which Could Result in the Use of
    Our Technology by Competitors or Other Third
    Parties

Our success depends significantly on our ability
to protect our proprietary technologies. If we are not
adequately protected, our competitors could use the intellectual
property that we have developed to enhance their products and
services to our detriment. We rely on a combination of trade
secrets, patents, 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 infringe such patent when it is issued 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 patent
infringement against us, or our failure to license the infringed
or similar technology, may cause us to delay or cancel shipment
of our products or result in significant costs. This could hurt
our revenues and profitability and result in a material adverse
effect on our business, operating results and financial
condition. In addition, any infringement claims, with or without
merit, would be time-consuming and expensive to litigate or
settle and could divert management attention from administering
our core business.



| |                                                                                                         
| | --------------------------------------------------------------------------------------------------------
| | Our Failure to Deliver Defect-Free Software
    Could Result in Greater Losses and Harmful
    Publicity

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

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##### Table of Contents



Risks Associated With Our Common
Stock



| |                                                                                                           
| | ----------------------------------------------------------------------------------------------------------
| | If the Price of Our Common Stock Remains
    Below $1.00, Our Common Stock May Be Delisted from
    Nasdaq

The National Association of Securities Dealers,
Inc. has established certain standards for the continued listing
of a security on the Nasdaq National Market and the Nasdaq
SmallCap Market. The standards for continued listing on either
market require, among other things, that the minimum bid price
for the listed securities be at least $1.00 per share. A
deficiency in the bid price maintenance standard will be deemed
to exist if the issuer fails the individual stated requirement
for thirty consecutive trading days, with a 90-day cure period,
with respect to the Nasdaq National Market, and a 180-day cure
period with respect to the Nasdaq SmallCap Market. On
February 14, 2002, we received a 30-day deficiency notice
from The Nasdaq Stock Market, Inc., for failure to comply with
the $1.00 minimum bid price per share for the last 30
consecutive trading days. We transferred to the Nasdaq SmallCap
Market on May 28, 2002, in order to take advantage of the
longer 180-day cure period. If the price deficiency is cured
during the 180-day period, and we otherwise continue to comply
with the Nasdaq National Market maintenance standards, we could
then transfer back to the Nasdaq National Market by
February 10, 2003. If we do not comply with the $1.00
minimum bid price at the end of the 180-day cure period, we may
also be eligible for an additional 180-calendar day grace period
provided we meet the initial listing criteria for the Nasdaq
SmallCap Market. If our common stock were to be excluded from
Nasdaq, the prices of our common stock and the ability of
holders to sell such stock would be adversely affected, and we
would be required to comply with the initial listing
requirements to be relisted on Nasdaq.



| |                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------
| | If Our Outstanding Warrants and Options Are
    Exercised, There Will Be Further Dilution to Our Common
    Stockholders

As of March 31, 2002, we had 3,670,862
warrants to purchase the equivalent number of shares of our
common stock outstanding at prices ranging from $0.65 to $6.81.
In addition, as of March 31, 2002, we had 24,405,883 stock
options granted outstanding with a weighted-average exercise
price of $2.53, of which 9,989,453 are exercisable at a
weighted-average exercise price of $3.19 at March 31, 2002.
Exercise of either the outstanding warrants or granted stock
options will dilute the position of our common stockholders.




Item 7A.     Quantitative
and Qualitative Disclosures About Market Risk

We do not use derivative financial instruments
for our investment purposes, nor do we have any foreign exchange
hedging contracts.

Exchange Rate Risk

We have minimal risk related to currency
fluctuations. Less than 10% of our revenues are from sources
outside the United States and all sales are denominated in U.S.
dollars. We have subsidiaries in Canada and the United Kingdom;
therefore, we are subject to exchange rate risk related to the
translation and consolidation of our subsidiaries
financial statements.

Interest Rate Risk

We may be exposed to interest rate risk related
to the Accounts Receivable Purchase Agreement that we entered
into with Silicon Valley Bank in April 2002, which allows us to
sell up to $4.0 million of our accounts receivable with a
finance charge equal to 5.0% above Prime Rate.



| |                      
| | ---------------------
| | Intangible Asset Risk

We have a substantial amount of intangible
assets. During the 2002 fiscal year, as a result of the
deterioration of the economy, the decrease in IT spending, the
lack of demand for the products obtained in the worldweb.net
acquisition and the significant reduction in headcount, we
recorded a write-down of intangible assets of
$64.8 million. Future deterioration of the economy could
result in further impairment of our intangible assets, requiring
us to record an additional write down expense.

24



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##### Table of Contents






Item 8.     Financial
Statements and Supplementary Data

|                                                                                                          |  |      |    | 
|--------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                          |  | Page
|                                                                                                          |  |     
|Consolidated Financial Statements of Starbase
    Corporation:                                            |  |      |    | 
|Independent Auditors Report                                                                              |  |      | 26 | 
|Consolidated Balance Sheets at March 31,
    2002 and 2001                                                |  |      | 27 | 
|Consolidated Statements of Operations for the
    years ended March 31, 2002, 2001 and 2000               |  |      | 28 | 
|Consolidated Statements of Comprehensive
    Operations for the years ended March 31, 2002, 2001 and 2000 |  |      | 29 | 
|Consolidated Statements of Cash Flows for the
    years ended March 31, 2002, 2001 and 2000               |  |      | 30 | 
|Consolidated Statements of Stockholders
    Equity for the years ended March 31, 2002, 2001 and 2000     |  |      | 31 | 
|Notes to Consolidated Financial Statements                                                                |  |      | 32 | 

25



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##### Table of Contents






INDEPENDENT AUDITORS REPORT

To the Board of Directors and

Stockholders of Starbase Corporation:


We have audited the accompanying consolidated
balance sheets of Starbase Corporation and its subsidiaries (the
Company) as of March 31, 2002 and 2001, and the related
consolidated statements of operations, comprehensive operations,
stockholders equity, and cash flows for each of the three
years in the period ended March 31, 2002. These
consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated 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
audits 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 consolidated financial
statements present fairly, in all material respects, the
financial position of Starbase Corporation and its subsidiaries
at March 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in
the period ended March 31, 2002, in conformity with
accounting principles generally accepted in the United States of
America.

The accompanying consolidated financial
statements have been prepared assuming that the Company will
continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Companys recurring
losses from operations and negative working capital raise
substantial doubt about its ability to continue as a going
concern. Managements plans concerning these matters are
also described in Note 1. The consolidated financial
statements do not include any adjustments that might result from
the outcome of this uncertainty.

/s/ DELOITTE & TOUCHE LLP

Costa Mesa, California

May 28, 2002


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STARBASE CORPORATION






CONSOLIDATED BALANCE SHEETS


|                                           |                                                                                                                                                  |                             |        |           |        |   |         |         |         | 
|------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------ | --------------------------- | ------ | --------- | ------ | - | ------- | ------- | ------- | 
|                                           |                                                                                                                                                  | March 31,                   |        | March 31,
|                                           |                                                                                                                                                  | 2002                        |        | 2001     
|                                           |                                                                                                                                                  |                             |        |          
|                                           |                                                                                                                                                  |                            
|                                           |                                                                                                                                                  | (In thousands,             
|                                           |                                                                                                                                                  | except share data)         
|ASSETS                                    
|Current assets:                            |                                                                                                                                                  |                             |        |           |        |   |         |        
|                                           | Cash and cash equivalents                                                                                                                        |                             | $      | 1,530     |        |   | $       | 14,075  |        
|                                           | Restricted cash                                                                                                                                  |                             |        | 62        |        |   |         | 257     |        
|                                           | Marketable securities                                                                                                                            |                             |        | 9         |        |   |         | 3       |        
|                                           | Accounts receivable, net of allowances of $1,561
    (2002) and $2,166 (2001)                                                                    |                             |        | 7,980     |        |   |         | 16,148  |        
|                                           | Notes and other receivables, net of allowance of
    $150 (2002) and $760 (2001)                                                                 |                             |        | 14        |        |   |         | 200     |        
|                                           | Prepaid expenses and other current assets                                                                                                        |                             |        | 704       |        |   |         | 1,183   |        
|                                           |                                                                                                                                                  |                             |        |           |        |   |         |        
|                                           |                                                                                                                                                  | Total current assets        |        |           | 10,299 |   |         |         | 31,866  | 
|Property and equipment, net                |                                                                                                                                                  |                             | 4,503  |           |        |   | 7,953   |        
|Intangible assets, net                     |                                                                                                                                                  |                             | 20,956 |           |        |   | 107,628 |        
|Note receivable from officer               |                                                                                                                                                  |                             | 109    |           |        |   | 104     |        
|Other non-current assets                   |                                                                                                                                                  |                             | 620    |           |        |   | 1,487   |        
|                                           |                                                                                                                                                  |                             |        |           |        |   |         |        
|Total assets                               |                                                                                                                                                  | $                           | 36,487 |           |        | $ | 149,038 |        
|                                           |                                                                                                                                                  |                             |        |           |        |   |         |        
|LIABILITIES AND STOCKHOLDERS
    EQUITY  
|Current liabilities:                       |                                                                                                                                                  |                             |        |           |        |   |         |        
|                                           | Accounts payable                                                                                                                                 |                             | $      | 2,953     |        |   | $       | 11,104  |        
|                                           | Accrued compensation                                                                                                                             |                             |        | 2,344     |        |   |         | 3,381   |        
|                                           | Other accrued liabilities                                                                                                                        |                             |        | 1,267     |        |   |         | 6,706   |        
|                                           | Deferred revenue                                                                                                                                 |                             |        | 6,598     |        |   |         | 8,950   |        
|                                           | Current portion of long-term obligations                                                                                                         |                             |        | 144       |        |   |         | 344     |        
|                                           |                                                                                                                                                  |                             |        |           |        |   |         |        
|                                           |                                                                                                                                                  | Total current liabilities   |        |           | 13,306 |   |         |         | 30,485  | 
|Long-term liabilities:                     |                                                                                                                                                  |                             |        |           |        |   |         |        
|                                           | Long-term obligations, less current portion                                                                                                      |                             |        | 42        |        |   |         | 238     |        
|                                           | Convertible debentures                                                                                                                           |                             |        | 1,632     |        |   |         |        |        
|                                           | Long-term deferred revenue                                                                                                                       |                             |        |          |        |   |         | 121     |        
|                                           |                                                                                                                                                  |                             |        |           |        |   |         |        
|                                           |                                                                                                                                                  | Total long-term liabilities |        |           | 1,674  |   |         |         | 359     | 
|                                           |                                                                                                                                                  |                             |        |           |        |   |         |        
|                                           |                                                                                                                                                  | Total liabilities           |        |           | 14,980 |   |         |         | 30,844  | 
|Commitments and contingencies (Note 10)    |                                                                                                                                                  |                             |        |           |        |   |         |        
|Stockholders equity:                      |                                                                                                                                                  |                             |        |           |        |   |         |        
|                                           | Preferred stock, $.01 par value; 10,000,000
    shares authorized; none issued and outstanding at March 31,
    2002 and 2001                    |                             |        |          |        |   |         |        |        
|                                           | Common stock, $.01 par value; 150,000,000 shares
    authorized; 79,655,488 and 69,386,443 issued and outstanding at
    March 31, 2002 and 2001 |                             |        | 797       |        |   |         | 694     |        
|                                           | Additional paid-in capital                                                                                                                       |                             |        | 201,030   |        |   |         | 193,321 |        
|                                           | Accumulated deficit                                                                                                                              |                             |        | (179,770  | )      |   |         | (74,857 | )      
|                                           | Deferred non-cash compensation                                                                                                                   |                             |        | (397      | )      |   |         | (662    | )      
|                                           | Notes receivable                                                                                                                                 |                             |        | (36       | )      |   |         | (219    | )      
|                                           | Accumulated other comprehensive loss                                                                                                             |                             |        | (117      | )      |   |         | (83     | )      
|                                           |                                                                                                                                                  |                             |        |           |        |   |         |        
|                                           |                                                                                                                                                  | Net stockholders equity    |        |           | 21,507 |   |         |         | 118,194 | 
|                                           |                                                                                                                                                  |                             |        |           |        |   |         |        
|Total liabilities and stockholders equity |                                                                                                                                                  | $                           | 36,487 |           |        | $ | 149,038 |        
|                                           |                                                                                                                                                  |                             |        |           |        |   |         |        

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

27



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STARBASE CORPORATION






CONSOLIDATED STATEMENTS OF
OPERATIONS


|                                           |                                                                      |                          |          |          |         |      |         |         |        |   |        |        |        | 
|------------------------------------------ | -------------------------------------------------------------------- | ------------------------ | -------- | -------- | ------- | ---- | ------- | ------- | ------ | - | ------ | ------ | ------ | 
|                                           |                                                                      |                         
|                                           |                                                                      | Years Ended March 31,   
|                                           |                                                                      |                         
|                                           |                                                                      | 2002                     |          | 2001     |         | 2000
|                                           |                                                                      |                          |          |          |         |     
|                                           |                                                                      |                         
|                                           |                                                                      | (In thousands, except   
|                                           |                                                                      | per share amounts)      
|Revenues:                                  |                                                                      |                          |          |          |         |      |         |         |        |   |        |       
|                                           | License                                                              |                          | $        | 26,601   |         |      | $       | 31,735  |        |   | $      | 14,486 |       
|                                           | Maintenance                                                          |                          |          | 10,478   |         |      |         | 6,183   |        |   |        | 2,012  |       
|                                           | Service                                                              |                          |          | 8,292    |         |      |         | 3,722   |        |   |        | 1,034  |       
|                                           |                                                                      |                          |          |          |         |      |         |         |        |   |        |       
|                                           |                                                                      | Total revenues           |          |          | 45,371  |      |         |         | 41,640 |   |        |        | 17,532 | 
|Cost of Revenues:                          |                                                                      |                          |          |          |         |      |         |         |        |   |        |       
|                                           | License                                                              |                          |          | 5,160    |         |      |         | 1,330   |        |   |        | 1,042  |       
|                                           | Service                                                              |                          |          | 6,202    |         |      |         | 4,560   |        |   |        | 1,480  |       
|                                           | Amortization and write-down of intangibles                           |                          |          | 8,844    |         |      |         | 2,426   |        |   |        | 94     |       
|                                           |                                                                      |                          |          |          |         |      |         |         |        |   |        |       
|                                           |                                                                      | Total cost of revenues   |          |          | 20,206  |      |         |         | 8,316  |   |        |        | 2,616  | 
|                                           |                                                                      |                          |          |          |         |      |         |         |        |   |        |       
|Gross margin                               |                                                                      |                          | 25,165   |          |         |      | 33,324  |         |        |   | 14,916 |       
|Operating Expenses:                        |                                                                      |                          |          |          |         |      |         |         |        |   |        |       
|                                           | Research and development                                             |                          |          | 14,529   |         |      |         | 12,327  |        |   |        | 4,552  |       
|                                           | Sales and marketing                                                  |                          |          | 27,498   |         |      |         | 21,888  |        |   |        | 9,097  |       
|                                           | General and administrative                                           |                          |          | 8,145    |         |      |         | 7,231   |        |   |        | 3,898  |       
|                                           | Non-cash equity based compensation                                   |                          |          | 1,259    |         |      |         | 1,502   |        |   |        | 629    |       
|                                           | In-process research and development                                  |                          |          |         |         |      |         | 1,200   |        |   |        | 2,130  |       
|                                           | Amortization and write-down of intangibles                           |                          |          | 76,732   |         |      |         | 6,686   |        |   |        | 377    |       
|                                           |                                                                      |                          |          |          |         |      |         |         |        |   |        |       
|                                           |                                                                      | Total operating expenses |          |          | 128,163 |      |         |         | 50,834 |   |        |        | 20,683 | 
|                                           |                                                                      |                          |          |          |         |      |         |         |        |   |        |       
|                                           | Operating loss                                                       |                          |          | (102,998 | )       |      |         | (17,510 | )      |   |        | (5,767 | )     
|                                           | Interest and other income (expense)                                  |                          |          | (1,787   | )       |      |         | 980     |        |   |        | 50     |       
|                                           |                                                                      |                          |          |          |         |      |         |         |        |   |        |       
|Loss before income taxes                   |                                                                      |                          | (104,785 | )        |         |      | (16,530 | )       |        |   | (5,717 | )     
|                                           | Provision for income taxes                                           |                          |          | 128      |         |      |         | 22      |        |   |        | 1      |       
|                                           |                                                                      |                          |          |          |         |      |         |         |        |   |        |       
|Net loss                                   |                                                                      |                          | (104,913 | )        |         |      | (16,552 | )       |        |   | (5,718 | )     
|                                           | Non-cash dividend and accretion of beneficial
    conversion feature |                          |          |         |         |      |         |        |        |   |        | 549    |       
|                                           |                                                                      |                          |          |          |         |      |         |         |        |   |        |       
|Net loss applicable to common stockholders |                                                                      | $                        | (104,913 | )        |         | $    | (16,552 | )       |        | $ | (6,267 | )     
|                                           |                                                                      |                          |          |          |         |      |         |         |        |   |        |       
|Per share data:                            |                                                                      |                          |          |          |         |      |         |         |        |   |        |       
|                                           | Basic and diluted net loss per common share                          |                          | $        | (1.49    | )       |      | $       | (0.34   | )      |   | $      | (0.19  | )     
|                                           |                                                                      |                          |          |          |         |      |         |         |        |   |        |       
|                                           | Basic and diluted weighted-average common shares
    outstanding     |                          |          | 70,589   |         |      |         | 49,107  |        |   |        | 33,412 |       
|                                           |                                                                      |                          |          |          |         |      |         |         |        |   |        |       

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

28



---



##### Table of Contents



STARBASE CORPORATION






CONSOLIDATED STATEMENTS OF COMPREHENSIVE
OPERATIONS


|                          |                                                             |                       |          |      |   |      |         |    |   |   |        |      |  
|------------------------- | ----------------------------------------------------------- | --------------------- | -------- | ---- | - | ---- | ------- | -- | - | - | ------ | ---- | -
|                          |                                                             |                      
|                          |                                                             | Years Ended March 31,
|                          |                                                             |                      
|                          |                                                             | 2002                  |          | 2001 |   | 2000
|                          |                                                             |                       |          |      |   |     
|                          |                                                             |                      
|                          |                                                             | (In thousands)       
|Net loss                  |                                                             | $                     | (104,913 | )    |   | $    | (16,552 | )  |   | $ | (5,718 | )   
|Other comprehensive loss: |                                                             |                       |          |      |   |      |         |    |   |   |        |     
|                          | Foreign currency translation adjustments                    |                       |          | (40  | ) |      |         | 35 |   |   |        |     |  
|                          | Unrealized gain (loss) on available-for-sale
    securities |                       |          | 6    |   |      |         | (8 | ) |   |        | (110 | )
|                          |                                                             |                       |          |      |   |      |         |    |   |   |        |     
|Total comprehensive loss  |                                                             | $                     | (104,947 | )    |   | $    | (16,525 | )  |   | $ | (5,828 | )   
|                          |                                                             |                       |          |      |   |      |         |    |   |   |        |     

