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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                   FORM 10-KSB

                   |X| ANNUAL REPORT UNDER SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                    For the Fiscal Year Ended March 31, 1997


                         Commission File Number: 0-25612

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

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

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

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

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

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

                              TITLE OF EACH CLASS:
                         Common Stock, $0.01 par value

Indicate by check mark whether the registrant has (1) filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required to file such reports), and (2) been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]

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

The registrant's revenues for its most recent fiscal year:       $1,039,000.

The  aggregate  market value of the voting stock held by  non-affiliates  of the
registrant as of May 31, 1997,  based on the closing price as reported by NASDAQ
was $ 10,847,821.

Number of shares outstanding as of May 31, 1997:     Common Stock: 13,463,717

Documents Incorporated by Reference: Proxy Statement for 1997 Annual
Shareholders' Meeting; Part III.


                                   
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                                TABLE OF CONTENTS
Part I........................................................................3
   Item 1. Business...........................................................3
     Company Formation and Acquisition........................................3
     Company and Product History..............................................3
     Market Background for ITE Products.......................................4
     The Market Opportunity...................................................5
     Industry Background......................................................6
     StarBase Strategy........................................................8
     StarBase ITE Products....................................................9
     Competition.............................................................12
     Marketing and Sales.....................................................14
     Proprietary Rights......................................................16
     Employees...............................................................17
     Forward Looking Statements..............................................17
     Risk Factors............................................................17
   Item 2. Properties........................................................18
   Item 3. Legal Proceedings.................................................18
   Item 4. Submission of Matters to a Vote of Security Holders...............18
Part II......................................................................19
   Item 5. Market for Registrant's Common Equity.............................19
   Item 6. Management's Discussion and Analysis of Financial Condition
           and Results of Operations.........................................19
     Results of Operations...................................................19
     Factors That May Effect Future Results..................................21
     Liquidity and Capital Resources.........................................23
     New Accounting Standards................................................24
   Item 7. Financial Statements..............................................25
     Report of Independent Accountants.......................................26
     Consolidated Balance Sheets.............................................27
     Consolidated Statements of Operations...................................28
     Consolidated Statements of Cash Flows...................................29
     Consolidated Statements of Shareholders' Equity.........................30
   Item 8. Changes in and Disagreements with Accountants on Accounting
           and Financial Disclosure..........................................41
Part III.....................................................................42
   Item 9. Directors and Executive Officers of The Registrant................42
   Item 10. Executive Compensation...........................................43
   Item 11. Security Ownership of Certain Beneficial Owners and Management...43
   Item 12. Certain Relationships and Related Transactions...................43
Part IV......................................................................44
   Item 13. Exhibits, Financial Statement Schedules, and Reports on
            Form 8-K.........................................................44
     (a)     (3) Exhibits With Each Management Contract or Compensatory 
                 Plan or Arrangement Required to be Filed Identified.........44
     (b)     Reports on Form 8-K.............................................44
     (c)     Exhibits........................................................44


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                                     PART I

ITEM 1. BUSINESS


COMPANY FORMATION AND ACQUISITION

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

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

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


COMPANY AND PRODUCT HISTORY

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

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

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


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

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

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

During  1995,  the  Company  was  restructured  to support  the new  product and
marketing  plans for the StarBase  ITE product  line.  In addition,  the Company
began to recruit new  marketing  and sales  personnel in early 1996 to implement
the market introduction of the ITE product line.


MARKET BACKGROUND FOR ITE PRODUCTS

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

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

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

Team tools for  personal  computers  such as software  configuration  management
("SCM") for the management of team programming  code,  collaboration  tools that
provided electronic  discussion  facilities,  project management,  work flow and


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defect tracking began to appear in the 1980s. It was becoming widely  recognized
that team process tools offered significant productivity improvements. Work flow
studies began to show that team productivity is primarily dependent on the rapid
transfer of information and work between team members. Admittedly, the reduction
of task time in a software project through  individual  programmer  productivity
improvements incrementally reduces the overall process time, but improvements by
orders of magnitude can be attained through team process improvements. Thus, the
Company concluded that team-oriented development tools, and in particular,  ITEs
that reduce the time to transfer  information  and facilitate  workflow  between
team members, are an important solution to the software development productivity
problem.


THE MARKET OPPORTUNITY

WINDOWS95,WINDOWS NT AND UNIX SOFTWARE DEVELOPMENT.
Management  believes  that  there  is a  significant  backlog  of  new  software
application  development  within  the  Fortune  1000.  As a  result,  management
believes that application development responsibility is migrating out of the MIS
organization and into the operating divisions of these corporations. In response
to  this  trend,   software   companies   are  offering  a  new   generation  of
object-oriented,  client-side  development  tools to satisfy these  departmental
desktop application development needs.

Moreover,  the  movement  of  application  development  to  corporate  operating
divisions,  in combination with the tools that enable the rapid  development and
deployment of applications,  has resulted in smaller,  multi-disciplinary teams.
These teams not only include  programmers and testers,  but individuals from the
operating  segment who develop the  requirements  for an application  or, in the
end, are the actual users.

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

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

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


                                       5
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The growth of the Internet and intranet  markets  represent a new alternative in
the manner  that  enterprises  develop and  disseminate  internal  and  external
information.  Currently  most changes to a corporate  web site must go through a
web master or web administrator. As more companies find themselves communicating
and doing business over the Internet or corporate intranets,  the need for tools
to support this unique type of development becomes critical.  With tools such as
StarTeam  VirtualTeam Server,  authorized users can access detailed audit trails
of development,  check files in and out for editing,  and retrieve past versions
of web site  files.  Using  StarTeam  VirtualTeam  Server,  these users can send
information  directly to a web site,  easing the burden for web  administrators.
Without a product  such as  StarTeam  VirtualTeam  Server,  it is  difficult  to
control  the  configuration  of a web site,  leading to invalid  hyperlinks  and
inconsistent information.  Additionally,  as web pages are constantly undergoing
change and updates, maintaining version control of web page information prevents
potentially costly information errors.

Market size and,  consequently,  revenue  potential cannot be determined at this
time as the Company  believes  that  StarTeam and its  extensions  represent new
market opportunities.  The market for Software Configuration Management has been
estimated to exceed $300 million in 1997.  StarTeam also  integrates  tools from
other markets such as defect  tracking and  collaboration  into SCM. Market size
information for web site development and white collar  professional  development
teams is not  available.  The  Company  believes  that  these  new  markets  are
potentially much larger than the SCM market.


INDUSTRY BACKGROUND

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

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

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

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


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

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

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

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

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

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

The most important  attribute for an effective  team-oriented tool is that it be
unobtrusive.  That is, it needs to deliver  only the work that needs to be acted
upon.  Programmer  productivity is significantly  reduced when  concentration is
interrupted by team administrative tasks or meetings. None the less, programmers
need to share information in order to collaborate effectively. At the same time,
managers need to know the status of  work-in-process in order to make decisions.
StarBase products are intended to enable uninterrupted  programmer  productivity
by offering  electronic  collaboration,  automatic work flow routing and on-line
access to project status.

The Company  believes  that ITEs that  integrate  into an IDE as a component are
more effective than using  non-integrated  tools in combination.  In particular,
the  Company  believes  users  achieve  greater   functionality  and  programmer
productivity using an ITE that is fully integrated into the IDE environment than


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can be achieved with separate,  non-integrated  ITE  components  such as version
control,  defect  tracking and  electronic  mail.  As evidenced by Visual Basic,
Visual C++, Delphi,  PowerBuilder,  and others, the software industry is quickly
moving  toward  IDEs  that  offer  integrated   development   tools  within  the
programmers  environment.  StarTeam complements the industry's direction through
the high  level of  integration  of its ITEs  into  the  leading  IDE.  StarTeam
components  are  intended to extend the tool set found within  industry  leading
IDEs.  To date,  the Company is not aware of any other  vendor that has achieved
this level of integration in its product.


STARBASE STRATEGY

StarBase's strategy is to develop,  market, and support an ITE product line that
addresses the evolving needs of a wide range of computer users.  The  Company 
seeks  to  develop  products  that  are  easy  to  use, offer "best-of-breed" 
functionality at  attractive  prices,  feature  familiar user  interfaces, and 
deliver a high degree of integration.  In developing its products, the Company 
relies on a combination of internal product development efforts, complementary
technologies and products from third parties.

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

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

         ACHIEVE  EARLY MARKET  ACCEPTANCE  AND  AWARENESS.  A vital part of the
         Company's   overall   strategy   in  1996   involved   achieving   both
         industry/customer  awareness and  credibility  in  preparation  for the
         Company's 1997 product launch of its StarTeam 3.0 ITE platform. A solid
         foundation within the team-oriented target market for the next phase of
         the Company's strategy has been established through the introduction of
         the initial StarTeam product line, product  recognition awards from the
         industry,  and the  successful  expansion  of the reseller, direct, OEM
         and international channels.

         ESTABLISH A UNIQUE MARKET  POSITION WITH THE  INTRODUCTION  OF STARTEAM
         3.0. The Company  believes  StarTeam 3.0 will offer  improvements  over
         other available  products unmatched by any individual  competitor.  The
         Company  is not  aware  of  any  commercially  available  team-oriented
         product  with the  capability,  integration,  and  local  and wide area
         communications represented by the StarTeam 3.0 suite of products. These
         products  represent  a new class of  software  development  tools which
         should uniquely set the Company apart from its competition.

         EXPAND MARKET ACCESS  THROUGH THE INTERNET,  PARTNERSHIPS  AND INDUSTRY
         ALLIANCES.  The  Company is  expanding  the  market  access for its ITE
         products by  aggressively  pursuing  partnerships  and  alliances  with
         industry  leading  vendors.  As a result,  Versions 2.0 is bundled as a
         component into several IDE products from the leading software  vendors.
         The Company has thus far announced  eight bundling  agreements with IDE
         vendors.  A more detailed  description of the OEM strategy and specific
         contracts  can be found in the  Sales  and  Marketing  section  of this
         document.

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


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STARBASE ITE PRODUCTS

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

Product  capabilities for StarTeam,  the Company's  flagship product,  currently
include configuration management,  threaded conversations (a specialized form of
collaboration   management),   defect  tracking   (providing  elements  of  both
collaboration  and work  flow),  and change  control  auditing (a  component  of
project  management).   Team  administration  commonly  found  in  configuration
management systems such as version control, branching, merging, and archiving is
also included. The first ITE product, StarTeam 1.0, was released in January 1996
and gained  critical  acclaim from the industry  press and  independent  testing
laboratories.  StarTeam 2.0,  released in August 1996,  included StarTeam Server
and StarTeam  Web Connect  which added  Internet and intranet  access as well as
improved  performance.  StarTeam 2.1,  released in April 1997,  offers  enhanced
functionality,  a combined  server  product  (StarTeam  VirtualTeam  Server) and
scalable  workstation  products  (StarTeam  Workstation,  for small  teams,  and
StarTeam Workstation Professional, for larger geographically distributed teams).

STARTEAM 2.1

StarTeam  integrates into IDEs, and supports all popular file-based  development
environments  and  applications  including  C++,  Java,  Delphi,  Visual  Basic,
Developer/2000, HAHTsite, HTML and more. StarTeam is designed from the ground up
for Windows 95 and NT, tightly  integrating into each to provide an unparalleled
level of power and  intuitive  ease-of-use.  StarTeam  is a family  of  products
designed to help teams of  application  and web  developers  work  together more
efficiently. Because there is a wide range of user requirements, StarBase offers
a range of scalable  StarTeam SCM  solutions.  For first time SCM users, smaller
teams and LAN users,  StarTeam  Workstation offers a easy-to-use  solution.  For
advanced,  Internet or client/server needs, StarBase offers StarTeam Workstation
Professional  and StarTeam  VirtualTeam  Server.  A team can migrate to the more
advanced StarTeam product as their needs grow.

StarTeam  Workstation  is a  tightly  integrated  suite of SCM  tools  including
version control,  visual differencing,  defect tracking with process management,
threaded  conversation,  project status reports and charts,  build and milestone
management,   an  audit  log  and  an  advanced  project  repository.   StarTeam
Workstation  Professional  extends  the  SCM  functionality  found  in  StarTeam
Workstation and includes client/server  connectivity to the StarTeam VirtualTeam
Server.

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

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


                                       9
<PAGE>

STARTEAM 3

REPOSITORY-BASED CLIENT/SERVER ARCHITECTURE
StarTeam  3  maintains  its data in a  secure,  database-independent  repository
compatible  with  Microsoft  Access,  Oracle,  SQL  Server  and many  other Open
Database   Connectivity   ("ODBC")   databases.   The  efficient   client/server
architecture  provides  a  language  and  protocol-independent  connection  to a
variety of clients including a Windows-based Graphical User Interface ("GUI"), a
portable   Java-based  command  line  interface  and  a  virtual  device  driver
interface. This architecture is designed to accommodate additional clients, such
as a graphical Java-based, universal client. Such a client, capable of operating
wherever a Java  virtual  machine is  available,  is planned for release by late
1997.

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

PROGRAMMABILITY, CUSTOMIZABILITY
No off-the-shelf  product can meet the needs of all teams in all situations.  To
address   the   necessity   for   tailorable   solutions,    StarTeam   provides
industry-standard   interfaces  based  on  Microsoft's  Component  Object  Model
("COM"). Support of COM allows any external application, for example a compiler,
editor or project management tool, to programmatically  drive StarTeam 3. Within
the  StarTeam  environment  itself, users  are provided with the ability  to
customize  the  behavior of the  application  through the  incorporation  of
Microsoft's Visual Basic for Applications ("VBA").

TASK MANAGEMENT
As software development projects get more complex, many teams find that the most
efficient  way to work is to organize  all changes to their  project  around the
notion of a task.  StarTeam 3 allows  users to create  "Tasks",  a  higher-level
construct than is typically  available in competing  products.  Through Tasks, a
user  defines  all the  file  changes  necessary  to  complete  a  single  task.
Typically, no changes can be made to any files unless those changes are assigned
to a specific task.  This provides  managers with the level of control they need
for large, complex projects.

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

DESIGNED TO PROVIDE HIGH PERFORMANCE FOR TODAY'S INTERNET/INTRANET TEAMS
Increasingly   software   development   teams  rely  on   outside   contractors,
telecommuters  and other remote team members.  StarTeam 3 incorporates  numerous
features to support the low-speed  connections  (dial-up lines, WANs,  Internet)
typically  available  to such remote team  members.  The  architecture  has been
designed to minimize data traveling  across the  client/server  connection.  For
example,  whenever a client  requests a file from the  server,  this  request is
routed through a local file cache.  Whereas most  competitive  products send all
such  requests to their  repositories,  in  StarTeam 3 any  request  that can be
fulfilled by the cache is not sent to the server.  Moreover, this local cache is
used to  dramatically  reduce the data sent to the  server in a file  "check-in"
process.   Because  the  cache  "knows"  the  state  of  a  file  prior  to  any


                                       10
<PAGE>

modifications,  only the  modifications  are sent across the  connection  to the
server.  The Company  estimates that network traffic from this type of operation
is reduced between one and two orders of magnitude through this mechanism.

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

STARTEAM 3.0 DELIVERY SCHEDULE
StarTeam 3 is  currently  in a late Alpha phase,  being used  internally  by the
Company to build  StarTeam 3, a process  known as  self-hosting.  The StarTeam 3
project itself consists of over 2,000 separate  modules and the development team
is distributed,  with several  developers in remote locations  connecting to the
project across the Internet.  Beta  deliveries  are expected in July 1997,  with
commercial  shipment  expected by late Fall of 1997.  Although  management fully
expects to meet  these  scheduled  dates,  there can be no  assurance  that this
development process will not encounter unanticipated delays.