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

29



---



##### Table of Contents



STARBASE CORPORATION






CONSOLIDATED STATEMENTS OF CASH
FLOWS


|                                                                 |                                                                             |                                                                                 |                                                         |          |        |         |        |         |        |        |        |        |       |        |  
|---------------------------------------------------------------- | --------------------------------------------------------------------------- | ------------------------------------------------------------------------------- | ------------------------------------------------------- | -------- | ------ | ------- | ------ | ------- | ------ | ------ | ------ | ------ | ----- | ------ | -
|                                                                 |                                                                             |                                                                                
|                                                                 |                                                                             | Years Ended March 31,                                                          
|                                                                 |                                                                             |                                                                                
|                                                                 |                                                                             | 2002                                                                            |                                                         | 2001     |        | 2000   
|                                                                 |                                                                             |                                                                                 |                                                         |          |        |        
|                                                                 |                                                                             |                                                                                
|                                                                 |                                                                             | (In thousands)                                                                 
|Cash Flows from Operating Activities:                            |                                                                             |                                                                                 |                                                         |          |        |         |        |         |        |        |        |       
|                                                                 | Net loss                                                                    |                                                                                 | $                                                       | (104,913 | )      |         | $      | (16,552 | )      |        | $      | (5,718 | )    
|                                                                 | Adjustments to reconcile net loss to cash used in
    operating activities: |                                                                                 |                                                         |          |        |         |        |         |        |        |        |        |      
|                                                                 |                                                                             | Depreciation and amortization                                                   |                                                         |          | 25,287 |         |        |         | 10,187 |        |        |        | 865   |       
|                                                                 |                                                                             | Write-down of intangibles                                                       |                                                         |          | 64,810 |         |        |         |       |        |        |        |      |       
|                                                                 |                                                                             | In-process research and development                                             |                                                         |          |       |         |        |         | 1,200  |        |        |        | 2,130 |       
|                                                                 |                                                                             | Provision for doubtful accounts                                                 |                                                         |          | 704    |         |        |         | 1,038  |        |        |        | 754   |       
|                                                                 |                                                                             | Loss on disposition of property and equipment                                   |                                                         |          |       |         |        |         | (3     | )      |        |        | 5     |       
|                                                                 |                                                                             | Non-cash equity based compensation                                              |                                                         |          | (27    | )       |        |         | 1,502  |        |        |        | 629   |       
|                                                                 |                                                                             | Non-cash equity based compensation related to
    warrant issuances             |                                                         |          | 1,288  |         |        |         |       |        |        |        |      |       
|                                                                 |                                                                             | Non-cash interest expense                                                       |                                                         |          | 1,897  |         |        |         |       |        |        |        |      |       
|                                                                 |                                                                             | Gain on sales of available-for-sale securities                                  |                                                         |          |       |         |        |         |       |        |        |        | (78   | )     
|                                                                 |                                                                             | Equity in loss of investee                                                      |                                                         |          |       |         |        |         |       |        |        |        | 250   |       
|                                                                 |                                                                             | Changes in operating assets and liabilities, net
    of effects of acquisition: |                                                         |          |        |         |        |         |        |        |        |        |       |       
|                                                                 |                                                                             |                                                                                 | Accounts receivable                                     |          |        | 7,614   |        |         |        | (6,313 | )      |        |       | (3,535 | )
|                                                                 |                                                                             |                                                                                 | Notes and other receivables                             |          |        | 36      |        |         |        | (56    | )      |        |       | (722   | )
|                                                                 |                                                                             |                                                                                 | Prepaid expenses and other assets                       |          |        | 733     |        |         |        | 42     |        |        |       | (203   | )
|                                                                 |                                                                             |                                                                                 | Other non-current assets                                |          |        | 74      |        |         |        | 2      |        |        |       | (529   | )
|                                                                 |                                                                             |                                                                                 | Accounts payable and accrued liabilities                |          |        | (10,658 | )      |         |        | 5,204  |        |        |       | 1,592  |  
|                                                                 |                                                                             |                                                                                 | Deferred revenue                                        |          |        | (2,473  | )      |         |        | (643   | )      |        |       | 3,105  |  
|                                                                 |                                                                             |                                                                                 |                                                         |          |        |         |        |         |        |        |        |       
|                                                                 |                                                                             |                                                                                 | Net cash used in operating activities                   |          |        | (15,630 | )      |         |        | (4,392 | )      |        |       | (1,455 | )
|Cash Flows from Investing Activities:                            |                                                                             |                                                                                 |                                                         |          |        |         |        |         |        |        |        |       
|                                                                 | Decrease (increase) in restricted cash                                      |                                                                                 |                                                         | 1,226    |        |         |        | 39      |        |        |        | 40     |      
|                                                                 | Proceeds from sale of available-for-sale
    securities                     |                                                                                 |                                                         |         |        |         |        |        |        |        |        | 1,141  |      
|                                                                 | Investment in equity investee                                               |                                                                                 |                                                         |         |        |         |        |        |        |        |        | (250   | )    
|                                                                 | Cash paid for acquisitions, net of cash acquired                            |                                                                                 |                                                         |         |        |         |        | (4,039  | )      |        |        | 57     |      
|                                                                 | Proceeds from sale of property and equipment                                |                                                                                 |                                                         |         |        |         |        | 29      |        |        |        |       |      
|                                                                 | Capital expenditures                                                        |                                                                                 |                                                         | (1,040   | )      |         |        | (4,816  | )      |        |        | (490   | )    
|                                                                 |                                                                             |                                                                                 |                                                         |          |        |         |        |         |        |        |        |       
|                                                                 |                                                                             |                                                                                 | Net cash provided by (used in) investing
    activities |          |        | 186     |        |         |        | (8,787 | )      |        |       | 498    |  
|Cash Flows from Financing Activities:                            |                                                                             |                                                                                 |                                                         |          |        |         |        |         |        |        |        |       
|                                                                 | Borrowings under line of credit                                             |                                                                                 |                                                         | 1,500    |        |         |        |        |        |        |        |       |      
|                                                                 | Payment of line of credit                                                   |                                                                                 |                                                         | (1,500   | )      |         |        |        |        |        |        |       |      
|                                                                 | Proceeds from issuance of common stock:                                     |                                                                                 |                                                         |          |        |         |        |         |        |        |        |        |      
|                                                                 |                                                                             | From private placements                                                         |                                                         |          |       |         |        |         | 17,500 |        |        |        | 4,225 |       
|                                                                 |                                                                             | For payment of expenses                                                         |                                                         |          |       |         |        |         |       |        |        |        |      |       
|                                                                 |                                                                             | Exercise of options                                                             |                                                         |          | 700    |         |        |         | 2,557  |        |        |        | 2,030 |       
|                                                                 |                                                                             | Exercise of warrants                                                            |                                                         |          |       |         |        |         | 428    |        |        |        | 5,495 |       
|                                                                 | Proceeds from sale of convertible debentures                                |                                                                                 |                                                         | 3,000    |        |         |        |        |        |        |        |       |      
|                                                                 | Payment of financing related costs                                          |                                                                                 |                                                         | (190     | )      |         |        | (1,570  | )      |        |        | (575   | )    
|                                                                 | Payments on capital lease obligations                                       |                                                                                 |                                                         | (571     | )      |         |        | (3,144  | )      |        |        | (133   | )    
|                                                                 |                                                                             |                                                                                 |                                                         |          |        |         |        |         |        |        |        |       
|                                                                 |                                                                             |                                                                                 | Net cash provided by financing activities               |          |        | 2,939   |        |         |        | 15,771 |        |        |       | 11,042 |  
|Effect of exchange rate changes on cash and cash
    equivalents |                                                                             |                                                                                 | (40                                                     | )        |        |         | 35     |         |        |        |       |       
|                                                                 |                                                                             |                                                                                 |                                                         |          |        |         |        |         |        |        |        |       
|Net increase (decrease) in cash and cash
    equivalents         |                                                                             |                                                                                 | (12,545                                                 | )        |        |         | 2,627  |         |        |        | 10,085 |       
|Cash and cash equivalents, beginning of year                     |                                                                             |                                                                                 | 14,075                                                  |          |        |         | 11,448 |         |        |        | 1,363  |       
|                                                                 |                                                                             |                                                                                 |                                                         |          |        |         |        |         |        |        |        |       
|Cash and cash equivalents, end of year                           |                                                                             | $                                                                               | 1,530                                                   |          |        | $       | 14,075 |         |        | $      | 11,448 |       
|                                                                 |                                                                             |                                                                                 |                                                         |          |        |         |        |         |        |        |        |       
|Supplemental Cash Flow Information:                              |                                                                             |                                                                                 |                                                         |          |        |         |        |         |        |        |        |       
|                                                                 | Interest paid                                                               |                                                                                 | $                                                       | 108      |        |         | $      | 35      |        |        | $      | 31     |      
|                                                                 |                                                                             |                                                                                 |                                                         |          |        |         |        |         |        |        |        |       
|                                                                 | Income taxes paid                                                           |                                                                                 | $                                                       | 128      |        |         | $      | 22      |        |        | $      | 1      |      
|                                                                 |                                                                             |                                                                                 |                                                         |          |        |         |        |         |        |        |        |       
|Non-cash investing and financing transactions:                   |                                                                             |                                                                                 |                                                         |          |        |         |        |         |        |        |        |       
|                                                                 | Non-cash preferred stock and common stock
    dividends                     |                                                                                 |                                                         |          |        |         |        |         |        |        | $      | 549    |      
|                                                                 |                                                                             |                                                                                 |                                                         |          |        |         |        |         |        |        |        |       
|                                                                 | Conversion of preferred stock to common stock                               |                                                                                 |                                                         |          |        |         |        |         |        |        | $      | 48     |      
|                                                                 |                                                                             |                                                                                 |                                                         |          |        |         |        |         |        |        |        |       
|                                                                 | Capitalized lease and insurance financing                                   |                                                                                 | $                                                       | 254      |        |         | $      | 171     |        |        | $      | 90     |      
|                                                                 |                                                                             |                                                                                 |                                                         |          |        |         |        |         |        |        |        |       
|                                                                 | Change in net unrealized gain (loss) on
    securities available-for-sale   |                                                                                 | $                                                       | 6        |        |         | $      | (8      | )      |        | $      | (110   | )    
|                                                                 |                                                                             |                                                                                 |                                                         |          |        |         |        |         |        |        |        |       
|                                                                 | Common stock for offering expense                                           |                                                                                 |                                                         |          |        |         |        |         |        |        | $      | 231    |      
|                                                                 |                                                                             |                                                                                 |                                                         |          |        |         |        |         |        |        |        |       
|                                                                 | Common stock issued in satisfaction of liabilities                          |                                                                                 | $                                                       | 3,022    |        |         |        |         |        |        |        |        |      
|                                                                 |                                                                             |                                                                                 |                                                         |          |        |         |        |         |        |        |        |       
|                                                                 | Conversion of convertible debentures to common
    stock                    |                                                                                 | $                                                       | 1,662    |        |         |        |         |        |        |        |        |      
|                                                                 |                                                                             |                                                                                 |                                                         |          |        |         |        |         |        |        |        |       
|                                                                 | Exchange of property and equipment for liabilities                          |                                                                                 | $                                                       | 1,300    |        |         |        |         |        |        |        |        |      
|                                                                 |                                                                             |                                                                                 |                                                         |          |        |         |        |         |        |        |        |       



---

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

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

30



---



##### Table of Contents



STARBASE CORPORATION






CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY


|                                                                     |                                      |                 |      |              |  |            |    |             |  |          |        |         |  |               |     |               |  |      |         |        |  |   |          |   |  |   |      |   |  |   |      |   |  |   |      |   |  |   |          |        | 
|-------------------------------------------------------------------- | ------------------------------------ | --------------- | ---- | ------------ |  | ---------- | -- | ----------- |  | -------- | ------ | ------- |  | ------------- | --- | ------------- |  | ---- | ------- | ------ |  | - | -------- | - |  | - | ---- | - |  | - | ---- | - |  | - | ---- | - |  | - | -------- | ------ | 
|                                                                     |                                      |                 |      |              |  |            |    |             |  |          |        |         |  | Accumulated   |     |              
|                                                                     |                                      | Preferred Stock |      | Common Stock |  | Additional |    |             |  | Deferred |        |         |  | Other         |     | Total        
|                                                                     |                                      |                 |      |              |  | Paid-in    |    | Accumulated |  | Non-cash |        | Notes   |  | Comprehensive |     | Stockholders
|                                                                     |                                      | Shares          |      | Amount       |  | Shares     |    | Amount      |  | Capital  |        | Deficit |  | Compensation  |     | Receivable    |  | Loss |         | Equity
|                                                                     |                                      |                 |      |              |  |            |    |             |  |          |        |         |  |               |     |               |  |      |         |       
|                                                                     |                                      |                
|                                                                     |                                      | (In thousands) 
|BALANCE at March 31, 1999                                            |                                      |                 | 589  |              |  | $          | 6  |             |  |          | 28,636 |         |  | $             | 286 |               |  | $    | 56,208  |        |  | $ | (52,038  | ) |  | $ |     |   |  | $ |     |   |  | $ |     |   |  | $ | 4,462    |       
|Preferred stock conversion to common stock                           |                                      |                 | (589 | )            |  |            | (6 | )           |  |          | 4,775  |         |  |               | 48  |               |  |      | (42     | )      |  |   |         |   |  |   |     |   |  |   |     |   |  |   |     |   |  |   |         |       
|Options and warrants issued for services provided                    |                                      |                 |     |              |  |            |   |             |  |          |       |         |  |               |    |               |  |      | 629     |        |  |   |         |   |  |   |     |   |  |   |     |   |  |   |     |   |  |   | 629      |       
|Common stock issued:                                                 |                                      |                 |      |              |  |            |    |             |  |          |        |         |  |               |     |               |  |      |         |        |  |   |          |   |  |   |      |   |  |   |      |   |  |   |      |   |  |   |          |       
|                                                                     | Exercise of options                  |                 |      |             |  |            |    |            |  |          |        | 1,510   |  |               |     | 15            |  |      |         | 2,015  |  |   |          |  |  |   |      |  |  |   |      |  |  |   |      |  |  |   |          | 2,030  | 
|                                                                     | Exercise of warrants                 |                 |      |             |  |            |    |            |  |          |        | 4,893   |  |               |     | 49            |  |      |         | 5,446  |  |   |          |  |  |   |      |  |  |   |      |  |  |   |      |  |  |   |          | 5,495  | 
|                                                                     | Acquisition                          |                 |      |             |  |            |    |            |  |          |        | 1,869   |  |               |     | 19            |  |      |         | 23,813 |  |   |          |  |  |   |      |  |  |   |      |  |  |   |      |  |  |   |          | 23,832 | 
|                                                                     | Private placement                    |                 |      |             |  |            |    |            |  |          |        | 2,504   |  |               |     | 25            |  |      |         | 4,200  |  |   |          |  |  |   |      |  |  |   |      |  |  |   |      |  |  |   |          | 4,225  | 
|Payment of financing related costs                                   |                                      |                 |     |              |  |            |   |             |  |          | 129    |         |  |               | 1   |               |  |      | (576    | )      |  |   |         |   |  |   |     |   |  |   |     |   |  |   |     |   |  |   | (575     | )     
|Non-cash dividend and accretion of beneficial
    conversion feature |                                      |                 |     |              |  |            |   |             |  |          |       |         |  |               |    |               |  |      | 549     |        |  |   | (549     | ) |  |   |     |   |  |   |     |   |  |   |     |   |  |   |         |       
|Unrealized loss on available-for-sale securities                     |                                      |                 |     |              |  |            |   |             |  |          |       |         |  |               |    |               |  |      |        |        |  |   |         |   |  |   |     |   |  |   |     |   |  |   | (110 | ) |  |   | (110     | )     
|Net loss                                                             |                                      |                 |     |              |  |            |   |             |  |          |       |         |  |               |    |               |  |      |        |        |  |   | (5,718   | ) |  |   |     |   |  |   |     |   |  |   |     |   |  |   | (5,718   | )     
|                                                                     |                                      |                 |      |              |  |            |    |             |  |          |        |         |  |               |     |               |  |      |         |        |  |   |          |   |  |   |      |   |  |   |      |   |  |   |      |   |  |   |          |       
|BALANCE at March 31, 2000                                            |                                      |                 |     |              |  |            |   |             |  |          | 44,316 |         |  |               | 443 |               |  |      | 92,242  |        |  |   | (58,305  | ) |  |   |     |   |  |   |     |   |  |   | (110 | ) |  |   | 34,270   |       
|                                                                     |                                      |                 |      |              |  |            |    |             |  |          |        |         |  |               |     |               |  |      |         |        |  |   |          |   |  |   |      |   |  |   |      |   |  |   |      |   |  |   |          |       
|Options and warrants issued for services provided                    |                                      |                 |     |              |  |            |   |             |  |          |       |         |  |               |    |               |  |      | 1,480   |        |  |   |         |   |  |   | 22   |   |  |   |     |   |  |   |     |   |  |   | 1,502    |       
|Common stock issued:                                                 |                                      |                 |      |              |  |            |    |             |  |          |        |         |  |               |     |               |  |      |         |        |  |   |          |   |  |   |      |   |  |   |      |   |  |   |      |   |  |   |          |       
|                                                                     | Exercise of options                  |                 |      |             |  |            |    |            |  |          |        | 1,052   |  |               |     | 11            |  |      |         | 2,546  |  |   |          |  |  |   |      |  |  |   |      |  |  |   |      |  |  |   |          | 2,557  | 
|                                                                     | Exercise of warrants                 |                 |      |             |  |            |    |            |  |          |        | 221     |  |               |     | 2             |  |      |         | 426    |  |   |          |  |  |   |      |  |  |   |      |  |  |   |      |  |  |   |          | 428    | 
|                                                                     | Acquisitions                         |                 |      |             |  |            |    |            |  |          |        | 20,586  |  |               |     | 206           |  |      |         | 80,045 |  |   |          |  |  |   |      |  |  |   |      |  |  |   |      |  |  |   |          | 80,251 | 
|                                                                     | Private placement                    |                 |      |             |  |            |    |            |  |          |        | 3,211   |  |               |     | 32            |  |      |         | 17,468 |  |   |          |  |  |   |      |  |  |   |      |  |  |   |      |  |  |   |          | 17,500 | 
|Payment of financing related costs                                   |                                      |                 |     |              |  |            |   |             |  |          |       |         |  |               |    |               |  |      | (1,570  | )      |  |   |         |   |  |   |     |   |  |   |     |   |  |   |     |   |  |   | (1,570   | )     
|Deferred non-cash compensation for assumed options                   |                                      |                 |     |              |  |            |   |             |  |          |       |         |  |               |    |               |  |      | 684     |        |  |   |         |   |  |   | (684 | ) |  |   |     |   |  |   |     |   |  |   |         |       
|Notes receivable for exercise of options                             |                                      |                 |     |              |  |            |   |             |  |          |       |         |  |               |    |               |  |      |        |        |  |   |         |   |  |   |     |   |  |   | (219 | ) |  |   |     |   |  |   | (219     | )     
|Foreign currency translation adjustment                              |                                      |                 |     |              |  |            |   |             |  |          |       |         |  |               |    |               |  |      |        |        |  |   |         |   |  |   |     |   |  |   |     |   |  |   | 35   |   |  |   | 35       |       
|Unrealized loss on available-for-sale securities                     |                                      |                 |     |              |  |            |   |             |  |          |       |         |  |               |    |               |  |      |        |        |  |   |         |   |  |   |     |   |  |   |     |   |  |   | (8   | ) |  |   | (8       | )     
|Net loss                                                             |                                      |                 |     |              |  |            |   |             |  |          |       |         |  |               |    |               |  |      |        |        |  |   | (16,552  | ) |  |   |     |   |  |   |     |   |  |   |     |   |  |   | (16,552  | )     
|                                                                     |                                      |                 |      |              |  |            |    |             |  |          |        |         |  |               |     |               |  |      |         |        |  |   |          |   |  |   |      |   |  |   |      |   |  |   |      |   |  |   |          |       
|BALANCE at March 31, 2001                                            |                                      |                 |     |              |  |            |   |             |  |          | 69,386 |         |  |               | 694 |               |  |      | 193,321 |        |  |   | (74,857  | ) |  |   | (662 | ) |  |   | (219 | ) |  |   | (83  | ) |  |   | 118,194  |       
|                                                                     |                                      |                 |      |              |  |            |    |             |  |          |        |         |  |               |     |               |  |      |         |        |  |   |          |   |  |   |      |   |  |   |      |   |  |   |      |   |  |   |          |       
|Options and warrants issued for services provided                    |                                      |                 |     |              |  |            |   |             |  |          |       |         |  |               |    |               |  |      | (292    | )      |  |   |         |   |  |   | 265  |   |  |   |     |   |  |   |     |   |  |   | (27      | )     
|Common stock issued:                                                 |                                      |                 |      |              |  |            |    |             |  |          |        |         |  |               |     |               |  |      |         |        |  |   |          |   |  |   |      |   |  |   |      |   |  |   |      |   |  |   |          |       
|                                                                     | Exercise of options                  |                 |      |             |  |            |    |            |  |          |        | 519     |  |               |     | 5             |  |      |         | 512    |  |   |          |  |  |   |      |  |  |   |      |  |  |   |      |  |  |   |          | 517    | 
|                                                                     | Conversion of convertible debentures |                 |      |             |  |            |    |            |  |          |        | 4,039   |  |               |     | 41            |  |      |         | 4,496  |  |   |          |  |  |   |      |  |  |   |      |  |  |   |      |  |  |   |          | 4,537  | 
|                                                                     | In satisfaction of liabilities       |                 |      |             |  |            |    |            |  |          |        | 5,711   |  |               |     | 57            |  |      |         | 2,993  |  |   |          |  |  |   |      |  |  |   |      |  |  |   |      |  |  |   |          | 3,050  | 
|Payments on notes receivable                                         |                                      |                 |     |              |  |            |   |             |  |          |       |         |  |               |    |               |  |      |        |        |  |   |         |   |  |   |     |   |  |   | 183  |   |  |   |     |   |  |   | 183      |       
|Foreign currency translation adjustment                              |                                      |                 |     |              |  |            |   |             |  |          |       |         |  |               |    |               |  |      |        |        |  |   |         |   |  |   |     |   |  |   |     |   |  |   | (40  | ) |  |   | (40      | )     
|Unrealized loss on available-for-sale securities                     |                                      |                 |     |              |  |            |   |             |  |          |       |         |  |               |    |               |  |      |        |        |  |   |         |   |  |   |     |   |  |   |     |   |  |   | 6    |   |  |   | 6        |       
|Net loss                                                             |                                      |                 |     |              |  |            |   |             |  |          |       |         |  |               |    |               |  |      |        |        |  |   | (104,913 | ) |  |   |     |   |  |   |     |   |  |   |     |   |  |   | (104,913 | )     
|                                                                     |                                      |                 |      |              |  |            |    |             |  |          |        |         |  |               |     |               |  |      |         |        |  |   |          |   |  |   |      |   |  |   |      |   |  |   |      |   |  |   |          |       
|BALANCE at March 31, 2002                                            |                                      |                 |     |              |  | $          |   |             |  |          | 79,655 |         |  | $             | 797 |               |  | $    | 201,030 |        |  | $ | (179,770 | ) |  | $ | (397 | ) |  | $ | (36  | ) |  | $ | (117 | ) |  | $ | 21,507   |       
|                                                                     |                                      |                 |      |              |  |            |    |             |  |          |        |         |  |               |     |               |  |      |         |        |  |   |          |   |  |   |      |   |  |   |      |   |  |   |      |   |  |   |          |       