VERSIONS 2.0

StarTeam  was built  around a version  control  component  and called  Versions.
Versions can also operate as a  standalone  product or integrate  into IDEs as a
component,   supporting   popular   file-based   development   environments  and
applications   including  C++,  Java,  Delphi,  Visual  Basic,   Developer/2000,
HAHTsite,  HTML and others.  Versions is designed from the ground up for Windows
95 and NT, tightly  integrating  into each to provide revision control power and
intuitive ease-of-use.  Versions provides version control,  visual differencing,
build and milestone  management,  audit logs,  security and an advanced  project
repository for  individuals and groups of application and web site developers on
a local area network.  The Company believes  Versions provides a unique blend of
power and intuitive ease-of-use unparalleled in other version control products.

ROUNDTABLE TOTAL SOFTWARE MANAGEMENT SYSTEM FOR PROGRESS SOFTWARE

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

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


                                       11
<PAGE>


COMPETITION

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

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

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

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

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

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

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


                                       12
<PAGE>


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

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

         5)       SOFTWARE  CONFIGURATION  MANAGEMENT.  Pure Atria Corporation's
                  ClearCase and Platinum's  CCC/Harvest  are the two leading SCM
                  products on the market.  Both of these  products  are high-end
                  tools   offering    comprehensive    version   control,   high
                  performance,  efficient  work space  management,  accurate and
                  automatic build processes,  and scale to the enterprise level.
                  StarTeam  offers   competitive  SCM  features   applicable  to
                  small-to-large  size development  groups and will scale to the
                  enterprise level in StarTeam 3.

         6)       CHANGE  MANAGEMENT WITH DEFECT TRACKING.  There is no dominant
                  vendor in the bug database  (defect  tracking)  segment of the
                  market today.  Archimedes  Software's  BugBase and  Intersolv,
                  Inc.'s Tracker are two of the more popular  products and offer
                  equivalent  functionality  including  bug  identification  and
                  disposition,  responsibility routing,  security and reporting.
                  Currently,  bug  database  products  typically  operate  in  a
                  stand-alone  fashion and do not  integrate  well with existing
                  version  control  and   configuration   management   products.
                  However,  both  Intersolv,  Inc. and MKS have  recently  begun
                  offering defect tracking products, and over time other version
                  control  vendors  are  expected  to evolve  their  products to
                  include  defect  tracking.   The  Company  believes  that  the
                  StarTeam  3 change  management  with  defect  tracking  offers
                  features that exceed those of existing bug database  products,
                  while offering integration within the ITE environment.

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


                                       13
<PAGE>


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

The Company believes that StarTeam's integration of on-line decision management,
project status,  version  control,  software  configuration  management,  defect
tracking, threaded conversations, work flow, security, administration,  software
component  analysis and  reporting  features into one  user-friendly  product is
unique  within this  segment of the  industry.  StarTeam  has won several  major
industry awards, including selection as  one of PC Week's  Products of the  Year
for  1995,  the  same  publication's  1996  award for  excellence in  design, 
implementation and  addressing the needs of  corporate information  technology
professionals, as well as the 1996 PC Week Analyst's Choice.

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


MARKETING AND SALES

StarBase  Corporation  focused  much of fiscal  1997  building a  comprehensive,
multi-channel  sales  organization that includes OEM sales, a direct sales group
(Corporate  Sales),  domestic  channel sales and an  international  distribution
network.

OEM SALES OF VERSIONS

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

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

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


                                       14
<PAGE>

     1)  The Company expects more than 1 million software  developers to receive
         Versions 2.0 bundled with products from  StarBase  partners  during the
         next 18 months,  and for every 1% who upgrade from  Versions 2.0 to the
         Company's  StarTeam product family,  the Company could realize up to $2
         million in revenue;

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

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

VERSIONS 2.0 TARGET MARKETS

StarBase  has targeted  four  markets for branding  Versions 2.0 as the standard
and, as of May 31, 1997, the Company has entered into bundling  agreements  with
companies in each of these market segments:

1)   TRADITIONAL  APPLICATION  DEVELOPMENT - Most applications in use today were
     created  with  these  tools.  Tools  range  from  simple  single  developer
     environments  to multiple  team  members  across an  enterprise  working on
     mission  critical  applications.  StarBase has entered into agreements with
     Oracle, Progress, Aonix and Metrowerks to reach customers in this segment.

2)   EMERGING JAVA  DEVELOPMENT - This market  segment is only two years old and
     represents the fastest  growing segment in application  development  today.
     Because this is a new market, there is little established brand loyalty and
     customers are exploring  many new options.  It is comprised of a mix of new
     and  established  key  vendors.   StarBase has entered into agreements with
     Symantec, Asymetrix, and Visix to reach customers in this segment.

3)   EMERGING  WEB  DEVELOPMENT  - The  proliferation  of Internet  and intranet
     websites  has  created a new market  segment  for new  revision  management
     solutions.  The demand for HTML  authoring  tools has been growing  rapidly
     with a host of new and  established  vendors leading the way.  StarBase has
     entered into agreements with  SoftQuad and Haht Software to reach customers
     in this segment. In addition, Corel (VENTURA) is an OEM customer.

4)   "WHITE COLLAR"  PROFESSIONAL - This is a new revision  control segment that
     includes word processors, spreadsheets and other productivity applications.
     Microsoft introduced limited version control  functionality to the products
     in  Office97  and  has  therefore  created  a need  for  the  same  or more
     functionality  from the competition.  In this segment,  Corel  (WordPerfect
     Office) is an OEM customer.

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

OEM SALES OF STARTEAM

The Company is pursuing StarTeam licensing agreements with SCM companies, such
as Intersolv, and with test tool companies.  Intersolv, Inc., whose PVCS product
is commonly accepted as the SCM industry standard for PC networks, has made both
an investment in StarBase and entered into a cross licensing  agreement.  The 
cross licensing  agreement  licenses  PVCS to  StarBase for use in its products
and provides rights for Intersolv,  Inc. to utilize certain StarBase technology
in its products.  StarBase and Intersolv, Inc. are  currently  negotiating a
potential expansion of the existing agreement.  It is management's belief that
it would be beneficial for the  Company to secure  an OEM  relationship  with 
Intersolv (or another  established leader) to market it's soon to be released
enterprise level product.  In doing so, the Company can leverage off  of  the 
market  strength of it's Versions bundling partners at the entry level, and of
an industry leader at the high end of the market, while selling to the rest of
the market through it's direct and channel sales organizations. There can be no
assurance, however, that Intersolv,  or any  other  company,  will  enter  into
such an  agreement  with StarBase.

                                       15
<PAGE>


PROGRESS SALES

StarBase  Corporation  currently has a nonexclusive  contract with Progress that
allows Progress to resell the Roundtable Total Software  Management System. This
current  contract is due to expire in July 1997.  The  companies  are  currently
negotiating a revised contract to extend the relationship. Although it is likely
that both companies will sell the Roundtable Total Software  Management  System,
there can be no assurance that such a contract extension will be agreed upon.

CORPORATE SALES

The Company has established a corporate sales organization that is predominately
telephone based to respond to customer leads and to proactively  sell product to
corporate end-user customers.  Leads are generated through a number of marketing
programs,  including focused advertisements,  direct mail campaigns,  trade show
participation, seminars, and press relations. Since the introduction of StarTeam
in January 1996, the corporate sales  organization has sold over 4,000 copies of
StarTeam to over 400 corporate  customers,  including  consulting  organizations
(Coopers and Lybrand,  KPMG Peat Marwick,  Anderson  Consulting),  manufacturers
(Westinghouse,  Eaton,  GE), software  companies  (McAfee,  Lotus),  electronics
companies (Intel,  Fujitsu),  financial institutions (Deutche Bank, Schwab), and
the federal government (IRS, Air Force,  Navy).  Although many of the StarTeam 2
sales were made to address the needs of departmental  groups, it is management's
belief that the current installed base will be of significant benefit in selling
StarTeam 3, which addresses enterprise level needs.