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

31



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##### Table of Contents



STARBASE CORPORATION






NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


1.     Nature of
Operations and Summary of Significant Accounting
Policies



| |                     
| | --------------------
| | Nature of Operations

Starbase Corporation, a Delaware corporation (the
Company), provides software management tools and professional
consulting services to assist our customers in managing their
development projects from beginning to end (Application
Lifecycle Management) and allowing them to develop their
software solutions and applications in a more efficient manner.
The Companys tools enable geographically dispersed
software developers to work as a team over corporate intranets
and the Internet. The Companys flagship product, StarTeam,
focuses primarily on supporting joint development efforts
regardless of the developers location. The Companys
Caliber products provide requirements management capabilities
that help customers define their software projects and meet
end-user needs. The Companys CodeWright product helps its
customers developers edit their software code with ease.
In addition, the Company provides or resells other products to
assist its customers with their software projects. The
Companys customers include management information systems
executives, software developers, sales and marketing personnel,
graphic designers and Webmasters.



| |                      
| | ---------------------
| | Basis of Presentation

The accompanying consolidated financial
statements have been prepared in accordance with accounting
principles generally accepted in the United States of America
and include the accounts of the Company and its wholly owned
subsidiaries. All intercompany balances and transactions have
been eliminated.



| |                                       
| | --------------------------------------
| | Management Plans and Going
    Concern

The accompanying consolidated financial
statements have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. Management
believes, based upon projected operating needs, that the
Companys working capital is insufficient for the Company
to maintain its current level of operating activities through
March 31, 2003. As shown in the consolidated financial
statement, the Company has also experienced recurring losses
from operations and has negative working capital at
March 31, 2002. These factors, among others, raise
substantial doubt about the Companys ability to continue
as a going concern. The consolidated financial statements do not
include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.

The Companys continuation as a going
concern is dependant upon its ability to generate sufficient
cash flow to meet its obligations on a timely basis, to obtain
additional financing, and ultimately, to obtain successful
operations. On May 22, 2002, the Company entered into a
definitive agreement to raise approximately $12.0 million
through the sale of convertible preferred stock and warrants to
institutional investors in a private placement. The Company
filed a Proxy Statement on June 29, 2002, and will seek
stockholder approval for the financing, which also requires that
stockholders approve a one-for-ten reverse stock split at a
special meeting of stockholders, to be held on July 29,
2002, and called for those purposes. In connection with the
financing and giving effect to the reverse stock split, the
Company has agreed to issue to the investor group new preferred
stock, convertible into between 4.8 and 6.0 million shares
of the Companys common stock, and 5-year warrants to
purchase 2.4 million shares of the Companys common
stock at $2.50 per share. The funding is contingent on the
approval of the private placement by stockholders and
consummation of the reverse split. Proceeds of the financing
will be used for working capital. Management believes that with
the completion of the $12.0 million financing, the Company
will have sufficient working capital to fund its operations
through at least March 31, 2003. While the Company has
successfully raised equity capital in the past, there can be no
assurance that the Company will be successful in their efforts
to obtain additional financing in the future.

32



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##### Table of Contents



STARBASE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)



| |                             
| | ----------------------------
| | Foreign Currency Translation

The Company measures the financial statements for
its foreign subsidiaries using the local currency as the
functional currency. Assets and liabilities of these
subsidiaries are translated at the exchange rate on the balance
sheet date. Revenues, costs and expenses are translated at the
rates prevailing during the year. Translation adjustments from
this process are included in stockholders equity. Any
gains or losses from foreign currency transactions are included
in other income.



| |                          
| | -------------------------
| | 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 18, 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 was reduced by
33.33% each year and expired on July 2, 2001. At
March 31, 2002, the balance of the letter of credit was
zero.

In February 2001, the Company assumed a balance
of $1,124,069 of restricted cash as a result of the acquisition
of worldweb.net, Inc. (worldweb) (Note 9). The cash was
pledged as collateral in connection with the lease of
worldwebs operating facility. In January 2002, the Company
forfeited the restricted cash for early termination of the lease
(Note 10).

The Company assumed a balance of $309,000 of
restricted cash as a result of the acquisition of Technology
Builders, Inc. (TBI) (Note 9). The cash was pledged as
collateral in connection with the lease of TBIs operating
facility. The letter of credit will be reduced by 20% each year
and will expire in February 2006. At March 31, 2002, the
balance of the letter of credit was $247,200.



| |                      
| | ---------------------
| | 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 securitiesand 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 securitiesand 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 securitiesor trading securitiesare classified as
available-for-sale securitiesand 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, 2002, the fair market value of
the security was $9,000. The unrealized loss of $112,000 has
been recorded as a separate component of stockholders
equity.



| |                              
| | -----------------------------
| | Accounts and Notes 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 estimated credit

33



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##### Table of Contents



STARBASE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)

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.

Activity related to the allowance accounts for
the years ended March 31, 2002, 2001 and 2000 is as follows:

|                           |                                 |                |   |            |  |              |   |            |  |            |   |     |  |  |   |        |   |  |   |       | 
|-------------------------- | ------------------------------- | -------------- | - | ---------- |  | ------------ | - | ---------- |  | ---------- | - | --- |  |  | - | ------ | - |  | - | ----- | 
|                           |                                 | Balance at     |   | Charges to |  |              |   |            |  | Balance at
|                           |                                 | Beginning      |   | Costs and  |  | From         |   |            |  | End of    
|                           |                                 | of Period      |   | Expenses   |  | Acquisitions |   | Deductions |  | Period    
|                           |                                 |                |   |            |  |              |   |            |  |           
|                           |                                 |               
|                           |                                 | (In thousands)
|Year ended March 31, 2002: |                                 |                |   |            |  |              |   |            |  |            |   |     |  |  |   |        |   |  |   |      
|                           | Allowance for doubtful accounts |                | $ | 2,926      |  |              | $ | 704        |  |            | $ |    |  |  | $ | (1,919 | ) |  | $ | 1,711 | 
|Year ended March 31, 2001: |                                 |                |   |            |  |              |   |            |  |            |   |     |  |  |   |        |   |  |   |      
|                           | Allowance for doubtful accounts |                | $ | 909        |  |              | $ | 1,229      |  |            | $ | 979 |  |  | $ | (191   | ) |  | $ | 2,926 | 
|Year ended March 31, 2000: |                                 |                |   |            |  |              |   |            |  |            |   |     |  |  |   |        |   |  |   |      
|                           | Allowance for doubtful accounts |                | $ | 155        |  |              | $ | 838        |  |            | $ |    |  |  | $ | (84    | ) |  | $ | 909   | 



| |            
| | -----------
| | 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, 2002 and 2001, property and equipment
included equipment under capital leases, net of accumulated
amortization, of $79,000 and $173,000, 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 No. 121, long-lived assets to be held
are reviewed for events, or changes in circumstances, which
indicate that their carrying value may not be recoverable. The
Company periodically reviews the carrying value of long-lived
assets to determine whether or not impairment to such value has
occurred. See Note 13 for discussion.

Due to the recent deterioration of the economy,
the decrease in IT spending, the lack of demand for products
obtained in the worldweb.net acquisition and the significant
reduction in headcount during the 2002 fiscal year, the Company
determined that the amounts recorded for goodwill, assembled
workforce and customer lists were impaired. See Note 13 for
further discussion.



| |                  
| | -----------------
| | Intangible Assets

Developed technology (Notes 2 and 9) is recorded
at cost and amortized on a straight-line basis over two to five
years. Accumulated amortization was $9,155,000 and $2,932,000 at
March 31, 2002 and 2001, respectively.

Goodwill arising from acquisitions (Notes 2
and 9) is amortized on a straight-line basis over five years.
Accumulated amortization was $19,954,000 and $6,327,000 at
March 31, 2002 and 2001, respectively.

34



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##### Table of Contents



STARBASE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)

Customer lists arising from acquisitions
(Notes 2 and 9) is amortized on a straight-line basis over
two to four and one-half years. Accumulated amortization was
$1,215,000 and $166,000 at March 31, 2002 and 2001,
respectively.

Assembled workforce arising from acquisitions
(Notes 2 and 9) is amortized on a straight-line basis over four
to five years. Accumulated amortization was $987,000 and
$175,000 at March 31, 2002 and 2001, respectively.

Manufacturing license is recorded at cost and is
amortized on a straight-line basis over three years. Accumulated
amortization was $75,000 and $7,000 at March 31, 2002 and
2001, respectively.



| |                    
| | -------------------
| | Revenue Recognition

Revenue is recognized if the criteria of
Statement of Position (SOP) 97-2, Software Revenue
Recognition,as amended, are met. If the arrangement does
not require significant production, modification, or
customization of software, revenue is recognized when all of the
following criteria are met:



| |   |                                              
| | - | ---------------------------------------------
| |  | Persuasive evidence of an arrangement exists.
|
| |  | Delivery (passage of title) has occurred.    
|
| |  | The vendors fee is fixed or determinable.   
|
| |  | Collectibility is probable.                  

License revenues from sales of software licenses
are recognized upon shipment of the related products and
transfer of title. Maintenance revenue is deferred and
recognized ratably over the contractual maintenance period,
generally one year. Service revenue from training and consulting
is recognized after the related services have been performed.

If the requirements of SOP 97-2, including
evidence of an arrangement, delivery, fixed or determinable fee,
collectibility, or vendor-specific objective evidence about the
value of an element are not met at the date of shipment, revenue
recognition is deferred until such elements are known or
resolved.

License revenues from sales of software licenses
through indirect channels are recorded upon shipment when an
end-user purchase order has been obtained and collectibility is
assured on standard payment terms. No provision for estimated
returns is recorded, as historically such returns have been
minimal.



| |                           
| | --------------------------
| | Warranty and Sales Returns

The Company warrants products against defects for
90 days. Warranty costs, which are not significant, have
been accrued based on managements estimates.



| |                    
| | -------------------
| | Advertising Expense

The Company expenses all advertising costs as
incurred, and such costs were $426,000, $1.3 million, and
$752,000 for the years ended March 31, 2002, 2001 and 2000,
respectively.



| |                         
| | ------------------------
| | 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 the first customer shipment, capitalizable
research and development costs are insignificant. Consequently,
all research and development costs are expensed as incurred.

35



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##### Table of Contents



STARBASE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)



| |             
| | ------------
| | 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, accrued liabilities and
convertible debentures. The Company considers the carrying value
of cash and cash equivalents, accounts receivable, notes
receivable, accounts payable, accrued liabilities and
convertible debentures 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
interest 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, 2002
and 2001.



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

For the year ended March 31, 2002, net loss
and net loss applicable to common stockholders was $104,913,000.
For the year ended March 31, 2001, net loss and net loss
applicable to common stockholders was $16,552,000. 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 a beneficial
conversion feature of $549,000 consisting of $501,000 associated
with the Series H Preferred Stock, and $48,000 associated
with the Series I Preferred Stock.

Potentially dilutive securities, which consist of
options to purchase 9,989,453 shares of common stock at prices
ranging from $0.46 to $14.63 per share, warrants to purchase
3,670,862 shares of common stock at prices ranging from $0.65 to
$6.81 per share, convertible debentures that could convert into
7,156,002 shares

36



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##### Table of Contents



STARBASE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)

of common stock 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, 2002. Potentially dilutive
securities, which consist of options to purchase 6,487,914
shares of common stock at prices ranging from $0.63 to $14.63
per share, warrants to purchase 893,085 shares of common stock
at prices ranging from $0.73 to $6.81 per share and 1,418,638
common shares held in escrow were not included in the
computation of diluted loss per share because such inclusion
would have been antidilutive for the year ended March 31,
2001. Potentially dilutive securities, which consist of options
to purchase 2,832,465 shares of common stock at prices ranging
from $0.63 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.



| |                 
| | ----------------
| | Use of Estimates

The preparation of the consolidated 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 consolidated financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.



| |                            
| | ---------------------------
| | Comprehensive Income (Loss)

For the year ended March 31, 2002, the
difference between net loss and comprehensive net loss was an
unrealized gain for available-for-sale securities of $6,000, and
foreign currency translation adjustments of $(40,000). For the
year ended March 31, 2001, the difference between net loss
and comprehensive net loss was an unrealized loss for
available-for-sale securities of $8,000, and foreign currency
translation adjustments of $35,000. 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.



| |                              
| | -----------------------------
| | New Accounting Pronouncements

In June 2001, the Financial Accounting Standards
Board (FASB) issued two new pronouncements: Statement of
Financial Accounting Standards (SFAS) No. 141,
Business Combinations, and SFAS No. 142, Goodwill
and Other Intangible Assets. SFAS No. 141 requires that
the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. Goodwill and
certain intangible assets will remain on the balance sheet and
not be amortized. On an annual basis, and when there is reason
to suspect that their values have been diminished or impaired,
these assets must be tested for impairment, and write-downs may
be necessary. The Company implemented SFAS No. 141 on
July 1, 2001. Such adoption had no impact on the
Companys consolidated financial position or results of
operations though March 31, 2002. SFAS No. 142 is
effective for fiscal years beginning after December 15,
2001 and changes the accounting for goodwill from an
amortization method to an impairment-only approach. Amortization
of goodwill, including goodwill recorded in past business
combinations, will cease upon adoption of this statement. The
Company adopted SFAS No. 142 on April 1, 2002. As a
result, the Company has ceased amortization of goodwill and
assembled workforce, reducing annual amortization expense by
approximately $10.4 million. The Company will continue to
amortize developed technology and customer lists over their
remaining lives. The Company is evaluating the full impact of
adopting the new standards and we expect to complete the
transition impairment test for goodwill before
September 30, 2002. In addition, future impairment reviews
may result in charges against earnings to write-down the value
of intangible assets.

In August 2001, the FASB issued SFAS
No. 144, Accounting for Impairment or Disposal of
Long-Lived Assets.SFAS No. 144 addresses financial
accounting and reporting for the impairment of long-lived assets
and

37



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##### Table of Contents



STARBASE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)

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



| |                        
| | -----------------------
| | 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 and
    Statement of Operations Captions

|                                               |  |                |         |           |  |   |         |  
|---------------------------------------------- |  | -------------- | ------- | --------- |  | - | ------- | -
|                                               |  | March 31,      |         | March 31,
|                                               |  | 2002           |         | 2001     
|                                               |  |                |         |          
|                                               |  |               
|                                               |  | (In thousands)
|Property and equipment:                        |  |                |         |           |  |   |         |  
|Computer hardware                              |  | $              | 2,527   |           |  | $ | 2,498   |  
|Furniture and fixtures                         |  |                | 1,330   |           |  |   | 2,000   |  
|Computer software                              |  |                | 3,970   |           |  |   | 3,394   |  
|Motor vehicle                                  |  |                |        |           |  |   | 32      |  
|Leasehold improvements                         |  |                | 707     |           |  |   | 1,735   |  
|                                               |  |                |         |           |  |   |         |  
|                                               |  |                | 8,534   |           |  |   | 9,659   |  
|Less accumulated depreciation and amortization |  |                | (4,031  | )         |  |   | (1,706  | )
|                                               |  |                |         |           |  |   |         |  
|                                               |  | $              | 4,503   |           |  | $ | 7,953   |  
|                                               |  |                |         |           |  |   |         |  
|Intangible assets:                             |  |                |         |           |  |   |         |  
|Patents and trademarks                         |  | $              | 20      |           |  | $ | 20      |  
|Manufacturing license                          |  |                | 385     |           |  |   | 470     |  
|Developed technology                           |  |                | 19,489  |           |  |   | 22,233  |  
|Customer lists                                 |  |                | 1,969   |           |  |   | 2,761   |  
|Assembled workforce                            |  |                | 2,907   |           |  |   | 4,868   |  
|Goodwill                                       |  |                | 27,591  |           |  |   | 86,904  |  
|                                               |  |                |         |           |  |   |         |  
|                                               |  |                | 52,361  |           |  |   | 117,256 |  
|Less accumulated amortization                  |  |                | (31,405 | )         |  |   | (9,628  | )
|                                               |  |                |         |           |  |   |         |  
|                                               |  | $              | 20,956  |           |  | $ | 107,628 |  
|                                               |  |                |         |           |  |   |         |  

38



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##### Table of Contents



STARBASE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)

Amounts recorded for non-cash equity based
compensation for the years ended March 31, 2002, 2001 and
2000 relate to the following consolidated statement of operation
categories:

|                           |  |                |       |           |  |           |       |  |  |   |     | 
|-------------------------- |  | -------------- | ----- | --------- |  | --------- | ----- |  |  | - | --- | 
|                           |  | March 31,      |       | March 31, |  | March 31,
|                           |  | 2002           |       | 2001      |  | 2000     
|                           |  |                |       |           |  |          
|                           |  |               
|                           |  | (In thousands)
|Research and development   |  | $              | (125  | )         |  | $         | 50    |  |  | $ |    | 
|Sales and marketing        |  |                | 75    |           |  |           | 95    |  |  |   |    | 
|General and administrative |  |                | 1,309 |           |  |           | 1,357 |  |  |   | 629 | 
|                           |  |                |       |           |  |           |       |  |  |   |     | 
|                           |  | $              | 1,259 |           |  | $         | 1,502 |  |  | $ | 629 | 
|                           |  |                |       |           |  |           |       |  |  |   |     | 



|   |                                             
|-- | --------------------------------------------
|3. | Capital Leases and Long-Term
    Obligations

The Company is the lessee of certain office
equipment under capital leases that expire from 2002 through
2005. The assets are depreciated over their estimated useful
lives.

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

|                                        |      |                |     |    | 
|--------------------------------------- | ---- | -------------- | --- | -- | 
|                                        |      | (In thousands)
|Years ending March 31:                  |      |                |     |   
|                                        | 2003 |                | $   | 97 | 
|                                        | 2004 |                |     | 27 | 
|                                        | 2005 |                |     | 1  | 
|                                        |      |                |     |   
|Total minimum lease payments            |      |                | 125 |   
|Less amount representing interest       |      |                | (9  | ) 
|                                        |      |                |     |   
|Present value of minimum lease payments |      |                | 116 |   
|Less current maturities                 |      |                | (90 | ) 
|                                        |      |                |     |   
|                                        |      | $              | 26  |   
|                                        |      |                |     |   

As a result of the acquisition of TBI
(Note 9), the Company assumed $305,900 of long-term
obligations. As of March 31, 2002, the following notes were
outstanding:

|                        |  |                |   |          |  |             |      |   |  |   |    | 
|----------------------- |  | -------------- | - | -------- |  | ----------- | ---- | - |  | - | -- | 
|                        |  | Monthly        |   | Interest |  | Outstanding
|                        |  | Payment        |   | Rate     |  | Balance    
|                        |  |                |   |          |  |            
|                        |  |               
|                        |  | (In thousands)
|Note due September 2002 |  | $              | 2 |          |  |             | 8.5  | % |  | $ | 12 | 
|Note due July 2003      |  | $              | 4 |          |  |             | 10.0 | % |  | $ | 58 | 

Principal payments related to such notes are due
as follows:

|                         |      |                |    |    | 
|------------------------ | ---- | -------------- | -- | -- | 
|                         |      | (In thousands)
|Years ending March 31:   |      |                |    |   
|                         | 2003 |                | $  | 54 | 
|                         | 2004 |                |    | 16 | 
|                         |      |                |    |   
|Total principal payments |      | $              | 70 |   
|                         |      |                |    |   

39



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##### Table of Contents



STARBASE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)



|   |             
|-- | ------------
|4. | Income Taxes

The provision for income taxes for the years
ended March 31, 2002, 2001 and 2000 is comprised of the
following:

|                    |         |                |         |           |   |           |         |        |   |   |        |        |  
|------------------- | ------- | -------------- | ------- | --------- | - | --------- | ------- | ------ | - | - | ------ | ------ | -
|                    |         | March 31,      |         | March 31, |   | March 31,
|                    |         | 2002           |         | 2001      |   | 2000     
|                    |         |                |         |           |   |          
|                    |         |               
|                    |         | (In thousands)
|Current:            |         |                |         |           |   |           |         |        |   |   |        |       
|                    | Federal |                | $       |          |   |           | $       |       |   |   | $      |       |  
|                    | Foreign |                |         | 13        |   |           |         |       |   |   |        |       |  
|                    | State   |                |         | 115       |   |           |         | 22     |   |   |        | 1      |  
|                    |         |                |         |           |   |           |         |        |   |   |        |       
|                    |         |                | 128     |           |   |           | 22      |        |   |   | 1      |       
|Deferred:           |         |                |         |           |   |           |         |        |   |   |        |       
|                    | Federal |                |         | (31,685   | ) |           |         | (9,613 | ) |   |        | (4,721 | )
|                    | State   |                |         | 937       |   |           |         | (1,630 | ) |   |        | (958   | )
|                    |         |                |         |           |   |           |         |        |   |   |        |       
|                    |         |                | (30,748 | )         |   |           | (11,243 | )      |   |   | (5,679 | )     
|Valuation allowance |         |                | 30,748  |           |   |           | 11,243  |        |   |   | 5,679  |       
|                    |         |                |         |           |   |           |         |        |   |   |        |       
|Total provision     |         | $              | 128     |           |   | $         | 21,923  |        |   | $ | 1      |       
|                    |         |                |         |           |   |           |         |        |   |   |        |       

The reported provision for income taxes for the
years ended March 31, 2002, 2001 and 2000 differs from the
amount computed by applying the statutory federal income tax
rate of 35% to the loss before income taxes as follows:

|                                    |                               |           |        |           |   |           |        |       |   |  |        |       |  
|----------------------------------- | ----------------------------- | --------- | ------ | --------- | - | --------- | ------ | ----- | - |  | ------ | ----- | -
|                                    |                               | March 31, |        | March 31, |   | March 31,
|                                    |                               | 2002      |        | 2001      |   | 2000     
|                                    |                               |           |        |           |   |          
|Benefit computed at statutory rates |                               |           | (35.00 | )%        |   |           | (35.00 | )%    |   |  | (35.00 | )%   
|Increase resulting from:            |                               |           |        |           |   |           |        |       |   |  |        |      
|                                    | State tax                     |           |        | 0.07      | % |           |        | 0.01  | % |  |        | 0.01  | %
|                                    | Goodwill                      |           |        | 23.86     | % |           |        | 15.56 | % |  |        | 14.71 | %
|                                    | Change in valuation allowance |           |        | 11.06     | % |           |        | 18.6  | % |  |        | 17.83 | %
|                                    | Other                         |           |        | 0.13      | % |           |        | 0.84  | % |  |        | 2.46  | %
|                                    |                               |           |        |           |   |           |        |       |   |  |        |      
|                                    |                               |           | 0.12   | %         |   |           | 0.01   | %     |   |  | 0.01   | %    
|                                    |                               |           |        |           |   |           |        |       |   |  |        |      

40



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##### Table of Contents



STARBASE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)

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:

|                                 |  |                |         |           |  |           |         |   |  |   |         |  
|-------------------------------- |  | -------------- | ------- | --------- |  | --------- | ------- | - |  | - | ------- | -
|                                 |  | March 31,      |         | March 31, |  | March 31,
|                                 |  | 2002           |         | 2001      |  | 2000     
|                                 |  |                |         |           |  |          
|                                 |  |               
|                                 |  | (In thousands)
|Net operating loss carryforwards |  | $              | 63,125  |           |  | $         | 37,933  |   |  | $ | 17,040  |  
|State taxes                      |  |                |        |           |  |           |        |   |  |   |        |  
|Research credit carryforwards    |  |                | 3,287   |           |  |           | 1,805   |   |  |   | 1,286   |  
|Deferred revenue                 |  |                |        |           |  |           | 327     |   |  |   | 1,761   |  
|Other accrueds                   |  |                | 1,663   |           |  |           | 2,806   |   |  |   | 833     |  
|Amortization of intangibles      |  |                | (5,165  | )         |  |           | (10,709 | ) |  |   |        |  
|                                 |  |                |         |           |  |           |         |   |  |   |         |  
|Net deferred income tax assets   |  |                | 62,910  |           |  |           | 32,162  |   |  |   | 20,920  |  
|Valuation allowance              |  |                | (62,910 | )         |  |           | (32,162 | ) |  |   | (20,920 | )
|                                 |  |                |         |           |  |           |         |   |  |   |         |  
|Net deferred tax assets          |  | $              | 0       |           |  | $         | 0       |   |  | $ | 0       |  
|                                 |  |                |         |           |  |           |         |   |  |   |         |  

As of March 31, 2002, a valuation allowance
of $62.9 million has been provided based upon the
Companys assessment of the future realizability of certain
tax deferred assets, as it is more likely than not that
sufficient taxable income will not be generated to realize these
temporary differences.

At March 31, 2002, approximately
$5.0 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, 2002, the Company had net
operating loss carryforwards of approximately
$170.0 million and $42.0 million for federal and state
income tax purposes, respectively, which are available to offset
future federal and state taxable income. These federal and state
net operating loss carryforwards begin to expire in 2008 and
2002, respectively. 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.

5.     Related Party
Transactions

In May 2001, the Company loaned Mr. Phillip
E. Pearce, a member of the Board of Directors, the sum of
$150,000. The loan is evidenced by a promissory note and bears
interest at a rate of 8% per annum, payable at maturity. The
maturity date on the note was February 28, 2002, and the
note is now in default. Mr. Pearce has informed the Company
that he loaned the proceeds of the note to eCollaboratory, a
company owned by Mr. Daniel P. Ginns, a director of
the Company. Mr. Pearce has also informed the Company that
he does not intend to repay the note unless his loan to
eCollaboratory is repaid. As a result, the Company has reserved
the outstanding amount of the loan to Mr. Pearce.

During the year ended March 31, 2002, the
Company paid $17,063 for consulting services to
Mr. Daniel P. Ginns, a member of the Board of
Directors.

In the fiscal year ended March 31, 2001, the
Company entered into a technology purchase from eCollaboratory
for the purchase amount of $1.7 million, which included
amounts previously advanced to eCollaboratory. During the fiscal
year ended March 31, 2001, Mr. Daniel P. Ginns,
owner, director and the chief executive officer of
eCollaboratory, received a salary from eCollaboratory, and
Mr. Phillip E. Pearce, a former director of
eCollaboratory, received fees for his services as a director
from eCollaboratory.

During the year ended March 31, 2001, the
Company paid $12,563 for consulting services to
Mr. Daniel P. Ginns, a member of the Board of
Directors.

41



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STARBASE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)

During the quarter ended December 31, 2000,
the Company, eCollaboratory, and OpenAvenue, Inc. entered into a
portal development and license agreement where OpenAvenue
granted to eCollaboratory and the Company a software license for
its OAsis portal software and exclusive rights to the Company to
sell its OAsis portal software. In consideration of the licenses
granted, eCollaboratory will pay OpenAvenue $1.0 million.
The Company also agreed to apply $250,000 as a credit against
amounts owed by OpenAvenue from a short-term loan. In addition,
the Company agreed to loan funds to eCollaboratory on a
short-term basis until eCollaboratorys financing
arrangements are completed. eCollaboratory is a Delaware company
incorporated to, among other things, be a showcase for the
promotion and marketing of product integration solutions using
the Companys proprietary StarTeam software and products of
other companies.

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, 2001, the
amount outstanding from the loan was $759,817. The loan balance
was fully reserved for as of March 31, 2001 because of the
uncertainty of repayment, and such provision was included in
selling, general and administrative expense in the year ended
March 31, 2001. During the year ended March 31, 2002,
the fully reserved loan balance was written off.

The Company also entered into a software license
agreement with OpenAvenue, where a one-time license fee of
$1,000,000 would 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 would also provide
maintenance and support services for the licensed software for
an annual fee of $180,000, which would also be paid in equal
quarterly installments over the next twelve months. The Company
recorded the annual maintenance fee as deferred revenue and
recognized it ratably over the applicable twelve month period.
During the year ended March 31, 2001, the Company
determined the remaining balance due from OpenAvenue was
uncollectible and reversed the outstanding accounts receivable
balance and the offsetting deferred revenue. As of
March 31, 2002, deferred revenue and accounts receivable
balances were zero.

In fiscal 1995, the Board of Directors authorized
the Company to loan William R. Stow III, a member of
the Board of Directors and former President and CEO of the
Company, the sum of $126,000. Principal and accrued interest
aggregated $108,743 and $103,915 at March 31, 2002 and
2001, respectively. The loan is evidenced by a promissory note
and is collateralized by 33,333 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, 2002, the maturity date on the
note was extended to November 4, 2002.

6.     Equity
Transactions

The Company has authorized 150,000,000 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, 2002.

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

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STARBASE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)

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, the non-cash dividend and accretion of
beneficial conversion feature was $549,000. There was no
non-cash dividend and accretion of beneficial conversion feature
for the years ended March 31, 2002 and 2001.



| |                                               
| | ----------------------------------------------
| | Activity for the Year Ended March 31,
    2002

During December 2001, the Company issued 120,759
shares of its common stock, valued at $68,833, for a settlement
related to the acquisition of worldweb.net, Inc. The settlement
was based on the fair market value of the Companys common
stock at the date of exchange and was recorded as amortization
and write-down of intangible expense. Additionally, the Company
issued 3,221,155 shares of its common stock to satisfy
$1,268,217 of outstanding liabilities consisting of $1,188,950
of accounts payable and $79,267 of short-term debt. The exchange
of common stock for liabilities was based on a 20% discount to
the fair market value of the Companys common stock at the
date of exchange and the discount was expensed as follows:
$26,950 interest and other income (expense); and $430,752
amortization and write-down of intangible expense.

During January 2002, the Company issued
189,873 shares of its common stock, valued at $100,633 to
satisfy outstanding accounts payable. The settlement was based
on the fair market value of the Companys common stock at
the date of exchange. Therefore, no gain or loss was realized.
Additionally, the Company issued 2,178,641 shares of its
common stock to satisfy $1,102,297 of outstanding accounts
payable. The exchange of common stock for accounts payable was
based on a 20% discount to the fair market value of the
Companys common stock at the date of exchange and the
discount of $52,442 was expensed as follows: $12,990 general and
administrative expense; $9,771 research and development expense;
and $29,681 amortization and write-down of intangible expense.

During the year ended March 31, 2002,
$1,517,950 of convertible debentures (Note 11) were
converted into 3,998,364 shares of common stock and
40,336 shares of common stock were issued for $13,749 of
accrued interest related to the convertible debentures.



| |                                               
| | ----------------------------------------------
| | Activity for the Year Ended March 31,
    2001

During September 2000, the Company completed a
private placement consisting of 3,211,009 shares of common
stock for $17,500,000. In addition, the Company issued warrants
to purchase 738,531 shares of common stock exercisable at
$6.81 per share that will expire on September 5, 2003. The
fair value of these warrants using the Black-Scholes model at
the date of grant was $3,279,000. The value of the warrants was
included in additional paid-in capital in the accompanying
consolidated financial statements.



| |                                               
| | ----------------------------------------------
| | 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.

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

43



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STARBASE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)

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.



| |         
| | --------
| | Warrants

Warrant activity for the years ended
March 31, 2000, 2001 and 2002 was as follows:

|                              |  |        |            |               |  |   |              | 
|----------------------------- |  | ------ | ---------- | ------------- |  | - | ------------ | 
|                              |  |        |            | Warrant Price
|                              |  | Shares |            | Per Share    
|                              |  |        |            |              
|Outstanding at March 31, 1999 |  |        | 2,984,388  |               |  | $ | 0.59 - $3.25 | 
|Granted                       |  |        | 2,148,011  |               |  | $ | 2.00 - $2.68 | 
|Expired                       |  |        | (4,892,730 | )             |  | $ | 0.59 - $3.25 | 
|                              |  |        |            |               |  |   |              | 
|Outstanding at March 31, 2000 |  |        | 239,669    |               |  | $ | 0.73 - $2.00 | 
|Granted                       |  |        | 884,910    |               |  | $ | 3.88 - $6.81 | 
|Expired                       |  |        | (9,387     | )             |  | $ | 0.75 - $1.59 | 
|Exercised                     |  |        | (222,107   | )             |  | $ | 1.25 - $2.00 | 
|                              |  |        |            |               |  |   |              | 
|Outstanding at March 31, 2001 |  |        | 893,085    |               |  | $ | 0.73 - $6.81 | 
|Granted                       |  |        | 2,777,777  |               |  |   | $0.65        | 
|                              |  |        |            |               |  |   |              | 
|Outstanding at March 31, 2002 |  |        | 3,670,862  |               |  | $ | 0.65 - $6.81 | 
|                              |  |        |            |               |  |   |              | 
|Exercisable at March 31, 2002 |  |        | 3,670,862  |               |  | $ | 0.65 - $6.81 | 
|                              |  |        |            |               |  |   |              | 

7.     Stock Option
Plans



| |          
| | ---------
| | 1996 Plan

In September 1996, the stockholders of the
Company approved the 1996 Stock Option Plan (1996 Plan) as
amended and restated. The 1996 Plan provides for the grant of
non-qualified and incentive stock options to employees,
directors, officers and consultants. 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. A total of 2,833,333 shares of
common stock have been authorized under the 1996 Plan, of which
1,367,942 were outstanding and 292,790 are available for future
grants at March 31, 2002.



| |          
| | ---------
| | 2001 Plan

In September 2001, the stockholders of the
Company approved the 2001 Stock Plan (2001 Plan). The 2001 Plan
provides for the grant of non-qualified and incentive stock
options to employees, directors, officers and consultants.
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. A total
of 3,400,000 shares of common stock have been authorized
under the 2001 Plan, of which 2,733,913 were outstanding and
666,087 are available for future grants at March 31, 2002.