DOMESTIC CHANNEL SALES

The domestic  channel  organization  through  fiscal 1997  focused  primarily on
specialty catalogue sales companies,  such as Programmers Paradise,  Programmers
SuperShop,  and Provantage,  with marginal success.  Only a small portion of the
fiscal 1997 sales came from this channel.  In fiscal 1998, the Company has begun
a recruitment  program for VAR's. The StarPartner  Program is intended to expand
the  channel  to  include  SCM  consultants,  value  added  resellers,  web site
developers, integrators, and traditional computer product retailers. The Company
plans to route the  majority of the business  generated  by these new  resellers
through two-step distribution. The Company currently has a two-step distribution
agreement with DistribuPro.

INTERNATIONAL SALES

In fiscal 1997, StarBase Corporation signed distribution agreements with several
new  international  distributors  to distribute,  market,  and support  StarBase
products to end-users, corporations,  resellers, VARs and mail-order catalogs in
their   respective   territories.   The   agreements   mark  the   beginning  of
representation  of StarBase products in each respective  country.  International
distributors  include  Contemporary  Software in the United Kingdom and Ireland;
NSAB (Nordic Software) in Sweden,  Norway, Denmark and Iceland; Boss Information
in Finland, Estonia, Lithuania, Latvia and Russia; Software Technology Resources
in France; Questar in Italy; and LoadPlan in Australia and New Zealand.

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


PROPRIETARY RIGHTS

The  Company's  success  is  heavily  dependent  upon its  proprietary  software
technology.  The Company does not  currently  have any patents and relies upon a
combination  of copyright,  trademark and trade secret laws, as well as license,
proprietary rights,  non-disclosure and other contractual  agreements to protect
the proprietary  rights to its  technology.  The Company  generally  enters into
proprietary  information  and  inventions  agreements  with its  employees.  The
Company also routinely  limits access to its software,  documentation  and other


                                       16
<PAGE>

proprietary  information.  There can be no assurance that the steps taken by the
Company will  prevent  misappropriation  of its  technology.  In addition,  such
protections may not preclude  competitors from developing products with features
similar to the Company's  products.  Although the Company  believes its products
will not infringe upon the proprietary rights of third parties,  there can be no
assurance that  infringement  claims will not be brought  against the Company in
the future. Any such claims could result in costly litigation or have a material
adverse  effect on the  Company's  business,  operating  results  and  financial
condition.


EMPLOYEES

As of  March  31,  1997,  the  Company  had 46  full-time  employees.  Of  these
employees, 25 were in Research and Development, seven were in Administration and
14 were in Sales and  Marketing.  The  Company's  workforce is not unionized and
management believes that the Company's relations with its employees is good.


FORWARD LOOKING STATEMENTS

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


RISK FACTORS

EARLY STAGE OF DEVELOPMENT; HISTORY OF LOSSES
The Company is a  development  stage  company and is subject to all of the risks
inherent in a  development  stage  company.  There can be no assurance  that the
Company's  product  development  efforts  will result in a  commercially  viable
business or that the Company  will be able to generate  significant  revenues or
operate profitably. Since its inception, the Company has had a history of losses
and as of March 31, 1997, the Company had a consolidated  accumulated deficit of
$23,947,000.  To date a substantial  portion of the Company's revenues have been
derived from the activities of its Consulting  Division,  which was discontinued
in fiscal 1996,  and from sales of products  that have been  de-emphasized.  The
Company anticipates incurring additional losses until it can successfully market
and  distribute  its existing ITE  products,  as well as  successfully  develop,
market, and distribute its planned future products.  The development of software
products  is  difficult   and  time   consuming,   requiring   the   coordinated
participation  of various  technical  and  marketing  personnel  and,  at times,
independent  third-party  suppliers.  This development  process often encounters
unanticipated  delays  and  expenses.  The  likelihood  of  the  success  of the
Company's  business  must be  considered  in  light of the  problems,  expenses,
difficulties,  complications,  and unforeseen delays  frequently  encountered in
connection with the development of new technologies.

PRODUCT LINES UNDER DEVELOPMENT; DEVELOPING MARKET
The Company's success will be dependent in large part upon its ability to market
its  StarTeam  2 and 3  product  lines  and  to  quickly  introduce  and  market
additional  products.  While the  Company  is in  various  stages of  developing
additional  products,  there can be no assurance that such  additional  products
will be  completed  or  successfully  marketed.  User  preferences  for software
products are difficult to predict and,  historically,  only a limited  number of
software products have achieved sustained market acceptance. Demand for software
products is subject to a number of variables, including user preferences and the
size  of the  installed  base of  personal  computers  capable  of  running  the
products.  Further, the market for ITE software products is evolving.  There can


                                       17
<PAGE>

be no  assurance  that the  products  introduced  by the  Company  will  achieve
acceptance,  or that other software vendors will not develop and market products
which render the Company's  products  obsolete or less  competitive.  Failure to
obtain  significant  customer  satisfaction  or market  share for the  Company's
products would have a material adverse effect on the Company.


ITEM 2. PROPERTIES

The Company's  executive offices consist of approximately  12,000 square feet in
an office  building  leased by the Company,  in Irvine,  California.  The office
lease  expires in February  1998.  The  property  and  equipment  of the Company
consist principally of office furniture, equipment and personal computers.


ITEM 3. LEGAL PROCEEDINGS

As of March 31, 1997, the Company is a party to the following lawsuit:

On January 5, 1995,  the  Company  obtained  a  judgment  for  non-payment  on a
promissory note against Dr. James Parker in Los Angeles Superior Court, case #BC
090 584,  entitled  StarBase  Corporation  vs.  James  Parker,  in the amount of
$311,822.88,  together  with  interest of $86.62 per day until the  judgment has
been paid.  Collection  efforts were temporarily  halted by a stay order in U.S.
Bankruptcy  case #LA  94-1079ER;  however,  the stay order has now  expired  and
collection efforts are in process.  As of March 31, 1997, a total of $40,000 has
been collected.


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

None.


                                       18
<PAGE>



                                     PART II


ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY

The  Company's Common Stock is traded on the NASDAQ SmallCap Marketthe under the
symbol  "SBAS." Prior to the Company's  listing on the NASDAQ  SmallCap  Market
on September 4, 1996, the Company's common stock had traded on the NASDAQ's Over
The Counter  Electronic Bulletin  Board, which commenced  January 5,  1996,  and
the Vancouver Stock Exchange ("VSE").  The following table sets out the high and
low sales prices of the Company's Common Stock for each quarter within the last
two fiscal years.  For fiscal 1997, quotation are bid and ask prices and may not
necessarily  reflect actual  transactions.  For fiscal 1996, quotations  are 
presented  in Canadian  dollars,  as reflected on the VSE, and converted to US
dollars for comparison purposes.

                                             US$     CDN$     US$     CDN$
 DATE                                        HIGH    HIGH     LOW     LOW
 FISCAL YEAR 1997
   Quarter Ended March 31, 1997            $  2.81          $ 1.25
   Quarter Ended December 31, 1996            4.56            1.47
   Quarter Ended September 30, 1996           6.50            2.50
   Quarter Ended June 30, 1996               10.50            3.25
 FISCAL YEAR 1996
   Quarter Ended March 31, 1996             $ 4.76  $ 6.50  $ 2.57  $ 3.50
   Quarter Ended December 31, 1995            3.55    4.85    2.01    2.75
   Quarter Ended September 30, 1995           3.72    5.00    1.60    2.15
   Quarter Ended June 30, 1995                6.10    8.38    2.25    3.10

As of March 31, 1997, based on information  received from the Company's transfer
agent on the Company's  common stock,  the number of shareholders of record were
584, who the Company believes,  held for in excess of 4,000 beneficial  holders.
Of the Company's Series C preferred stock, there was one shareholder of record.