44



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STARBASE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)



| |            
| | -----------
| | Premia Plan

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 acquisition, there
were 270,084 options outstanding at a weighted-average
exercise price of $1.48, of which 213,451 were exercisable at a
weighted-average exercise price of $1.48. As of March 31,
2002, there were 161,350 options outstanding at a
weighted-average exercise price of $1.48, of which 149,855 were
exercisable at a weighted average exercise price of $1.48. No
further options will be granted under the Premia Plan.



| |         
| | --------
| | TBI Plan

As a result of the acquisition of Technology
Builders, Inc. (TBI) (Note 9), the Company assumed all of
the outstanding options granted under the Technology Builders,
Inc. Amended and Restated Stock Option and Incentive Stock
Option Plan (TBI Plan). At the date of acquisition, there were
1,220,498 options outstanding at a weighted-average
exercise price of $1.24, of which 787,951 were exercisable at a
weighted-average exercise price of $0.89. As of March 31,
2002, there were 722,339 options outstanding at a
weighted-average exercise price of $1.28, of which 581,943 were
exercisable at a weighted-average exercise price of $1.07. No
further options will be granted under the TBI Plan.



| |                         
| | ------------------------
| | NSO Stock Option Program

The NSO Stock Option Program (NSO Program) allows
the Company to grant nonstatutory stock options for employees,
directors and consultants. 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. As of March 31, 2002, there were
19,420,339 options issued and outstanding.

Stock option activity for all plans for the years
ended March 31, 2000, 2001 and 2002 was as follows:

|                              |  |        |            |                  |  |   |      | 
|----------------------------- |  | ------ | ---------- | ---------------- |  | - | ---- | 
|                              |  |        |            | Weighted-       
|                              |  |        |            | Average Exercise
|                              |  | Shares |            | Price           
|                              |  |        |            |                 
|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 | 
|Granted                       |  |        | 10,862,909 |                  |  | $ | 4.04 | 
|Assumed in acquisition        |  |        | 1,220,498  |                  |  | $ | 1.24 | 
|Lapsed or canceled            |  |        | (1,132,223 | )                |  | $ | 5.33 | 
|Exercised                     |  |        | (1,052,538 | )                |  | $ | 2.43 | 
|                              |  |        |            |                  |  |   |      | 
|Outstanding at March 31, 2001 |  |        | 21,734,769 |                  |  | $ | 3.95 | 
|Granted                       |  |        | 10,388,413 |                  |  | $ | 0.68 | 
|Lapsed or canceled            |  |        | (7,198,162 | )                |  | $ | 4.22 | 
|Exercised                     |  |        | (519,137   | )                |  | $ | 1.00 | 
|                              |  |        |            |                  |  |   |      | 
|Outstanding at March 31, 2002 |  |        | 24,405,883 |                  |  | $ | 2.53 | 
|                              |  |        |            |                  |  |   |      | 
|Exercisable at March 31, 2002 |  |        | 9,989,453  |                  |  | $ | 3.19 | 
|                              |  |        |            |                  |  |   |      | 

45



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STARBASE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)

Stock option summary information for stockholder
approved plans (1996 Plan and 2001 Plan) at March 31, 2002
is as follows:

|                         |  |                     |           |                     |  |                  |           |        |  |                  |      |  |  |  |           |  |  |   |      | 
|------------------------ |  | ------------------- | --------- | ------------------- |  | ---------------- | --------- | ------ |  | ---------------- | ---- |  |  |  | --------- |  |  | - | ---- | 
|                         |  |                     |           |                    
|                         |  | Options Outstanding |           | Options Exercisable
|                         |  |                     |           |                    
|                         |  |                     |           | Weighted-Average    |  | Weighted-        |           |        |  | Weighted-       
|                         |  |                     |           | Remaining           |  | Average Exercise |           |        |  | Average Exercise
|Range of Exercise Prices |  | Shares              |           | Contractual Life    |  | Price            |           | Shares |  | Price           
|                         |  |                     |           |                     |  |                  |           |        |  |                 
|$0.00 - $0.50            |  |                     | 1,248,913 |                     |  |                  | 9.8 years |        |  | $                | 0.48 |  |  |  | 120,741   |  |  | $ | 0.50 | 
|$0.51 - $1.00            |  |                     | 1,642,061 |                     |  |                  | 9.3 years |        |  | $                | 0.66 |  |  |  | 377,264   |  |  | $ | 0.74 | 
|$1.01 - $1.50            |  |                     | 725,070   |                     |  |                  | 4.0 years |        |  | $                | 1.25 |  |  |  | 725,070   |  |  | $ | 1.25 | 
|$1.51 - $2.00            |  |                     | 485,811   |                     |  |                  | 5.2 years |        |  | $                | 1.64 |  |  |  | 485,811   |  |  | $ | 1.64 | 
|                         |  |                     |           |                     |  |                  |           |        |  |                  |      |  |  |  |           |  |  |   |      | 
|                         |  |                     | 4,101,855 |                     |  |                  | 8.0 years |        |  | $                | 0.82 |  |  |  | 1,708,886 |  |  | $ | 1.19 | 
|                         |  |                     |           |                     |  |                  |           |        |  |                  |      |  |  |  |           |  |  |   |      | 

Stock option summary information for assumed
plans (Premia Plan and TBI Plan) at March 31, 2002 is as
follows:

|                         |  |                     |         |                     |  |                  |           |        |  |                  |      |  |  |  |         |  |  |   |      | 
|------------------------ |  | ------------------- | ------- | ------------------- |  | ---------------- | --------- | ------ |  | ---------------- | ---- |  |  |  | ------- |  |  | - | ---- | 
|                         |  |                     |         |                    
|                         |  | Options Outstanding |         | Options Exercisable
|                         |  |                     |         |                    
|                         |  |                     |         | Weighted-Average    |  | Weighted-        |           |        |  | Weighted-       
|                         |  |                     |         | Remaining           |  | Average Exercise |           |        |  | Average Exercise
|Range of Exercise Prices |  | Shares              |         | Contractual Life    |  | Price            |           | Shares |  | Price           
|                         |  |                     |         |                     |  |                  |           |        |  |                 
|$0.51 - $1.00            |  |                     | 330,053 |                     |  |                  | 4.9 years |        |  | $                | 0.69 |  |  |  | 329,601 |  |  | $ | 0.69 | 
|$1.01 - $1.50            |  |                     | 365,312 |                     |  |                  | 6.8 years |        |  | $                | 1.42 |  |  |  | 338,967 |  |  | $ | 1.42 | 
|$1.51 - $2.00            |  |                     |        |                     |  |                  |          |        |  |                  |     |  |  |  |        |  |  |   |     | 
|$2.01 - $2.50            |  |                     | 170,245 |                     |  |                  | 8.2 years |        |  | $                | 2.07 |  |  |  | 58,711  |  |  | $ | 2.07 | 
|$2.51 - $3.00            |  |                     |        |                     |  |                  |          |        |  |                  |     |  |  |  |        |  |  |   |     | 
|$3.01 - $3.50            |  |                     | 18,079  |                     |  |                  | 8.8 years |        |  | $                | 3.43 |  |  |  | 4,519   |  |  | $ | 3.43 | 
|                         |  |                     |         |                     |  |                  |           |        |  |                  |      |  |  |  |         |  |  |   |      | 
|                         |  |                     | 883,689 |                     |  |                  | 6.4 years |        |  | $                | 1.32 |  |  |  | 731,798 |  |  | $ | 1.16 | 
|                         |  |                     |         |                     |  |                  |           |        |  |                  |      |  |  |  |         |  |  |   |      | 

Stock option summary information for plan not
approved by stockholders (NSO Program) at March 31, 2002 is
as follows:

|                         |  |                     |            |                     |  |                  |           |        |  |                  |       |  |  |  |           |  |  |   |       | 
|------------------------ |  | ------------------- | ---------- | ------------------- |  | ---------------- | --------- | ------ |  | ---------------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                         |  |                     |            |                    
|                         |  | Options Outstanding |            | Options Exercisable
|                         |  |                     |            |                    
|                         |  |                     |            | Weighted-Average    |  | Weighted-        |           |        |  | Weighted-       
|                         |  |                     |            | Remaining           |  | Average Exercise |           |        |  | Average Exercise
|Range of Exercise Prices |  | Shares              |            | Contractual Life    |  | Price            |           | Shares |  | Price           
|                         |  |                     |            |                     |  |                  |           |        |  |                 
|$0.00 - $0.50            |  |                     | 565,000    |                     |  |                  | 5.2 years |        |  | $                | 0.44  |  |  |  | 162,000   |  |  | $ | 0.47  | 
|$0.51 - $1.00            |  |                     | 7,821,827  |                     |  |                  | 9.2 years |        |  | $                | 0.63  |  |  |  | 1,121,350 |  |  | $ | 0.65  | 
|$1.01 - $1.50            |  |                     | 2,170,674  |                     |  |                  | 7.5 years |        |  | $                | 1.32  |  |  |  | 1,319,395 |  |  | $ | 1.32  | 
|$1.51 - $2.00            |  |                     | 1,089,049  |                     |  |                  | 6.9 years |        |  | $                | 1.72  |  |  |  | 748,700   |  |  | $ | 1.69  | 
|$2.01 - $2.50            |  |                     | 638,656    |                     |  |                  | 7.8 years |        |  | $                | 2.14  |  |  |  | 384,910   |  |  | $ | 2.10  | 
|$2.51 - $3.00            |  |                     | 735,012    |                     |  |                  | 8.4 years |        |  | $                | 2.60  |  |  |  | 603,188   |  |  | $ | 2.58  | 
|$3.01 - $3.50            |  |                     | 1,560,859  |                     |  |                  | 8.8 years |        |  | $                | 3.34  |  |  |  | 439,976   |  |  | $ | 3.33  | 
|$3.51 - $4.00            |  |                     | 1,594,300  |                     |  |                  | 8.2 years |        |  | $                | 3.81  |  |  |  | 1,104,284 |  |  | $ | 3.82  | 
|$4.01 - $4.50            |  |                     | 100,000    |                     |  |                  | 8.4 years |        |  | $                | 4.10  |  |  |  | 39,686    |  |  | $ | 4.09  | 
|$4.51 - $16.13           |  |                     | 3,144,962  |                     |  |                  | 7.6 years |        |  | $                | 10.28 |  |  |  | 1,625,280 |  |  | $ | 10.41 | 
|                         |  |                     |            |                     |  |                  |           |        |  |                  |       |  |  |  |           |  |  |   |       | 
|                         |  |                     | 19,420,339 |                     |  |                  | 8.3 years |        |  | $                | 2.95  |  |  |  | 7,548,769 |  |  | $ | 3.83  | 
|                         |  |                     |            |                     |  |                  |           |        |  |                  |       |  |  |  |           |  |  |   |       | 

46



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STARBASE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)



| |                                            
| | -------------------------------------------
| | 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, 2002, 2001 and 2000 to the pro forma amounts of
$112,264,000, $25,216,000, and $7,932,000, respectively, with a
corresponding pro forma net loss per common share of $1.59,
$0.51 and $0.24, 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, 2001 and 2000. 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
110.0% were applied to all grants for the year ended
March 31, 2002. The weighted-average fair value at grant
date for the options granted during the years ended
March 31, 2002, 2001 and 2000 was $0.48, $2.72 and $4.46
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 allocate resources and in assessing performance.
The operating segments of the Company are managed separately
because each segment represents a strategic business unit that
offers different products or services.

The Companys reportable operating segments
include Starbase product licenses, third party product licenses,
maintenance and services. The Starbase product licenses
operating segment develops and markets the Companys
end-to-end collaborative products for the development of
integrated content and code for eBusiness applications. The
third party product licenses operating segment resells other
companies products. The maintenance operating segment
provides after-sale support for software licenses. The services
operating segment provides 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.

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STARBASE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)

Reportable operating segment data for the years
ended March 31, 2002, 2001, and 2000 was as follows:

|                           |                  |                |   |          |        |             |   |          |     |       |   |        |       |  |   |       |       |   |   |        |        | 
|-------------------------- | ---------------- | -------------- | - | -------- | ------ | ----------- | - | -------- | --- | ----- | - | ------ | ----- |  | - | ----- | ----- | - | - | ------ | ------ | 
|                           |                  |                |   | Third    |        |             |   |          |     |      
|                           |                  | Starbase       |   | Party    |        |             |   |          |     |      
|                           |                  | Product        |   | Product  |        |             |   |          |     |      
|                           |                  | Licenses       |   | Licenses |        | Maintenance |   | Services |     | Total
|                           |                  |                |   |          |        |             |   |          |     |      
|                           |                  |               
|                           |                  | (In thousands)
|Year ended March 31, 2002: |                  |                |   |          |        |             |   |          |     |       |   |        |       |  |   |       |       |   |   |       
|                           | Revenues         |                | $ | 22,585   |        |             | $ | 4,016    |     |       | $ | 10,478 |       |  | $ | 8,292 |       |   | $ | 45,371 |       
|                           | Cost of revenues |                |   | 9,868    |        |             |   | 3,357    |     |       |   | 779    |       |  |   | 6,202 |       |   |   | 20,206 |       
|                           |                  |                |   |          |        |             |   |          |     |       |   |        |       |  |   |       |       |   |   |       
|                           |                  | Gross margin   |   | $        | 12,717 |             |   | $        | 659 |       |   | $      | 9,699 |  |   | $     | 2,090 |   |   | $      | 25,165 | 
|                           |                  |                |   |          |        |             |   |          |     |       |   |        |       |  |   |       |       |   |   |       
|Year ended March 31, 2001: |                  |                |   |          |        |             |   |          |     |       |   |        |       |  |   |       |       |   |   |       
|                           | Revenues         |                | $ | 31,270   |        |             | $ | 465      |     |       | $ | 6,183  |       |  | $ | 3,722 |       |   | $ | 41,640 |       
|                           | Cost of revenues |                |   | 3,290    |        |             |   | 280      |     |       |   | 186    |       |  |   | 4,560 |       |   |   | 8,316  |       
|                           |                  |                |   |          |        |             |   |          |     |       |   |        |       |  |   |       |       |   |   |       
|                           |                  | Gross margin   |   | $        | 27,980 |             |   | $        | 185 |       |   | $      | 5,997 |  |   | $     | (838  | ) |   | $      | 33,324 | 
|                           |                  |                |   |          |        |             |   |          |     |       |   |        |       |  |   |       |       |   |   |       
|Year ended March 31, 2000: |                  |                |   |          |        |             |   |          |     |       |   |        |       |  |   |       |       |   |   |       
|                           | Revenues         |                | $ | 14,486   |        |             | $ |         |     |       | $ | 2,012  |       |  | $ | 1,034 |       |   | $ | 17,532 |       
|                           | Cost of revenues |                |   | 1,136    |        |             |   |         |     |       |   |       |       |  |   | 1,480 |       |   |   | 2,616  |       
|                           |                  |                |   |          |        |             |   |          |     |       |   |        |       |  |   |       |       |   |   |       
|                           |                  | Gross margin   |   | $        | 13,350 |             |   | $        |    |       |   | $      | 2,012 |  |   | $     | (446  | ) |   | $      | 14,916 | 
|                           |                  |                |   |          |        |             |   |          |     |       |   |        |       |  |   |       |       |   |   |       

For the years ended March 31, 2002 and 2001,
no one customer represented greater than 10% of total revenue.
For the year ended March 31, 2000, one customer represented
11% of total revenue. At March 31, 2002 and 2001, no one
customer comprised greater than 10% of outstanding accounts
receivable. At March 31, 2000, one customer comprised 14%
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 $24,082,000 was
allocated as follows:

|                                    |                      |                |        |        | 
|----------------------------------- | -------------------- | -------------- | ------ | ------ | 
|                                    |                      | (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 | 
|                                    |                      |                |        |       

Premias operating results have been
included in the Companys financial statements from the
date of acquisition. Goodwill and assembled workforce are being
amortized on a straight-line basis over five years and recorded
as an operating expense. Developed technology is being amortized
on a straight-line basis over four

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STARBASE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)

years and recorded as a cost of revenues.
Customer list is being amortized on a straight-line basis over
four and one-half years and recorded as an operating expense.
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 lives, 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 would be incurred over a two-year period.

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
1,210,838 shares of the Companys common stock valued
at $8,842,000, transaction costs of $1,065,000 (payable in
100,000 shares of the Companys common stock valued at
$506,000 and cash of $559,000) and the assumption of net
liabilities of $972,000. The net liabilities assumed included
property and equipment that were written-down by $279,000 to
their estimated fair market value and the assumption of $253,000
of severance liabilities which was settled by the issuance of
49,985 shares of the Companys common stock. The
acquisition was accounted for as a purchase, and the purchase
price of $9,907,000 was allocated as follows:

|                    |                      |                |        |       | 
|------------------- | -------------------- | -------------- | ------ | ----- | 
|                    |                      | (In thousands)
|Current assets      |                      | $              | 179    |      
|Goodwill            |                      |                | 10,879 |      
|Long-term assets    |                      |                | 42     |      
|Liabilities assumed |                      |                | (1,193 | )    
|                    |                      |                |        |      
|                    | Total purchase price |                | $      | 9,907 | 
|                    |                      |                |        |      

ObjectShares operating results have been
included in the Companys consolidated financial statements
from the date of acquisition. Goodwill has been amortized on a
straight-line basis over five years and recorded as an operating
expense.

On June 12, 2000, the Company, through a
wholly owned subsidiary, acquired all of the outstanding common
stock of Genitor Corporation (Genitor), in exchange for
419,904 shares of the Companys common stock valued at
$2,456,000, plus transaction costs of $7,000. The acquisition
was accounted for as a purchase, and the purchase price of
$2,463,000 was allocated as follows:

|                     |                      |                |       |       | 
|-------------------- | -------------------- | -------------- | ----- | ----- | 
|                     |                      | (In thousands)
|Current assets       |                      | $              | 34    |      
|Developed technology |                      |                | 2,459 |      
|Long-term assets     |                      |                | 4     |      
|Liabilities assumed  |                      |                | (34   | )    
|                     |                      |                |       |      
|                     | Total purchase price |                | $     | 2,463 | 
|                     |                      |                |       |      

Genitors operating results have been
included in the Companys consolidated financial statements
from the date of acquisition. Developed technology is being
amortized on a straight-line basis over five years and recorded
as a cost of revenue.