The Company has never  declared a cash dividend on its Common Stock or Preferred
Stock. The Board of Directors  presently  intends to retain all earnings for use
in the Company's  business and  therefore  does not  anticipate  paying any cash
dividends on its Common Stock in the foreseeable future. Payment of dividends on
Common  Stock,  if any,  would be  subject  to the  discretion  of the  Board of
Directors,  which  may  consider  factors  such  as  the  Company's  results  of
operations,  financial condition,  capital needs and acquisition strategy, among
others.  In  addition,  under the  corporate  law of  Delaware,  the  Company is
prohibited from paying dividends except out of the Company's  surplus  (retained
earnings)  or, if there is no surplus,  out of the Company's net profits for the
fiscal year in which the dividend is declared and/or the preceding  fiscal year.
At March 31, 1997, the Company's balance sheet reflected an accumulated  deficit
of approximately $23,947,000.



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


RESULTS OF OPERATIONS


YEAR ENDED MARCH 31, 1997 COMPARED TO 1996

Total revenue  increased  $48,000 or 5%, to $1,039,000,  from $991,000 in fiscal
1996.  This  increase  was due  principally  to  increased  product  revenue and
license/royalty  revenue,  $342,000 or 134%, and $217,000 or 97%,  respectively,
offset by the  decrease in  consulting  revenue to none from  $500,000 in fiscal


                                       19
<PAGE>

1996, due to the discontinuation of the Company's  Consulting Division in fiscal
1996.  The  elimination  of the  Consulting  division was based on the Company's
decision  to focus  entirely on the  development  and  marketing  of software to
increase team productivity, rather than individual productivity. The Company was
reorganized  in fiscal 1996 to reflect this change in product and market  focus.
The  increase in product  revenue was  favorably  affected by the release of the
StarTeam 2.0 family of products in August  1996,  which  utilizes  client/server
technology  and allows mobile team members access to projects  remotely  through
the Internet, intranet, WAN or dial-up connectivity. License and royalty revenue
was  favorably  affected by the  increase  in license  fee and  royalty  revenue
generated from the Company's Roundtable product.

Product  revenue to date has been limited by a number of factors,  including the
introductory cycle for new software development tools such as StarTeam. StarTeam
1.0 was  introduced in January 1996,  followed by StarTeam 2.0 in late August of
1996.  Sufficient  working capital was not available to support a major StarTeam
1.0 marketing and sales program.  Therefore, the StarTeam 1.0 marketing strategy
was to sell the product to strategic  customers,  who, with a successful initial
experience,  had the potential to generate significant  additional business.  In
June 1996,  sufficient working capital was raised through a private placement to
support a major  marketing  and sales  program  for  StarTeam  2.0,  which began
shipping  in the final week of August  1996.  In  addition,  Versions  2.0 sales
commenced during the final week of December 1996.

StarTeam  is a new  software  product  line  whose  target  market  consists  of
technical   software   professionals   (developers).   Marketing   to  technical
professionals is an educational process. In the typical sales cycle, the product
is purchased as a pilot test  program,  installed and evaluated on a small scale
(3-10 seats),  and, if the evaluation is  satisfactory,  implemented on a larger
project which may involve 10 to 25 developers.  Successful implementation in the
project may lead to broader  acceptance within the  organization.  The time span
from  an  initial  test  order  to  implementation   throughout  the  customer's
organization   varies   depending   on  the   organization   and  the  level  of
standardization within the individual company, but in very large companies,  may
take 6 months to a year.

Gross profit  increased  230% to $943,000 in fiscal 1997 from $285,000 in fiscal
1996,  primarily due to the elimination of the Consulting Division during fiscal
1996, which  represented  approximately 88% or $624,000 of the prior year's cost
of sales. In fiscal 1996, the Company's  Consulting Division incurred a negative
gross margin as a result of losses on certain  fixed-price  contracts,  combined
with the  cost of  discontinuing  the  division.  Product  cost of  sales,  as a
percentage of revenues,  decreased  from the prior year due to the write-down of
obsolete  inventory  during  fiscal  1996.  Gross  profit,  as a  percentage  of
revenues, increased to 91% from 29% in fiscal 1996.

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

                                                            1997      1996
                                                          --------  --------
Cost of services as a percentage of service revenues          -        125%
Cost of products as a percentage of product revenues         16%        32%

Operating expenses increased by approximately  $616,000 or 10% from fiscal 1996.
This increase was primarily due to increased product marketing and sales efforts
related to the market  introduction  of the StarTeam 2.0 family of products (the
ITE product  line) and the release of Versions  2.0,  offset by the  decrease in
research and development expenses. During fiscal 1996, the Company experienced a
severe  cash  shortage,  which  resulted  in a dramatic  cut-back  in  operating
expenses, including personnel reductions. The Company commenced fiscal 1996 with
approximately 86 employees and ended the year with 32 employees. In early fiscal
1997, when additional  working capital became available,  the Company focused on
strengthening  its sales and  marketing  efforts,  which  included  filling  key
marketing and sales positions as well as increased  promotional  activities.  At
March 31, 1997,  the Company had 46 employees,  the  increases  being in sales &


                                       20
<PAGE>

marketing and research & development.  During fiscal 1997, the Company increased
its sales & marketing staff from eight at the end of fiscal 1996, to 14 at March
31, 1997.  Research & development  staff  increased from 16 at the end of fiscal
1996 to 25 at March 31, 1997.

RESEARCH AND DEVELOPMENT EXPENSES
Although  StarBase  continues  to  make significant  investments  in  research
and  development  intended  to bring its products  to  market and to  support
existing products, overall research  and development expenses have been reduced.
Research & development expenses decreased $845,000 from the prior year.  During
fiscal 1997, the Company changed the  way it  allocated certain  insurance and 
facility expenses.  In prior yeas, a portion of these expenses were allocated to
research  &  development from  selling, general  &  administrative  expenses.   
Approximately $486,000 of the decrease in the division's overall  expenses was 
result  of  this  change.  Compensation  related  expenses also decreased  by
approximately $436,000, mainly due to a lower average number of employees during
fiscal 1997 as compare to fiscal 1996.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
For the  year ended March 31, 1997, selling,  general & administrative expenses
increased approximately $1.5  million over the  prior  year.  This was  chiefly 
due to the  increase  in  promotional  activities,  $674,000; the  increase in
sales  and  marketing personnel  coupled  with commissions  paid  on  increased 
product sales, $342,000; combined with  the  affect of the change in allocating
certain facilities  expenses,  $486,000.  Sales  &  marketing  expenses  include
advertising,   trade  shows  and  other promotional  expenses,  compensation an
sales  commissions,  public  relations, travel, and certain facilities expenses.


INCOME TAXES

The Company  incurred  minimal  income taxes in the last two fiscal years due to
its cumulative  losses.  The Company adopted  Statement of Financial  Accounting
Standards  No. 109,  "Accounting  for Income Taxes" ("SFAS 109") in fiscal 1994.
SFAS 109 requires that deferred taxes be calculated using an asset and liability
approach  at  currently   enacted  tax  rates.   SFAS  109  also   requires  the
establishment of a valuation  allowance to reflect the likelihood of realization
of deferred tax assets.  Upon adoption of SFAS 109, the Company did not record a
net benefit from income taxes resulting from net operating loss carryforwards; a
valuation  allowance  of equal  amount was  provided  for the deferred tax asset
which would have been otherwise recorded.