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STARBASE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)

On February 20, 2001, the Company acquired
all of the outstanding capital stock of worldweb.net, Inc.
(worldweb) in exchange for 8,300,000 shares of the
Companys common stock valued at $30,000,000, cash in-lieu
of shares of $557,000, and cash transaction costs of $1,286,000.
The acquisition was accounted for as a purchase, and the
purchase price of $31,843,000 was allocated as follows:

|                     |                      |                |        |        | 
|-------------------- | -------------------- | -------------- | ------ | ------ | 
|                     |                      | (In thousands)
|Current assets       |                      | $              | 1,008  |       
|Fixed assets         |                      |                | 2,255  |       
|Developed technology |                      |                | 4,600  |       
|Assembled workforce  |                      |                | 1,200  |       
|Goodwill             |                      |                | 30,004 |       
|Long-term assets     |                      |                | 1,001  |       
|Liabilities assumed  |                      |                | (8,225 | )     
|                     |                      |                |        |       
|                     | Total purchase price |                | $      | 31,843 | 
|                     |                      |                |        |       

Worldwebs operating results have been
included in the Companys consolidated financial statements
from the date of acquisition. Developed technology is being
amortized on a straight-line basis over two years and recorded
as cost of revenues. Assembled workforce has been amortized on a
straight-line basis over four years and recorded as an operating
expense. Goodwill has been amortized on a straight-line basis
over five years and recorded as an operating expense.

On February 23, 2001, the Company acquired
all of the outstanding capital stock and stock options of
Technology Builders, Inc. (TBI) in exchange for
10,505,280 shares of the Companys common stock valued
at $35,836,000, assumed vested stock options valued at
$2,359,000, and cash transaction costs of $1,929,000. The
Company excluded from the purchase price the intrinsic value of
unvested stock options of $684,000, which has been allocated to
deferred non-cash compensation and will be recognized as
non-cash stock option compensation expense over the remaining
future vesting period of two and one-half years. The acquisition
was accounted for as a purchase, and the purchase price of
$40,124,000 was allocated as follows:

|                                             |                      |                |         |        | 
|-------------------------------------------- | -------------------- | -------------- | ------- | ------ | 
|                                             |                      | (In thousands)
|Current assets                               |                      | $              | 4,029   |       
|Fixed assets                                 |                      |                | 920     |       
|Developed technology                         |                      |                | 8,100   |       
|Assembled workforce                          |                      |                | 3,300   |       
|Customer list                                |                      |                | 2,600   |       
|Goodwill                                     |                      |                | 32,063  |       
|In-process research and development          |                      |                | 1,200   |       
|Long-term assets                             |                      |                | 339     |       
|Liabilities assumed                          |                      |                | (12,646 | )     
|Notes receivable for stock options exercised |                      |                | 219     |       
|                                             |                      |                |         |       
|                                             | Total purchase price |                | $       | 40,124 | 
|                                             |                      |                |         |       

TBIs operating results have been included
in the Companys consolidated financial statements from the
date of acquisition. Developed technology is being amortized on
a straight-lie basis over three years and recorded as cost of
revenues. Assembled workforce has been amortized on a
straight-line basis over five years and recorded as an operating
expense. Customer list is being amortized on a straight-line
basis over two years and recorded as an operating expense.
Goodwill has been amortized on a straight-line basis over five
years and recorded as an operating expense. The in-process
research and development arose from new product projects

50



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STARBASE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)

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 cash flows of the products over the
products expected lives, reflecting the estimated stage of
completion of the projects and the estimate of the costs to
complete the projects.

New project developments underway at TBI at the
time of acquisition included, among other things,
CaliberRM 4.0 and eCaliber. The Company estimated the
percent completion of these projects at the date of acquisition
was 41% and 54% respectively, and that the cost to complete
these projects will aggregate approximately $650,000 and will be
incurred over a two-year period.

The following unaudited pro forma results of
operations assume that all of the acquisitions had occurred on
the first day of each year presented. The pro forma data 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.

|                                           |  |                           |         |      |  |   |         |  
|------------------------------------------ |  | ------------------------- | ------- | ---- |  | - | ------- | -
|                                           |  |                          
|                                           |  | Years Ended March 31,    
|                                           |  |                          
|                                           |  | 2001                      |         | 2000
|                                           |  |                           |         |     
|                                           |  |                          
|                                           |  | (In thousands, except per
|                                           |  | share amounts)           
|Net revenues                               |  | $                         | 69,636  |      |  | $ | 49,609  |  
|Net loss                                   |  |                           | (58,625 | )    |  |   | (54,938 | )
|Net loss applicable to common stockholders |  | $                         | (1.19   | )    |  | $ | (1.64   | )

10.     Commitments
and Contingencies

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

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

Minimum rental commitments under lease agreements
at March 31, 2002 are as follows:

|                      |      |                  |       |       | 
|--------------------- | ---- | ---------------- | ----- | ----- | 
|                      |      | Non-Cancelable  
|                      |      | Operating Leases
|                      |      |                 
|                      |      | (In thousands)  
|Year ending March 31, |      |                  |       |      
|                      | 2003 |                  | $     | 2,476 | 
|                      | 2004 |                  |       | 2,310 | 
|                      | 2005 |                  |       | 2,352 | 
|                      | 2006 |                  |       | 1,431 | 
|                      |      |                  |       |      
|Total payments        |      | $                | 8,569 |      
|                      |      |                  |       |      

Rent expense for the years ended March 31,
2002, 2001 and 2000 totaled $3.5 million, $503,000, and
$388,000, respectively.

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STARBASE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)

11.     Convertible
Debentures

On November 20, 2001, the Company entered
into a convertible debenture and warrant purchase agreement with
various investors. Pursuant to this agreement, the investors
purchased an aggregate of $3,000,000 in 7% convertible
debentures and warrants. The purchase of the convertible
debentures and the warrants took place in two tranches. The
first tranche closed on November 21, 2001 and the second
tranche closed on December 18, 2001. The convertible
debentures are due three years from the date of issuance and are
convertible into shares of the Companys common stock at a
conversion rate equal to the lesser of $0.594 or 80% of the
average of the five lowest closing bid prices of the common
stock as traded on the Nasdaq National Market System for the ten
trading days ending on the trading day immediately before the
day the notice of conversion is submitted. Such conversion
feature represents a beneficial conversion as such conversion
amounts are less than the fair market value of the
Companys common stock at the date of issuance. The
intrinsic value of the beneficial conversion feature was
$1,584,734 based on the relative beneficial conversion amounts
and was immediately expensed as interest expense. The Company
also issued warrants to the investors to purchase
2,199,074 shares of common stock that are exercisable at
$0.65 per share and expire on November 20, 2006. The fair
value of these warrants, using the Black-Scholes model at the
date of grant, was $1,287,605 and was recorded as non-cash
equity compensation during the three months ended
December 31, 2001. The assumptions used in the
Black-Scholes model were as follows: no dividend yield; 3.97%
interest rate; five years contractual life; and volatility of
110%.

Also in connection with the issuance of the
convertible debentures, the Company paid $190,000 in cash and
issued an additional $150,000 of convertible debentures on the
same terms as described above and issued 578,703 warrants to
purchase additional shares of common stock for placement agent
fees. These fees are recorded in other non-current assets and
will be amortized over the term of the debentures. The warrants
are exercisable at $0.65 per share and expire on
December 17, 2006. The fair value of these warrants, using
the Black-Scholes model at the date of grant, was $127,661 and
was recorded in other non-current assets and will be amortized
over the term of the debentures. The assumptions used in the
Black-Scholes model were as follows: no dividend yield; 3.97%
interest rate; five years contractual life; and volatility of
110%.

During the three months ended December 31,
2001, holders of the convertible debentures converted $750,000
of convertible debentures and $3,753 of accrued interest into
1,907,064 and 5,723 shares of common stock, respectively.
As of March 31, 2002, the outstanding balance of the
convertible debentures was $1,632,000.

12.     Line of
Credit

On June 29, 2001, the Company entered into a
Loan and Security Agreement with Silicon Valley Bank with a
committed revolving line of up to $5.0 million at an
interest rate equal to one-half percentage point above the Prime
Rate but never lower than seven percent. The line of credit
required that the Company maintain the following financial
covenants: on a monthly basis, a ratio of quick assets to
current liabilities less deferred revenue of at least 1.00; and
a loss, based on earnings before interest, taxes, depreciation
and other non-cash amortization expenses (EBITDA) of no
greater than $2.0 million for the fiscal quarter ended
June 30, 2001, and of no greater than $500,000 for each
fiscal quarter thereafter, provided that the Company shall
attain positive EBITDA for the fiscal year ending March 31,
2002. During the three months ended December 31, 2001, the
Company paid off and terminated the line of credit agreement.

13.     Impairment of
Goodwill and Intangible Assets

On March 8, 2000, the Company acquired all
of the outstanding capital of Premia Corporation (Premia) for a
total purchase price of $24.1 million. The Company
attributed $20.6 million of the purchase price to goodwill
and other intangible assets.

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STARBASE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)

On April 13, 2000, the Company acquired all
of the outstanding common stock of ObjectShare, Inc.
(ObjectShare) for a total purchase price of $9.9 million.
The Company attributed $10.9 million of the purchase price
to goodwill.

On February 20, 2001, the Company acquired
all of the outstanding capital stock of worldweb.net, Inc.
(worldweb) for a total purchase price of
$31.8 million. The Company attributed $35.8 million of
the purchase price to goodwill and other intangible assets.

On February 23, 2001, the Company acquired
all of the outstanding capital stock of Technology Builders,
Inc. (TBI) for a total purchase price of
$40.1 million. The Company attributed $46.1 million of
the purchase price to goodwill and other intangible assets.

During the quarter ended September 30, 2001,
due to the recent deterioration of the economy, the decrease in
IT spending, the lack of demand for products obtained in the
worldweb acquisition and the significant reduction in headcount,
and pursuant to SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of,the Company evaluated the recoverability
of the goodwill and intangible assets acquired from ObjectShare,
worldweb, and TBI and recorded impairment charges of
$36.3 million. The Company compared the carrying amounts of
developed technology acquired in the worldweb acquisition to the
current cash flow forecasts and the original cash flow forecasts
at the date of acquisition and determined that amounts recorded
for developed technology were impaired. As a result, the Company
wrote down the value of developed technology by
$2.7 million. The Company compared the carrying amounts of
goodwill acquired in the worldweb and ObjectShare acquisitions
to current cash flow forecasts and the original cash flow
forecasts at the date of acquisitions and determined that the
amounts recorded for goodwill were impaired. As a result, the
Company wrote down the value of goodwill related to worldweb by
$23.4 million and the value of goodwill related to
ObjectShare by $7.7 million. The Company compared the
carrying amount of customer lists acquired in the TBI
acquisition to current cash flow forecasts and the original cash
flow forecasts at the date of acquisition and determined that
the amount recorded for customer lists was impaired. As a
result, the Company wrote down the value of customer lists
related to TBI by $792,000. The Company also wrote down the
values recorded for assembled workforce related to worldweb and
TBI by $859,000 and $838,000, respectively, to reflect the
substantial reduction in workforce.

Prior to December 31, 2001, all of the
Companys goodwill was specifically related to a particular
acquisition. Subsequent to December 31, 2001, the Company
reorganized its operations for all acquired companies and any
remaining goodwill became enterprise level goodwill, as the
operations for the acquisitions were integrated within the
Company and no longer separately tracked. During the quarter
ended March 31, 2002, the Company evaluated whether an
impairment of this enterprise goodwill existed by comparing the
book value of the Companys stockholders equity to
the product of (i) the number of shares of common stock
issued and outstanding at the end of the quarter and
(ii) the market price of the common stock at the end of the
quarter (market approach). If the product of shares and market
price exceeds the book value, impairment does not exist. If the
product of shares and market price is less than book value, the
Company would evaluate whether the condition is other than
temporary based primarily on fluctuations in the Companys
stock price. If the Company determines that the indicated
goodwill impairment is other than temporary, an impairment
charge is recorded for the excess of book value over fair value.
As a result of this analysis, the Company determined that
enterprise goodwill was impaired and recorded an additional
impairment charge of $26.8 million. In addition, during the
quarter ended March 31, 2002, the Company wrote down the
value recorded for assembled workforce related to the TBI
acquisition by $264,000 to reflect the further reduction in
workforce.

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STARBASE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)

The remaining unamortized amounts of intangible
assets by acquisition and category as of March 31, 2002 are
as follows:

|                                               |                      |                |        |       | 
|---------------------------------------------- | -------------------- | -------------- | ------ | ----- | 
|                                               |                      | (In thousands)
|SITE:                                          |                      |                |        |      
|                                               | Developed technology |                | $      | 379   | 
|Premia:                                        |                      |                |        |      
|                                               | Developed technology |                |        | 2,949 | 
|                                               | Customer list        |                |        | 87    | 
|                                               | Assembled workforce  |                |        | 216   | 
|Genitor:                                       |                      |                |        |      
|                                               | Developed technology |                |        | 1,574 | 
|worldweb.net:                                  |                      |                |        |      
|                                               | Developed technology |                |        | 298   | 
|                                               | Assembled workforce  |                |        | 154   | 
|Technology Builders                            |                      |                |        |      
|                                               | Developed technology |                |        | 5,135 | 
|                                               | Customer list        |                |        | 667   | 
|                                               | Assembled workforce  |                |        | 1,550 | 
|Enterprise goodwill                            |                      |                | 7,637  |      
|                                               |                      |                |        |      
|Total intangible assets from acquisitions, net |                      | $              | 20,646 |      
|Manufacturing license                          |                      |                | 310    |      
|                                               |                      |                |        |      
|Total intangible assets, net                   |                      | $              | 20,956 |      
|                                               |                      |                |        |      

Based upon the Companys most recent
impairment analysis, the Company believes that the remaining
amounts recorded for intangible assets will be recoverable.

14.     Subsequent
Events

On April 3, 2002, Mr. William R. Stow
III resigned as Chief Executive Officer and Chairman of the
Board of Directors. The Company appointed James A. Harrer as
Chief Executive Officer. In addition, the Board of Directors
elected John R. Snedegar, a current member of the Board of
Directors, as Chairman of the Board of Directors. Mr. Stow
will remain a member of the Board of Directors.

On April 3, 2002, the Company entered into a
consulting agreement with Mr. William R. Stow III,
former Chief Executive Officer and Chairman of the Board of
Directors of the Company. The Company will pay Mr. Stow an
annual consulting fee of $250,000. The term of the agreement is
one year.

On April 19, 2002, the Company entered into
an Accounts Receivable Purchase Agreement with Silicon Valley
Bank. The term of the Agreement is for one year and it allows
the Company to sell up to $4.0 million of its accounts
receivable with a finance charge equal to 5.0% above Prime Rate
for the gross average daily outstanding balance and a collateral
handling fee equal to 0.5% per month of the average daily
outstanding balance. There is a minimum finance charge of
$15,000 per month.

On May 22, 2002, the Company entered into a
definitive agreement to raise approximately $12.0 million
through the sale of convertible preferred stock and warrants to
institutional investors in a private placement. The Company
filed a Proxy Statement on June 29, 2002, and will seek
stockholder approval for the financing, which also requires that
stockholders approve a one-for-ten reverse stock split at a
special meeting of

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STARBASE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)

stockholders, to be held on July 29, 2002,
and called for those purposes. In connection with the financing
and giving effect to the reverse stock split, the Company has
agreed to issue to the investor group new preferred stock,
convertible into between 4.8 and 6.0 million shares of the
Companys common stock, and 5-year warrants to purchase
2.4 million shares of the Companys common stock at
$2.50 per share. The funding is contingent on the approval of
the private placement by stockholders and consummation of the
reverse split. Proceeds of the financing will be used for
working capital.

On February 14, 2002, the Company received a
30-day deficiency notice from The Nasdaq Stock Market, Inc., for
failure to comply with the $1.00 minimum bid price per share for
the last 30 consecutive trading days. The Company
transferred to the Nasdaq SmallCap Market on May 28, 2002,
in order to take advantage of the longer 180-day cure period. If
the price deficiency is cured during the 180-day period, and the
Company otherwise continues to comply with the Nasdaq National
Market maintenance standards, the Company could then transfer
back to the Nasdaq National Market by February 10, 2003. If
the Company does not comply with the $1.00 minimum bid price at
the end of the 180-day cure period, the Company may also be
eligible for an additional 180-calendar day grace period
provided that the Company meets the initial listing criteria for
the Nasdaq SmallCap Market.

15.     Selected
Quarterly Financial Data (Unaudited)

The following table sets forth certain unaudited
quarterly financial data for the fiscal years ended
March 31, 2001 and 2002. The information has been prepared
on the same basis as the Consolidated Financial Statements and
all necessary adjustments have been included in the amounts
stated below to present fairly the selected quarterly
information when read in conjunction with Consolidated Financial
Statements and the Notes thereto. Historical quarterly financial
results and trends may not be indicative of future results.

|                                            |  |                                          |        |           |  |          |        |          |  |          |        |           |  |          |        |          |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|------------------------------------------- |  | ---------------------------------------- | ------ | --------- |  | -------- | ------ | -------- |  | -------- | ------ | --------- |  | -------- | ------ | -------- |  | - | ------- | - |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                            |  |                                         
|                                            |  | Quarters Ended                          
|                                            |  |                                         
|                                            |  | June 30,                                 |        | Sept. 30, |  | Dec. 31, |        | Mar. 31, |  | June 30, |        | Sept. 30, |  | Dec. 31, |        | Mar. 31,
|                                            |  | 2000                                     |        | 2000      |  | 2000     |        | 2001     |  | 2001     |        | 2001      |  | 2001     |        | 2002    
|                                            |  |                                          |        |           |  |          |        |          |  |          |        |           |  |          |        |         
|                                            |  |                                         
|                                            |  | (In thousands, except per share amounts)
|Revenues                                    |  | $                                        | 7,041  |           |  | $        | 8,444  |          |  | $        | 9,540  |           |  | $        | 16,614 |          |  | $ | 12,054  |   |  | $ | 10,528  |   |  | $ | 10,888  |   |  | $ | 11,901  |  
|Gross margin                                |  |                                          | 5,607  |           |  |          | 6,700  |          |  |          | 7,691  |           |  |          | 13,325 |          |  |   | 6,900   |   |  |   | 3,815   |   |  |   | 6,617   |   |  |   | 7,833   |  
|Loss before income taxes                    |  |                                          | (3,887 | )         |  |          | (3,386 | )        |  |          | (2,883 | )         |  |          | (6,373 | )        |  |   | (13,708 | ) |  |   | (48,561 | ) |  |   | (10,442 | ) |  |   | (32,072 | )
|Net loss applicable to common stockholders  |  |                                          | (3,888 | )         |  |          | (3,386 | )        |  |          | (2,904 | )         |  |          | (6,373 | )        |  |   | (13,765 | ) |  |   | (48,591 | ) |  |   | (10,450 | ) |  |   | (32,105 | )
|                                            |  |                                          |        |           |  |          |        |          |  |          |        |           |  |          |        |          |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Basic and diluted net loss per common share |  | $                                        | (0.09  | )         |  | $        | (0.07  | )        |  | $        | (0.06  | )         |  | $        | (0.11  | )        |  | $ | (0.20   | ) |  | $ | (0.71   | ) |  | $ | (0.15   | ) |  | $ | (0.42   | )
|                                            |  |                                          |        |           |  |          |        |          |  |          |        |           |  |          |        |          |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |  

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|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure

None.