INFLATION

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


FACTORS THAT MAY EFFECT FUTURE RESULTS

SALES STRATEGY

The Company has established a multi-channel sales organization that includes OEM
sales, a direct sales group  (Corporate  Sales),  domestic  channel sales and an
international distribution network. In doing so, the Company can leverage off of
the market  strength  of  partners  at both the entry  level and high end of the
market,  while selling to the rest of the market through it's direct and channel
sales organizations. (See Part I - "Marketing and Sales")

                                       21
<PAGE>



OEM SALES OF VERSIONS

A major  element  of the OEM  program is  bundling  Versions  2.0 with  industry
leading  products.  Management  believes  that this  strategy will present broad
market exposure and revenue opportunities due to the success and distribution of
the bundling partners'  products,  as well as the complementary  relationship of
Versions 2.0 with such products. There are three primary reasons for this:

1) More than 1 million  software developers are expected to receive Versions 2.0
   over the next 18 months, providing up to $2 million in revenue potential for
   every 1% who upgrade to the StarTeam product family;

2) Such exposure creates the potential for Versions 2.0 to become a standard for
   revision management and version control;

3) Marketing  materials,   included  with  the  bundled  products,  and  other
   activities  are  expected  to  create  significant  exposure  for  StarBase
   products.

There  can  be no assurance, however, of increased revenues as a result of these
bundling agreements.

VERSIONS 2.0 TARGET MARKETS

The Company has targeted  four  markets for the bundling  strategy and as of May
31, 1997, has agreements with companies in each of these market segments:

1)    Traditional Application Development - Companies include Oracle, Progress
      Aonix and Metrowerks.

2)    Emerging Java Development - Companies include Symantec, Asymetrix,and
      Visix.

3)    Emerging Web Development - Companies include  SoftQuad  and Haht  Software
      In  addition, Corel (VENTURA) is an OEM customer.

4)    "White Collar" Professional - Corel(WordPerfect Office)is an OEM customer.

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

OEM SALES OF STARTEAM

Management  believes that it would be  beneficial to secure an OEM  relationship
with an  established  leader in the SCM or test tool market to support  sales of
the  StarTeam  product  family.  The  Company  presently  has a cross  licensing
agreement  with  Intersolv  and  both  companies  are  negotiating  a  potential
extension of that contract.  The Company is also discussing  StarTeam  licensing
agreements  with other SCM and test tool  companies.  There can be no assurance,
however, that any company will enter into such an agreement with StarBase.

PROGRESS SALES

StarBase  Corporation  currently has a nonexclusive  contract with Progress that
allows Progress to resell the Roundtable Total Software  Management System. This
current contract is due to expire in July 1997.  The companies are currently
negotiating a revised contract to extend the relationship.


CORPORATE SALES

The Company created a corporate sales organization to sell directly to corporate
end-user customers.  Leads are generated through a number of marketing programs,
including   focused   advertisements,   direct   mail   campaigns,   trade  show
participation, seminars and press relations. Since the introduction of StarTeam
in January 1996, the corporate sales  organization has sold over 4,000 copies of
StarTeam to over 400 customers.  Management  believes that the current installed
base,  consisting mostly of departmental  groups, will be of significant benefit
in selling StarTeam 3.0, which addresses enterprise level needs.


                                       22
<PAGE>


DOMESTIC CHANNEL SALES

In addition to  specialty  catalogue  companies,  which have  provided  marginal
success,  the Company has begun a recruitment program for VAR's. The StarPartner
Program is  intended to expand the  channel to include  SCM  consultants,  value
added resellers,  web site  developers,  integrators  and traditional  computer
product   retailers.   In  addition,   the  Company  currently  has  a  two-step
distribution agreement with Distribupro.

INTERNATIONAL SALES

In fiscal 1997, StarBase  Corporation signed distribution  agreements,  covering
over 15 countries, with several new international  distributors,  to distribute,
market  and support StarBase  products to end-users,  corporations,  resellers,
VARs  and  mail-order  catalogs.  Each  distributor  actively  markets  StarBase
products in a number of ways including  telesales,  direct mail, trade shows and
exhibits,  magazine and catalog advertising,  public relations and the Internet.
In addition,  each provides  comprehensive  technical  support,  consulting  and
training services.


LIQUIDITY AND CAPITAL RESOURCES

Cash and cash  equivalents on hand as of year-end totaled $2.7 million in fiscal
1997 and $1.3 million in fiscal 1996. At March 31, 1997 the Company had positive
working  capital of $2.4 million,  compared to negative  working capital of $0.5
million at March 31, 1996.

Proceeds from the issuance of equity securities  represent the primary source of
funds for meeting the Company's requirements for operations. During fiscal 1997,
the Company  generated  $8.1 million  (net) in cash from  financing  activities,
including  $8.2 million  (net) from the sale of additional  equity.  The Company
completed a private  placement of common stock for net proceeds of approximately
$5.4  million,  a private  placement  of  preferred  stock for net  proceeds  of
approximately  $0.9 million,  warrant  exercises  for $1.6  million,  and option
exercises for $0.3 million. Offsetting the proceeds from financings, the Company
made payments on financing related costs of $1.0 million and on promissory notes
of approximately $0.1 million.

During  fiscal  1996,  the Company  received  $3.9  million from the proceeds of
private  placements  of equity.  The  Company  also  received  promissory  notes
totaling  $1.1  million in fiscal 1996,  of which $0.9 million was  subsequently
converted into equity.

During fiscal 1997, the Company used $6.5 million for operations, an increase of
approximately  $1.6  million  over the amount used for  operations  in the prior
year. The increase was primarily due to the pay down of accounts payable,  which
had accumulated in the prior year due to a cash shortage.  Capital  expenditures
totaled $0.1 million, representing purchases primarily of computer equipment and
furniture.  Capital expenditures in fiscal 1996 were not significant.

StarBase's  distributors and direct purchasers are generally  permitted a 30-day
right of return for software purchased. The Company may, on occasion, grant more
liberal rights of return to its distributors, particularly where new products or
major upgrades are introduced and sales do not meet expectations.  Although such
returns are generally  exchanged for other  products or credited  against future
orders,  StarBase may be required to accept major product  returns for cash or a
credit  against  accounts  receivable.  The Company has  reserved  approximately
$65,000 at March 31, 1997 for future returns and other collection issues.

The  Company is  currently  in the  process of  negotiating  approximately  $2.5
million of  financing  and  anticipates  raising an  additional  $2.5 million of
financing in the third quarter of fiscal 1998, through a combination of debt and
equity securities.  The Company believes that proceeds from the sale of debt and
equity securities during fiscal 1998, combined with operating revenues,  will be


                                       23
<PAGE>

sufficient to allow the Company to conduct its operations during the fiscal year
that ends March 31, 1998.  Continuing  operations thereafter will depend on cash
flow from operations or the Company's  ability to raise additional funds through
equity, debt, or other financing. There can be no assurance,  however, that such
funds will be available.


NEW ACCOUNTING STANDARDS

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



                                       24
<PAGE>


ITEM 7. FINANCIAL STATEMENTS

Consolidated Financial Statements of StarBase Corporation

Report of Independent Accountants                                            26

Consolidated Balance Sheets at March 31, 1997 and 1996                       27

Consolidated Statements of Operations for the years ended
      March 31, 1997 and 1996 and for the period from
      September 6, 1991 (inception) to March 31, 1997                        28

Consolidated Statements of Cash Flows for the years ended
      March 31, 1997 and 1996 and for the period from
      September 6, 1991 (inception) to March 31, 1997                        29

Consolidated  Statements of Shareholders' Equity for the
      years ended March 31,1997,  1996,  1995,  1994,  
      and 1993, and for the period from September 6, 1991
      (inception) to March 31, 1992                                          30

Notes to Consolidated Financial Statements                                   31





                                       25
<PAGE>




REPORT OF INDEPENDENT ACCOUNTANTS





To The Board of Directors and
Shareholders of StarBase Corporation


In our  opinion,  the  consolidated  financial  statements  listed  in the index
appearing in Item 7 present  fairly,  in all material  respects,  the  financial
position  of  StarBase   Corporation  (a  development  stage  company)  and  its
subsidiaries at March 31, 1997 and 1996, and the results of their operations and
their cash flows for each of the two years in the period  ended  March 31,  1997
and for the period from  September 6, 1991  (inception)  to March 31,  1997,  in
conformity  with  generally  accepted  accounting  principles.  These  financial
statements   are  the   responsibility   of  the   Company's   management;   our
responsibility  is to express an opinion on these financial  statements based on
our audits.  We conducted  our audits of these  statements  in  accordance  with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable  assurance about whether the financial statements are
free of material  misstatement.  An audit includes  examining,  on a test basis,
evidence  supporting the amounts and  disclosures  in the financial  statements,
assessing the  accounting  principles  used and  significant  estimates  made by
management,  and evaluating the overall  financial  statement  presentation.  We
believe  that our audits  provide a reasonable  basis for the opinion  expressed
above.