PART III




Item 10.     Directors
and Executive Officers of the Registrant

Executive Officers and Directors

Our executive officers and directors as of
June 14, 2002 and their ages are as follows:

|                          |  |     |    |             |  |                                                           
|------------------------- |  | --- | -- | ----------- |  | ----------------------------------------------------------
|Name                      |  | Age |    | Position(s)
|                          |  |     |    |            
|James A. Harrer           |  |     | 43 |             |  | Chief Executive Officer, President and Director           
|Lawrence R. Boldt         |  |     | 53 |             |  | Executive Vice President, Technical Sales and
    Services
|Ava M. Fanelli            |  |     | 49 |             |  | Executive Vice President, Customer Support                
|Donald R. Farrow(2)       |  |     | 56 |             |  | Executive Vice President and Director                     
|C. Scott Hunter Jr.       |  |     | 34 |             |  | Executive Vice President, Engineering and Chief           
|                          |  |     |    |             |  | Information Officer                                       
|Dennis E. Michael         |  |     | 44 |             |  | Executive Vice President, Marketing                       
|Douglas S. Norman         |  |     | 38 |             |  | Chief Financial Officer and Secretary                     
|James H. Smith            |  |     | 46 |             |  | Executive Vice President, Customer Group                  
|Daniel P. Ginns           |  |     | 52 |             |  | Director                                                  
|Phillip E. Pearce(3)      |  |     | 73 |             |  | Director                                                  
|John R. Snedegar(2)(3)    |  |     | 53 |             |  | Chairman of the Board and Director                        
|William R. Stow III(1)(2) |  |     | 57 |             |  | Director                                                  
|Barry W. Sullivan(1)      |  |     | 60 |             |  | Director                                                  



---



|    |                                     
|--- | ------------------------------------
|(1) | Member of the Compensation Committee
|   
|(2) | Member of the Nominating Committee  
|   
|(3) | Member of the Audit Committee       

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

James A. Harrerhas
served as our Chief Executive Officer since April 2002 and as
our President since January 2002. From December 2001 to April
2002, served as our Chief Operating Officer. From July 2001 to
December 2001, Mr. Harrer was President and CEO of Web
Associates Inc., an Internet Professional Services company. From
September 1986 to August 2000, Mr. Harrer was a founder,
President and CEO of Mustang Software, Inc. Mr. Harrer has
served as a member of our Board or Directors since November
2001. Mr. Harrer serves on the board of directors of Web
Associated Inc.

Donald R. Farrowhas
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 or Directors since February 1997. Mr. Farrow holds a
B.S. in Industrial Management from Purdue University.

Daniel P. Ginnshas
served as a member of our Board or Directors since January 1997.
From October 2000, Mr. Ginns has been Chief Executive
Officer of eCollaboratory Corporation, a company that is a

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showcase for the promotion and marketing of
product integration solutions using Starbases proprietary
StarTeam software and products of other companies. From October
1996 to August 2000, Mr. Ginns was 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. Pearcehas served as a member of our Board or
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 Bravo International 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. Snedegarhas
served as a member of our Board or Directors since December 1991
and as Chairman of the Board since April 2002. Mr. Snedegar
is President, Chief Executive Officer and a director of Micro
General Corporation, a software development telecommunications
company. 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.
Mr. Snedegar holds a B.A. degree in Business and Journalism
from Kansas State University.

William R. Stow IIIfounded Starbase in September 1991.
Mr. Stow has served as our Chief Executive Officer from
September 1991 to April 2002 (exclusive of the period from
August 1996 to January 1997) and has served as our President
from July 1998 through January 2002 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 or Directors since September 1991, our Co-Chairman
of the Board from October 1994 to August 1996 and our Chairman
of the Board from August 1996 through April 2002. Mr. Stow
holds a B.S. in Mathematics from Oregon State University.

Barry W. Sullivanhas served as a member of our Board or
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.

Members of the Board or Directors hold office
until the next annual meeting and until their successors are
elected and qualified.

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

Lawrence R. Boldthas served as our Executive Vice
President, Technical Sales and Services since May 2002 and as a
Vice President Strategic Support since February 2001. Prior to
that, from August 1994 to February of 2001, he served as Senior
Vice President of Pre-Sales and Consulting at Technology
Builders, Inc. Mr. Boldt holds a BA degree in Business
Management from St. Leo College and an MS in Management from
Maryville University.

Ava M. Fanellihas
served as our Executive Vice President of Customer Support since
January 2002, Divisional Vice President of StarTeam family of
products from April 2001 to January 2002 and as Vice President
Corporate Products from June 2000 to March 2001. Prior to that,
Ms. Fanelli served in various management positions in
product planning, product management and development,
manufacturing and quality assurance at Xerox Corporation.
Ms. Fanelli holds a B.S. degree in Chemistry from Rochester
Institute of Technology and an MBA from the University of
Rochester.

C. Scott Hunter, Jr.has served as Executive Vice President
of Engineering/ Chief Information Officer since February 2002.
From August 2001 to February 2002, Mr. Hunter served as
Chief Technology Officer at

57



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##### Table of Contents



Acrasoft. From June 1988 to September 2000,
Mr. Hunter served as Executive Vice President of
Engineering for Mustang Software, Inc., a developer of email
management products. Mr. Hunter holds a B.S. in Computer
Science and a minor in Economics from California State
University.


Dennis E. Michaelhas served as our Executive Vice
President of Marketing since March 2002. From April 1995 to
August 2001, Mr. Michael served as Vice President of
Marketing for NQL, Inc and its predecessor Alpha Microsystems
and AlphaServ. Prior to joining NQL, Inc., from 1990 to 1995,
Mr. Michael served in various management positions at AST
Computers. Mr. Michael has a B.A. in Communications from
California State University at Fullerton.

Douglas S. Normanfounded 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. In
February 2002, Mr. Norman was elected Secretary.
Mr. Norman has served as our Assistant Secretary since
February 1997 and Director of Finance from June 1996 to February
2000. Douglas S. Norman is the son-in-law of
William R. Stow III, a member of the Board or Directors.
Mr. Norman holds a B.S. in Business Administration from
California State University and an M.B.A. from Loyola Marymount.

James H. Smithhas
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 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.

Our executive officers are appointed by the Board
of Directors to serve until they resign or are removed by the
Board of Directors.

Section 16(a) Beneficial Ownership Reporting
Compliance

Section 16(a) of the Securities Act of 1934,
as amended, requires our directors and executive officers, and
persons who own more than ten percent of our common stock, to
file with the Securities and Exchange Commission (SEC) initial
reports of ownership and reports of changes in ownership of our
common stock and our other equity securities. To our 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

None of our directors or officers have 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.

None of our directors or officers have 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 us to, or
on behalf of, our Chief Executive Officer and the other of our
most highly compensated executive officers (Named Executive
Officers), for services rendered in all capacities to us during
the fiscal years ended

58



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##### Table of Contents



March 31, 2000, 2001, and 2002. Except as
otherwise noted, no Named Executive Officer received any
restricted stock award, stock appreciation right or payment
under any long-term incentive plan.


Summary Compensation Table

|                            |                                    |      |      |                     |  |            |         |              |  |              |        |         |  |  |         |         |  |   |       |        |    
|--------------------------- | ---------------------------------- | ---- | ---- | ------------------- |  | ---------- | ------- | ------------ |  | ------------ | ------ | ------- |  |  | ------- | ------- |  | - | ----- | ------ | ---
|                            |                                    |      |      |                     |  |            |         | Long Term    |  |             
|                            |                                    |      |      |                     |  |            |         | Compensation |  |             
|                            |                                    |      |      |                     |  |            |         | Awards       |  |             
|                            |                                    |      |      |                     |  |            |         |              |  |             
|                            |                                    |      |      |                     |  | Securities |         |             
|                            |                                    |      |      | Annual Compensation |  | Underlying |         |             
|                            |                                    |      |      |                     |  | Options(1) |         | All Other   
|Name and Principal Position |                                    | Year |      | Salary              |  | Bonus      |         | (Shares)     |  | Compensation
|                            |                                    |      |      |                     |  |            |         |              |  |             
|William R. Stow III         |                                    |      | 2002 |                     |  | $          | 246,667 |              |  | $            | 28,750 |         |  |  | 245,000 |         |  | $ | 6,757 | (2)   
|                            | Chief Executive Officer,           |      |      | 2001                |  |            | $       | 250,000      |  |              | $      | 86,750  |  |  |         | 35,000  |  |   | $     | 85,626 | (3)
|                            | Chairman of the Board and Director |      |      | 2000                |  |            | $       | 150,000      |  |              | $      | 1,000   |  |  |         | 35,000  |  |   | $     |       |    
|Karen Bennett               |                                    |      | 2002 |                     |  | $          | 165,000 |              |  | $            | 69,255 |         |  |  | 200,000 |         |  | $ |      |       
|                            | Executive Vice President,          |      |      | 2001                |  |            | $       | 66,953       |  |              | $      | 15,500  |  |  |         | 150,000 |  |   | $     |       |    
|                            | Professional Services              |      |      | 2000                |  |            | $       |             |  |              | $      |        |  |  |         |        |  |   | $     |       |    
|Donald R. Farrow            |                                    |      | 2002 |                     |  | $          | 200,000 |              |  | $            | 12,500 |         |  |  | 235,000 |         |  | $ |      |       
|                            | Executive Vice President,          |      |      | 2001                |  |            | $       | 200,000      |  |              | $      | 38,000  |  |  |         | 35,000  |  |   | $     |       |    
|                            | Administration and Director        |      |      | 2000                |  |            | $       | 135,307      |  |              | $      | 1,000   |  |  |         | 85,000  |  |   | $     |       |    
|Douglas S. Norman           |                                    |      | 2002 |                     |  | $          | 181,821 |              |  | $            | 15,000 |         |  |  | 200,000 |         |  | $ |      |       
|                            | Chief Financial Officer and        |      |      | 2001                |  |            | $       | 179,078      |  |              | $      | 50,500  |  |  |         |        |  |   | $     |       |    
|                            | Secretary                          |      |      | 2000                |  |            | $       | 105,000      |  |              | $      | 16,000  |  |  |         | 80,000  |  |   | $     |       |    
|James H. Smith              |                                    |      | 2002 |                     |  | $          | 200,000 |              |  | $            | 98,000 |         |  |  | 200,000 |         |  | $ |      |       
|                            | Executive Vice President,          |      |      | 2001                |  |            | $       | 145,000      |  |              | $      | 105,500 |  |  |         | 123,445 |  |   | $     |       |    
|                            | Customer Group                     |      |      | 2000                |  |            | $       | 61,875       |  |              | $      | 10,000  |  |  |         | 437,000 |  |   | $     |       |    



---



|    |                                                                  
|--- | -----------------------------------------------------------------
|(1) | Amounts represent stock options granted for the
    period shown.
|   
|(2) | Includes $6,757 relocation wages.                                
|   
|(3) | Includes $85,626 payment for accrued vacation.                   

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##### Table of Contents



The following table sets forth information
concerning stock option grants made to each person named in the
Summary Compensation Table during the fiscal year ended
March 31, 2002. No stock appreciation rights were granted
to such individuals 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 our
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. The named executive officers will
realize no gain on these options unless the price of the common
stock increases above the exercise price for such options, which
will benefit all stockholders proportionately.

Option/SAR Grants in the Fiscal Year Ended
March 31, 2002

|                    |  |                   |         |                   |  |                 |      |             |  |                  |      |        |  |  |          |  |  |  |   |  |  |  |        | 
|------------------- |  | ----------------- | ------- | ----------------- |  | --------------- | ---- | ----------- |  | ---------------- | ---- | ------ |  |  | -------- |  |  |  | - |  |  |  | ------ | 
|                    |  |                   |         |                   |  |                 |      |             |  |                 
|                    |  |                   |         | Potential        
|                    |  | Individual Grants |         | Realizable Value 
|                    |  |                   |         | at Assumed       
|                    |  | Number of         |         |                   |  | Annual Rates of
|                    |  | Securities        |         | Percent of Total  |  |                 |      | Stock Price
|                    |  | Underlying        |         | Options/SARS      |  | Exercise        |      |             |  | Appreciation for
|                    |  | Options/SARS      |         | Granted to        |  | or Base         |      |             |  | Option Term     
|                    |  | Granted           |         | Employees         |  | Price           |      | Expiration  |  |                 
|Name                |  | (# of Shares)(1)  |         | In Fiscal Year(2) |  | ($/Sh)(3)       |      | Date        |  | 5%($)            |      | 10%($)
|                    |  |                   |         |                   |  |                 |      |             |  |                  |      |       
|William R. Stow III |  |                   | 210,000 |                   |  |                 | 2.0% |             |  |                  | 0.63 |        |  |  | 12/26/11 |  |  |  | 0 |  |  |  | 14,765 | 
|                    |  |                   | 35,000  |                   |  |                 | *    |             |  |                  | 0.71 |        |  |  | 10/5/11  |  |  |  | 0 |  |  |  | 0      | 
|Karen Bennett(4)    |  |                   | 200,000 |                   |  |                 | 1.9% |             |  |                  | 0.63 |        |  |  | 12/26/11 |  |  |  | 0 |  |  |  | 14,062 | 
|Donald R. Farrow    |  |                   | 200,000 |                   |  |                 | 1.9% |             |  |                  | 0.63 |        |  |  | 12/26/11 |  |  |  | 0 |  |  |  | 14,062 | 
|                    |  |                   | 35,000  |                   |  |                 | *    |             |  |                  | 0.71 |        |  |  | 10/5/11  |  |  |  | 0 |  |  |  | 0      | 
|Douglas S. Norman   |  |                   | 200,000 |                   |  |                 | 1.9% |             |  |                  | 0.63 |        |  |  | 12/26/11 |  |  |  | 0 |  |  |  | 14,062 | 
|James H. Smith      |  |                   | 200,000 |                   |  |                 | 1.9% |             |  |                  | 0.63 |        |  |  | 12/26/11 |  |  |  | 0 |  |  |  | 14,062 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*   | Less than 1%                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|(1) | Options granted to purchase common stock. All
    options granted during the period were granted pursuant to the
    2001 Stock Plan at fair market value on the date of the grant.
    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. 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
    10,388,413 shares of our common stock to employees, consultants
    and Board members during the year ended March 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(3) | The exercise price may be paid in cash or in
    shares of common stock valued at fair market value on the
    exercise date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|(4) | Ms. Bennetts employment with Starbase
    terminated on June 3, 2002. Any unexercised options expire
    July 3, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

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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 person named in the Summary
compensation table as of March 31, 2002.

Aggregated Option Exercises in Fiscal Year
2002

and Option Values as of March 31,
2002


|                    |  |          |   |          |  |                        |   |                         |  |             |         |               |  |  |         |  |  |  |   |  |  |  |   | 
|------------------- |  | -------- | - | -------- |  | ---------------------- | - | ----------------------- |  | ----------- | ------- | ------------- |  |  | ------- |  |  |  | - |  |  |  | - | 
|                    |  |          |   |          |  |                        |   |                         |  |            
|                    |  |          |   |          |  | Number of Securities   |   |                         |  |            
|                    |  |          |   |          |  | Underlying Unexercised |   |                        
|                    |  | Shares   |   |          |  | Options at             |   | Value of Unexercised   
|                    |  | Acquired |   |          |  | March 31, 2002         |   | In-the-Money(1) Options
|                    |  | on       |   | Value    |  | (# of Shares)          |   | at March 31, 2002($)(2)
|                    |  | Exercise |   | Realized |  |                        |   |                        
|Name                |  | (#)      |   | ($)      |  | Exercisable            |   | Unexercisable           |  | Exercisable |         | Unexercisable
|                    |  |          |   |          |  |                        |   |                         |  |             |         |              
|William R. Stow III |  |          |  |          |  |                        |  |                         |  |             | 502,413 |               |  |  | 239,377 |  |  |  |  |  |  |  |  | 
|Karen Bennett       |  |          |  |          |  |                        |  |                         |  |             | 49,999  |               |  |  | 300,001 |  |  |  |  |  |  |  |  | 
|Donald R. Farrow    |  |          |  |          |  |                        |  |                         |  |             | 422,029 |               |  |  | 215,418 |  |  |  |  |  |  |  |  | 
|Douglas S. Norman   |  |          |  |          |  |                        |  |                         |  |             | 157,115 |               |  |  | 239,585 |  |  |  |  |  |  |  |  | 
|James H. Smith      |  |          |  |          |  |                        |  |                         |  |             | 347,839 |               |  |  | 412,606 |  |  |  |  |  |  |  |  | 



---



|    |                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In-the-money options are options
    whose exercise price was less than the market price of a share
    of Common Stock at March 28, 2002, which was the final day
    of trading in March.                       
|   
|(2) | Calculated based on a stock price of $0.27 per
    share, which was the closing price of a share of common stock
    reported on the Nasdaq National Market on March 28, 2002,
    the final day of trading in March

Board Compensation

Through December 2001, directors who are not our
employee received $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. After January 1, 2002 only approved travel
arrangements were reimbursed. In addition, directors receive
non-qualified stock option grants for shares of our common
stock. All options awarded to 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. Ginns performed certain
consulting services for which he was compensated $17,063 during
fiscal year 2002.

Change in Control Agreements

We have change in control agreements with
Messrs. Lawrence R. Boldt, C. Scott
Hunter, Jr., Alan D. Kucheck, Dennis E. Michael,
Douglas S. Norman, Donald R. Farrow, James H.
Smith, Ms. Ava M. Fanelli and Ms. Lydia J.
Patterson. In the event of termination, as a result of change of
control, the executive shall be entitled to receive his/her
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. 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 for Messrs. Kucheck,
Norman, Smith and Ms. Patterson and the direct or indirect
sale or exchange in a single series of related transactions by
our stockholders of more than thirty percent of our voting stock
for Messrs. Boldt, Hunter, Michael and Ms. Fanelli;
(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; (iv) we
are liquidated or dissolved; or (v) for Messrs. Boldt,
Hunter, Michael and Ms. Fanelli, whenever the individuals
on the Board of Directors as of June 1, 2002 (incumbent
Board) no longer constitute two-thirds of the then current
Board, unless any new member was approved by two-thirds of the
incumbent Board.

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Compensation Committee Interlocks and Insider
Participation

The members of the Compensation Committee
participate in all deliberations concerning executive
compensation. As of March 31, 2002, the Compensation
Committee consisted of Messrs. Frank R. Caccamo,
William R. Stow III, and Barry W. Sullivan.
During the fiscal year ended March 31, 2002, Mr. Stow
served as our Chief Executive Officer. None of our executive
officers serve as a member of the Board or Directors or
compensation committee of any other entity that has one or more
executive officers serving as a member of our Board or 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 our
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 our other executive officers.

The objectives of our executive compensation
program are to:



| |   |                                                                                              
| | - | ---------------------------------------------------------------------------------------------
| |  | Support the achievement of our desired
    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

Our 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 our employees.

Base Salary

Base salary levels for our 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 us.

Stock Option Program

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

The 2001 Stock Option Plan and the 1996 Stock
Plan each 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 our common
stock on the date of the grant and the exercise period may not
exceed ten years, subject to further limitations.

In addition, we issue non-qualified stock options
outside either the 2001 Stock Plan or 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.

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##### Table of Contents



Benefits

We provide to executive officers, medical and
pension benefits that are generally available to our employees.

Bonus

We 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

REPORT OF THE AUDIT COMMITTEE

The Audit Committee has reviewed and discussed
the audited consolidated financial statements for the year ended
March 31, 2002 with our management and with
Deloitte & Touche, LLP, our independent auditors. The
Audit Committee has also discussed with Deloitte &
Touche the matters required to be discussed by Statement of
Auditing Standards No. 61, Communicating with the Audit
Committee.

Based on the reviews and discussions referred to
above, the Audit Committee recommended to the Board of Directors
that the consolidated financial statements referred to above be
included in our Annual Report on Form 10-K for the year
ended March 31, 2002.



| |                               
| | ------------------------------
| | Phillip E. Pearce             
| | John R. Snedegar              
| | Members of the Audit Committee

Fees Paid to Independent Auditors



| |           
| | ----------
| | Audit Fees

Deloitte & Touche, LLP (Deloitte) billed
us aggregate fees of $107,000 for professional services rendered
for the audit of our annual consolidated financial statements
for the year ended March 31, 2002, and for review of the
consolidated financial statements included in our quarterly
reports on Form 10-Q for the first three quarters of fiscal
2002.



| |                                                            
| | -----------------------------------------------------------
| | Financial Information Systems Design and
    Implementation

Deloitte did not bill us for financial
information systems design and implementation fees for the year
ended March 31, 2002.



| |               
| | --------------
| | All Other Fees

Deloitte billed us aggregate fees of $221,890 for
other professional services rendered for the year ended
March 31, 2002, including professional services in
connection with our tax return preparation, tax consulting,
statutory filings and other consulting services.

The Audit Committee of the Board of Directors has
considered and concluded that the provision by Deloitte of the
non-audit services listed above is compatible with maintaining
Deloittes independence.

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##### Table of Contents



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, 1997 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)

|                                 |  |         |     |         |  |         |     |         |  |         |     |         |  |   |     |  |  |   |     |  |  |   |     | 
|-------------------------------- |  | ------- | --- | ------- |  | ------- | --- | ------- |  | ------- | --- | ------- |  | - | --- |  |  | - | --- |  |  | - | --- | 
|                                
|                                
|                                 |  | 3/29/97 |     | 3/31/98 |  | 3/31/99 |     | 3/31/00 |  | 3/31/01 |     | 3/28/02
|                                
|                                
|STARBASE CORPORATION             |  | $       | 100 |         |  | $       | 240 |         |  | $       | 126 |         |  | $ | 698 |  |  | $ | 165 |  |  | $ | 20  | 
|NASDAQ COMPOSITE INDEX: US       |  | $       | 100 |         |  | $       | 152 |         |  | $       | 205 |         |  | $ | 380 |  |  | $ | 152 |  |  | $ | 153 | 
|COMPUTER & DATA PROCESSING INDEX |  | $       | 100 |         |  | $       | 175 |         |  | $       | 285 |         |  | $ | 513 |  |  | $ | 174 |  |  | $ | 177 | 

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.

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##### Table of Contents






Item 12.     Security
Ownership of Certain Beneficial Owners and
Management

The following table sets forth information
regarding beneficial ownership of our outstanding common stock
as of May 31, 2002, except as otherwise indicated, by:
(1) each person or group that beneficially owns more than
5% of the outstanding shares of common stock; (2) each of
the Chief Executive Officer and our four most highly compensated
executive officers other than the Chief Executive Officer for
the year ended March 31, 2002; (3) each of our
directors; and (4) all executive officers and directors as
a group. The shares shown as beneficially owned by all directors
and executive officers as a group include shares beneficially
owned by persons who joined us or otherwise became executive
officers during fiscal 2003 (i.e., the year ending
March 31, 2003) prior to May 31, 2002. Except as
otherwise indicated below, each owner has sole voting and
investment power with respect to all shares listed as
beneficially owned.

|                                                             |  |                     |           |               |  |  |     |  
|------------------------------------------------------------ |  | ------------------- | --------- | ------------- |  |  | --- | -
|                                                             |  | Number of Shares of |           | Percentage of
|Name(1)                                                      |  | Common Stock        |           | Common Stock 
|                                                             |  |                     |           |              
|William R. Stow III                                          |  |                     | 1,249,273 | (2)           |  |  | 1.4 | %
|Karen Bennett                                                |  |                     | 56,249    | (3)           |  |  | *   |  
|Donald R. Farrow                                             |  |                     | 498,516   | (4)           |  |  | *   |  
|Douglas S. Norman                                            |  |                     | 245,273   | (5)           |  |  | *   |  
|James H. Smith                                               |  |                     | 450,221   | (6)           |  |  | *   |  
|Frank R. Caccamo                                             |  |                     | 160,624   | (7)           |  |  | *   |  
|Daniel P. Ginns                                              |  |                     | 354,324   | (8)           |  |  | *   |  
|James A. Harrer                                              |  |                     | 405,782   | (9)           |  |  | *   |  
|Phillip E. Pearce                                            |  |                     | 210,624   | (10)          |  |  | *   |  
|John R. Snedegar                                             |  |                     | 240,567   | (11)          |  |  | *   |  
|Barry W. Sullivan                                            |  |                     | 160,624   | (12)          |  |  | *   |  
|Total: All directors and executive officers
    (15 persons) |  |                     | 4,354,262 | (13)          |  |  | 4.8 | %



---



|  |             
|- | ------------
|* | 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 900 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 572,163 shares of common stock and 70,109 shares
    of common stock issuable upon the exercise of stock options that
    are currently exercisable or will become exercisable within
    60 days after May 31, 2002 by Mr. Stow and
    Mrs. Stow, respectively. Mr. Stow disclaims beneficial
    ownership of the shares exercisable by Mrs. Stow.
|   
|(3) | Represents shares of common stock issuable upon
    the exercise of stock options that are currently exercisable or
    will become exercisable within 60 days after May 31,
    2002. Ms. Bennetts employment with Starbase
    terminated as of June 3, 2002.                                                                                                                                                                                                                                                                                                                                                      
|   
|(4) | Includes 15,000 shares of common stock held by
    Mr. Farrow. Also includes 483,516 shares of common stock
    issuable upon the exercise of stock options that are currently
    exercisable or will become exercisable within 60 days after
    May 31, 2002.                                                                                                                                                                                                                                                                                                                                                      
|   
|(5) | Includes 25,421 shares of common stock held by
    Mr. Norman of which 13,786 shares are subject to a
    Performance Escrow Agreement. Also includes 219,852 shares of
    common stock issuable upon the exercise of stock options that
    are currently exercisable or will become exercisable within
    60 days after May 31, 2002.                                                                                                                                                                                                                                                                             
|   
|(6) | Includes 6,847 shares of common stock held by
    Mr. Smith. Also includes 443,374 shares of common stock
    issuable upon the exercise of stock options that are currently
    exercisable or will become exercisable within 60 days after
    May 31, 2002.                                                                                                                                                                                                                                                                                                                                                        

65



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##### Table of Contents





|    |                                                                                                                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(7) | Represents shares of common stock issuable upon
    the exercise of stock options that are currently exercisable or
    will become exercisable within 60 days after May 31,
    2002. Mr. Caccamo resigned as of May 10, 2002.                                                                                         
|   
|(8) | Includes 163,200 shares of common stock held by
    Mr. Ginns and 5,500 shares of common stock held by
    Mrs. Ginns. Also includes 185,624 shares of common stock
    issuable upon the exercise of stock options that are currently
    exercisable or will become exercisable within 60 days after
    May 31, 2002.
|   
|(9) | Includes 128,700 shares of common stock held by
    Mr. Harrer. Also includes 277,082 shares of common stock
    issuable upon the exercise of stock options that are currently
    exercisable or will become exercisable within 60 days after
    May 31, 2002.                                                       



|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Represents shares of common stock issuable upon
    the exercise of stock options that are currently exercisable or
    will become exercisable within 60 days after May 31,
    2002.                                                                                                                                                                                                                                                                            
|    
|(11) | 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 and 1,667 shares held by Norexco Petroleum of which
    Mr. Snedegar is President. Also includes 223,956 shares of
    common stock issuable upon the exercise of stock options that
    are currently exercisable or will become exercisable within
    60 days after May 31, 2002.
|    
|(12) | Includes 7,000 shares of common stock held by
    Mr. Sullivan. Also includes 153,624 shares of common stock
    issuable upon the exercise of stock options that are currently
    exercisable or will become exercisable within 60 days after
    May 31, 2002.                                                                                                                                                                                                 
|    
|(13) | Includes a total of 1,057,223 shares of common
    stock and 3,297,039 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 or will become exercisable within 60 days after
    May 31, 2002.                                                                                                                                         




Item 13.     Certain
Relationships and Related Transactions

Certain Transactions

In fiscal 1995, the Board of Directors authorized
us to loan William Stow III, our former President and CEO,
the sum of $126,000. Principal and accrued interest aggregated
$108,743 and $103,915, at March 31, 2002 and 2001,
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, 2002, the maturity date on the note was extended
to November 4, 2002.

In the fiscal year ended March 31, 2001, we
entered into a technology purchase from eCollaboratory for the
purchase amount of $1.7 million, which includes amounts
previously advanced to eCollaboratory. During the fiscal year
ended March 31, 2001, Mr. Daniel P. Ginns, owner,
director and the chief executive officer of eCollaboratory,
received a salary from eCollaboratory and Mr. Phillip E.
Pearce, a former director of eCollaboratory, received fees for
his services as a director from eCollaboratory.

In May 2001, we loaned Mr. Phillip E.
Pearce, a member of our Board of Directors, the sum of $150,000.
The loan is evidenced by a promissory note and bears interest at
a rate of 8% per annum, payable at maturity. The maturity date
on the note was February 28, 2002 and the note is now in
default. Mr. Pearce has informed us that he loaned the
proceeds of the note to eCollaboratory, a company owned by
Mr. Daniel P. Ginns, a director of our company.
Mr. Pearce has also informed us that he does not intend to
repay the note unless his loan to eCollaboratory is repaid. As a
result, we have reserved the outstanding amount of the loan to
Mr. Pearce.

On April 3, 2002, we entered into a
consulting agreement with Mr. William R.
Stow III, our former Chief Executive Office and Chairman of
our Board of Directors. We will pay Mr. Stow an annual
consulting fee of $250,000. The term of the agreement is one
year.

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##### Table of Contents






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.

|        |       |                         |  |                                                                                                                             |  |  |     | 
|------- | ----- | ----------------------- |  | --------------------------------------------------------------------------------------------------------------------------- |  |  | --- | 
|Exhibit |       |                         |  | Ref./                                                                                                                      
|Number  |       | Description Of Document |  | Page                                                                                                                       
|        |       |                         |  |                                                                                                                            
|        | 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 dated as of
    November 20, 2001.                                                    |  |  | (C) | 
|        | 10.1  |                         |  | Form of Non-Qualified Stock Option Contract
    between the registrant and its directors, employees and
    consultants.    |  |  | (D) | 
|        | 10.2  |                         |  | Technology Builders, Inc. Amended and Restated
    Stock Option and Incentive Stock Option Plan adopted
    March 22, 2000. |  |  | (D) | 
|        | 10.3  |                         |  | Form of Technology Builders, Inc. Notice of Grant
    of Stock Options and Option Agreement.                                |  |  | (D) | 
|        | 10.4  |                         |  | Form of Technology Builders, Inc. Incentive Stock
    Option Conversion Information.                                        |  |  | (D) | 
|        | 10.5  |                         |  | Convertible Debenture and Warrant Purchase
    Agreement, dated as of November 20, 2001.                                    |  |  | (C) | 
|        | 10.6  |                         |  | Form of Convertible Debenture.                                                                                              |  |  | (C) | 
|        | 10.7  |                         |  | Form of Warrant.                                                                                                            |  |  | (C) | 
|        | 10.8  |                         |  | UBS Warburg Agreement, dated as of
    December 3, 2001.                                                                    |  |  | (E) | 
|        | 10.9  |                         |  | SG Cowen Securities Corporation Agreement dated
    as of December 18, 2001.                                                |  |  | (E) | 
|        | 10.10 |                         |  | Form of Agreement.                                                                                                          |  |  | (E) | 
|        | 10.11 |                         |  | Secured Promissory Note with William R.
    Stow III and Naoma J. Stow, dated July 1, 1995.                                 |  |  |     | 
|        | 10.12 |                         |  | Promissory Note with Phillip E. Pearce, dated as
    of May 3, 2002.                                                        |  |  |     | 
|        | 10.13 |                         |  | Consulting Agreement with William R.
    Stow III, dated as of April 3, 2002.                                               |  |  |     | 
|        | 10.14 |                         |  | Accounts Receivable Purchase Agreement with
    Silicon Valley Bank, dated as of April 19, 2002.                            |  |  |     | 
|        | 21.1  |                         |  | Subsidiaries of the Company                                                                                                 |  |  |     | 
|        | 23.1  |                         |  | Consent of Deloitte & Touche LLP, Independent
    Auditors                                                                  |  |  |     | 



---



|    |  |                                                                                                                                                                        
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 S-3 (file number 333-75846) filed
    with the Commission on December 21, 2001.                             
|   
|(D) |  | Incorporated herein by reference to the
    Companys Form S-3 (file number 333-66052) filed
    with the Commission on July 27, 2001.                                 
|   
|(E) |  | Incorporated herein by reference to the
    Companys Form S-3 (file number 333-81206) filed
    with the Commission on January 23, 2002.                              

(b) Reports on Form 8-K

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

In a report filed on Form 8-K, dated
June 4, 2002, the Company reported entering into a
definitive agreement to raise approximately $12 million
contingent on the approval by stockholder of the private place
and a one-for-ten reverse stock split.

67



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##### Table of Contents






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 12th day of July,
2002.



| |                     
| | --------------------
| | 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.

|                                           |  |                                                                          |  |              
|------------------------------------------ |  | ------------------------------------------------------------------------ |  | -------------
|Signature                                  |  | Title                                                                    |  | Date         
|                                           |  |                                                                          |  |              
|/s/ JAMES A. HARRERJames A. Harrer         |  | Chief Executive Officer, and President
    (principal executive officer) |  | July 12, 2002
|                                          
|/s/ DOUGLAS S. NORMANDouglas S. Norman     |  | Chief Financial Officer, and Secretary
    (principal financial officer) |  | July 12, 2002
|                                          
|/s/ DAVID J. KATZOFFDavid J. Katzoff       |  | Corporate Controller                                                     |  | July 12, 2002
|                                          
|/s/ DONALD R. FARROWDonald R. Farrow       |  | Executive Vice President and Director                                    |  | July 12, 2002
|                                          
|/s/ PHILLIP E. PEARCEPhillip E. Pearce     |  | Director                                                                 |  | July 12, 2002
|                                          
|/s/ JOHN R. SNEDEGARJohn R. Snedegar       |  | Chairman of the Board and Director                                       |  | July 12, 2002
|                                          
|/s/ WILLIAM R. STOW IIIWilliam R. Stow III |  | Director                                                                 |  | July 12, 2002
|                                          
|/s/ BARRY W. SULLIVANBarry W. Sullivan     |  | Director                                                                 |  | July 12, 2002

68



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##### Table of Contents






EXHIBIT INDEX

|        |       |                         |  |                                                                                                                             |  |  |     | 
|------- | ----- | ----------------------- |  | --------------------------------------------------------------------------------------------------------------------------- |  |  | --- | 
|Exhibit |       |                         |  | Ref./                                                                                                                      
|Number  |       | Description Of Document |  | Page                                                                                                                       
|        |       |                         |  |                                                                                                                            
|        | 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 dated as of
    November 20, 2001.                                                    |  |  | (C) | 
|        | 10.1  |                         |  | Form of Non-Qualified Stock Option Contract
    between the registrant and its directors, employees and
    consultants.    |  |  | (D) | 
|        | 10.2  |                         |  | Technology Builders, Inc. Amended and Restated
    Stock Option and Incentive Stock Option Plan adopted
    March 22, 2000. |  |  | (D) | 
|        | 10.3  |                         |  | Form of Technology Builders, Inc. Notice of Grant
    of Stock Options and Option Agreement.                                |  |  | (D) | 
|        | 10.4  |                         |  | Form of Technology Builders, Inc. Incentive Stock
    Option Conversion Information.                                        |  |  | (D) | 
|        | 10.5  |                         |  | Convertible Debenture and Warrant Purchase
    Agreement, dated as of November 20, 2001.                                    |  |  | (C) | 
|        | 10.6  |                         |  | Form of Convertible Debenture.                                                                                              |  |  | (C) | 
|        | 10.7  |                         |  | Form of Warrant.                                                                                                            |  |  | (C) | 
|        | 10.8  |                         |  | UBS Warburg Agreement, dated as of
    December 3, 2001.                                                                    |  |  | (E) | 
|        | 10.9  |                         |  | SG Cowen Securities Corporation Agreement dated
    as of December 18, 2001.                                                |  |  | (E) | 
|        | 10.10 |                         |  | Form of Agreement.                                                                                                          |  |  | (E) | 
|        | 10.11 |                         |  | Secured Promissory Note with William R.
    Stow III and Naoma J. Stow, dated July 1, 1995.                                 |  |  |     | 
|        | 10.12 |                         |  | Promissory Note with Phillip E. Pearce, dated as
    of May 3, 2002.                                                        |  |  |     | 
|        | 10.13 |                         |  | Consulting Agreement with William R.
    Stow III, dated as of April 3, 2002.                                               |  |  |     | 
|        | 10.14 |                         |  | Accounts Receivable Purchase Agreement with
    Silicon Valley Bank, dated as of April 19, 2002.                            |  |  |     | 
|        | 21.1  |                         |  | Subsidiaries of the Company                                                                                                 |  |  |     | 
|        | 23.1  |                         |  | Consent of Deloitte & Touche LLP, Independent
    Auditors                                                                  |  |  |     | 



---



|    |  |                                                                                                                                                                        
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 S-3 (file number 333-75846) filed
    with the Commission on December 21, 2001.                             
|   
|(D) |  | Incorporated herein by reference to the
    Companys Form S-3 (file number 333-66052) filed
    with the Commission on July 27, 2001.                                 
|   
|(E) |  | Incorporated herein by reference to the
    Companys Form S-3 (file number 333-81206) filed
    with the Commission on January 23, 2002.                              

69