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

As discussed in Note 3 to the  consolidated  financial  statements,  the Company
changed its method of calculating  loss per common share in the year ended March
31, 1997 to exclude escrow shares. The consolidated financial statements for the
year ended March 31, 1996 have been restated to reflect retroactive application
of the change.





PRICE WATERHOUSE LLP


Costa Mesa, California
June 20, 1997


                                       26
<PAGE>



                                           STARBASE CORPORATION
                                      (a development stage company)

                                       CONSOLIDATED BALANCE SHEETS
                          (In thousands, except number of shares and par values)
<TABLE>
<CAPTION>


                                                                                      March 31,       March 31,
                                                                                         1997            1996
                                                                                    --------------- ---------------
     <S>                                                                            <C>             <C>

     ASSETS

     Current assets:
       Cash and cash equivalents                                                    $       2,722   $       1,252
       Accounts receivable, net of allowances of $65 (1997) and $44 (1996)                    118               3
       Other receivables                                                                       83              10
       Prepaid expenses                                                                       312             137
       Inventories                                                                             34              14
                                                                                    --------------- ---------------
         Total current assets                                                               3,269           1,416

       Property and equipment, net                                                            524             660
       Note receivable from officer                                                            76              76
       Other non-current assets                                                                 7              21
                                                                                    --------------- ---------------
         Total assets                                                               $       3,876   $       2,173
                                                                                    =============== ===============


     LIABILITIES AND SHAREHOLDERS' EQUITY

     Current liabilities:
       Accounts payable and accrued liabilities                                     $         885   $       1,375
       Due to director                                                                          -             280
       Other current liabilities                                                                -             111
       Current portion of notes payable and capitalized lease obligations                       -             186
                                                                                    --------------- ---------------
         Total current liabilities                                                            885           1,952

     Capitalized lease obligations, less current portion                                        -             153
                                                                                    --------------- ---------------
         Total liabilities                                                                    885           2,105
                                                                                    --------------- ---------------

     Commitments and contingencies (Note 7)

     Shareholders' equity:
       Preferred stock, $.01 par value; $75 (1997) and $4,456 (1996) liquidation
         value; authorized 10,000,000; issued and outstanding 25,000 (1997) and                              
         2,227,946 (1996)                                                                       -              22
       Common stock, $.01 par value; authorized 50,000,000; issued 13,319,487
        (1997) and 7,841,812 (1996); outstanding 13,319,487 (1997) and 
         7,835,551 (1996)                                                                     133              78
       Common stock pending authorization                                                       -              27
       Additional paid-in capital                                                          26,805          18,185
       Treasury stock, 0 commons shares (1997) and 6,261 common shares (1996)                   -             (21)
       Deficit accumulated during development stage                                       (23,947)        (18,223)
                                                                                    --------------- ---------------
       Total shareholders' equity                                                           2,991              68
                                                                                    --------------- ---------------
     Total liabilities and shareholders' equity                                     $       3,876   $       2,173
                                                                                    =============== ===============


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

</TABLE>


                                       27
<PAGE>



                                           STARBASE CORPORATION
                                      (a development stage company)

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


<TABLE>
<CAPTION>
                                                                                
                                                                                Sept. 6, 1991
                                              For the years ended March 31,        through
                                              -------------------------------   March 31, 1997
                                                   1997            1996          (cumulative)
                                              --------------- --------------- -----------------
<S>                                           <C>             <C>             <C>  

Revenues:
  Consulting services                         $           -   $         500   $       4,430
  Consulting services--related party                      -               -             281
  Products                                              598             256           1,958
  License and royalty                                   441             224             678
  Other                                                   -              11              64
                                              --------------- --------------- -----------------
    Total revenues                                    1,039             991           7,411

Cost of Sales:
  Consulting services                                     -             624           4,716
  Consulting services--related party                      -               -             289
  Products, licenses and other                           96              82             427
                                              --------------- --------------- -----------------
    Total cost of sales                                  96             706           5,432
                                              --------------- --------------- -----------------
Gross margin                                            943             285           1,979

Operating Expenses:
  Research and development                            1,621           2,466           9,056
  Selling, general and administrative                 5,220           3,759          17,208
                                              --------------- --------------- ----------------
    Total operating expenses                          6,841           6,225          26,264
                                              --------------- --------------- ----------------
  Operating loss                                     (5,898)         (5,940)        (24,285)

  Interest income                                       228              42             389
  Other income and expense                              (30)              6             (19)
                                              --------------- --------------- ----------------
    Total interest and other income  
      and expense                                       198              48             370
                                              --------------- --------------- ----------------
Loss before income taxes                             (5,700)         (5,892)        (23,915)

  Provision for income taxes                              3               1              11
                                              --------------- --------------- ----------------
    Net loss                                  $       (5,703) $      (5,893)  $      (23,926)
                                              =============== =============== ================
Per share data:
  Loss per common share                       $        (0.52) $       (1.01)
                                              =============== ===============
  Weighted average number of
   common shares outstanding                          10,938          5,825
                                              =============== ===============


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

</TABLE>

                                       28
<PAGE>




                                           STARBASE CORPORATION
                                      (a development stage company)
                                  CONSOLIDATED STATEMENTS OF CASH FLOWS
                                              (In thousands)

<TABLE>
<CAPTION>
                                                                                   Sept. 6, 1991
                                                                                      Through
                                                   For the years ended March 31,   March 31, 1997
                                                   ------------------------------- ---------------
                                                        1997            1996        (cumulative)
                                                   --------------- --------------- ---------------
<S>                                                <C>             <C>             <C>   

Cash Flows from Operating Activities:
  Net loss                                         $      (5,703)  $      (5,893)  $     (23,926)
  Adjustments to reconcile net loss to
   netcash used in operating activities:
    Depreciation and amortization                            236             253             804
    Loss on disposition of property, equipment
     and capital lease                                        25              74              99
    Provision for doubtful accounts and sales            
     returns                                                  97             130             227
    Gain on debt restructuring                                 -            (138)           (138)
    Recognition of deferred income                          (135)           (235)           (370)
    Write-down of assets                                       -              50              50
    Other adjustments                                         12              75              87
    Changes in assets and liabilities,
     excluding the effect of non-cash
     transactions:
      Accounts receivable                                   (212)            593            (344)
      Other receivables                                      (73)              -            (154)
      Inventories                                            (20)             22             (34)
      Prepaid expenses                                      (112)            (15)           (263)
      Other assets                                            10              17             (31)
      Accounts payable and accrued liabilities              (631)            118           1,474
                                                    --------------- -------------- ---------------
Net cash used in operating activities                     (6,506)         (4,949)        (22,519)

Cash Flows from Investing Activities:
  Proceeds from disposition of property and       
   equipment                                                   3               4               7
  Capital expenditures                                      (124)            (31)         (1,369)
                                                    --------------- -------------- ---------------
Net cash used in investing activities                       (121)            (27)         (1,362)

Cash Flows from Financing Activities:
  Proceeds from reverse acquisition                            -               -           1,402
  Proceeds from sale of preferred stock                    1,021           3,563           7,294
  Proceeds from issuance of common stock:
    From stock purchase plan                                   -               -              10
    From public offering                                       -               -           4,063
    From private placements                                6,300             304          10,698
    From exercise of options                                 282             103             548
    From exercise of warrants                              1,630               -           2,654
  Proceeds from convertible subordinated notes                 -               -             381
  Proceeds from promissory notes                               -           1,083           1,083
  Payments on promissory notes                              (111)           (163)           (274)
  Borrowings on line of credit                                 -               -             664
  Payments on line of credit                                   -            (664)           (664)
  Payment of financing related costs                      (1,025)           (302)         (1,430)
  Payments on capitalized lease obligations                    -              (8)            (40)
  Loans from officers and directors                            -             365             365
  Repayment of loans from officers and directors               -             (75)            (75)
  Repayment of (disbursement of) loan to officer               -              50             (76)
                                                     ------------- --------------- ---------------
Net cash provided from financing activities                8,097           4,256          26,603
                                                     ------------- --------------- ---------------
Net increase (decrease) in cash                            1,470            (720)          2,722
Cash and cash equivalents, beginning of period             1,252           1,972               -
                                                     ------------- --------------- ---------------
Cash and cash equivalents, end of period             $     2,722   $       1,252   $       2,722
                                                     ============= =============== ===============

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


</TABLE>

                                       29
<PAGE>


                              STARBASE CORPORATION
                          (a development stage company)

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                 (In thousands)
<TABLE>
<CAPTION>


                                 Preferred Stock          Common Stock           Common      Additional   
                            ------------------------  -------------------------   Stock        Paid-in    
                                Shares      Amount       Shares      Amount     Subscribed     Capital    
                            ------------ -----------  ----------- ------------- ------------ ------------ 
<S>                         <C>          <C>           <C>        <C>           <C>          <C>          
September 6, 1991 (inception)        -    $      -            -    $       -    $       -     $      -      
Net loss                             -           -            -            -            -            -     
                             ------------ -----------  ----------- ------------- ------------ ------------
Balance at March 31, 1992            -           -            -            -            -            -      
                             ------------ -----------  ----------- ------------- ------------ ------------ 
Common stock issued:
  Reverse acquisition  
   transaction                       -            -        2,975          30            -        1,183         
  For cash                           -            -          323           3            -            7          
  Conversion of notes
   payable                           -            -          226           2            -          379          
  Private placements                 -            -           79           1            -          254         
  Exercise of stock options          -            -           76           1            -          134         
  For non-cash consideration         -            -           37           -            -            1        
  Exercise of warrants               -            -           34           -            -           76        
Net loss                             -            -            -           -            -            -       
                             ------------ -----------  ----------- ------------- ------------ ------------ 
Balance at  March 31, 1993           -            -        3,750          37            -        2,034      
                             ------------ -----------  ----------- ------------- ------------ ------------
Common stock issued:
  Public offering                    -            -          542           6            -        4,057      
  Private placements                 -            -          399           4            -        1,597       
  Exercise of warrants               -            -           22           -            -           73      
  Exercise of stock options          -            -           15           -            -           28      
Net loss                             -            -            -           -            -            -       
                             ------------ -----------  ----------- ------------- ------------ ------------ 
Balance at  March 31, 1994           -            -        4,728          47            -        7,789      
                             ------------ -----------  ----------- ------------- ------------ ------------ 
Preferred stock issued           2,750        2,710            -           -           -             -      
Common stock issued:
  Private placements                 -            -          464           6            -        2,190       
  Exercise of warrants               -            -          236           2            -          873     
  Exercise of options                -            -            6           -            -            -     
  Finder's Fees                      -            -          120           1            -           69      
Net loss                             -            -            -           -            -            -               
                             ------------ -----------  ----------- ------------- ------------ ------------ 
Balance at March 31, 1995        2,750        2,710        5,554          56            -       10,921      
                             ------------ -----------  ----------- ------------- ------------ ------------
Preferred stock conversion  
 to common                      (2,750)      (2,710)       2,111          21            -        2,689         
Preferred stock issued           2,228           22            -           -            -        4,131        
Common stock pending   
 authorization                       -            -            -           -           27            -     
Common stock retired                 -            -           (6)          -            -            -      
Common stock issued:  
  Private placements                 -            -          136           1            -          303         
  Exercise of options                -            -           28           -            -          103          
  Finder's Fees                      -            -           19           -            -           39           
Purchase of treasury shares          -            -            -           -            -            -            
Pay-out of fractional       
 share interest                      -            -            -           -            -           (1)        
Net loss                             -            -            -           -            -            -      
                             ------------ -----------  ----------- ------------- ------------ ------------
Balance at March 31, 1996        2,228           22        7,842          78           27       18,185
                             ------------ -----------  ----------- ------------- ------------ ------------ 
Preferred stock conversion    
 to common                      (2,568)         (25)       2,656          26            -           (1)          
Preferred stock issued             365            3            -           -            -          975           
Common stock issued: 
  Private placements                 -            -        2,100          21            -        5,468           
  Exercise of options                -            -          127           1            -          280           
  Exercise of  warrants              -            -          441           5            -        1,625           
  Payment of liabilities             -            -          159           2          (27)         277           
Costs of commons stock
 registration                        -            -            -           -            -          (56)           
Options for services 
 provided                            -            -            -           -            -           52            
Retirement of 6,261
 treasury shares                     -            -           (6)          -            -            -         
Net loss                             -            -            -           -            -            -      
                             ============ ===========  =========== ============= ============ ============ 
Balance at March 31, 1997           25    $       -       13,319   $     133            -     $ 26,805     
                             ============ ===========  =========== ============= ============ ============




                                            Stock                      Total
                             Accumulated Subscription   Treasury   Shareholders'
                               Deficit    Receivable      Stock        Equity
                             ------------ ----------- ------------ ------------ 
<S>                          <C>          <C>         <C>          <C>          

September 6, 1991 (inception) $      -    $      -    $       -     $        -
Net loss                            (8)          -            -             (8)
                             ----------- ------------ ------------ -------------
Balance at March 31, 1992           (8)          -            -             (8)
                             ----------- ------------ ------------ -------------
Common stock issued:
  Reverse acquisition  
   transaction                       -           -            -          1,213
  For cash                           -           -            -             10
  Conversion of notes
   payable                           -           -            -            381
  Private placements                 -         (81)           -            174
  Exercise of stock options          -           -            -            135
  For non-cash consideration         -           -            -              1
  Exercise of warrants               -           -            -             76
Net loss                        (1,121)          -            -         (1,121)
                             ----------- ------------ ------------ -------------
Balance at  March 31, 1993      (1,129)        (81)           -            861
                             ----------- ------------ ------------ -------------
Common stock issued:
  Public offering                    -           -            -          4,063
  Private placements                 -          81            -          1,682
  Exercise of warrants               -           -            -             73
  Exercise of stock options          -           -            -             28
Net loss                        (3,481)          -            -         (3,481)
                             ----------- ------------ ------------ -------------
Balance at  March 31, 1994      (4,610)          -            -          3,226
                             ----------- ------------ ------------ -------------
Preferred stock issued               -           -            -          2,710
Common stock issued:
  Private placements                 -           -            -          2,196
  Exercise of warrants               -           -            -            875
  Exercise of options                -           -            -              -
  Finder's Fees                      -           -            -             70
Net loss                        (7,720)          -            -         (7,720)            
                             ----------- ------------ ------------ -------------
Balance at March 31, 1995      (12,330)          -            -          1,357
                             ----------- ------------ ------------ -------------
Preferred stock conversion  
 to common                           -           -            -              -
Preferred stock issued               -           -            -          4,153
Common stock pending   
 authorization                       -           -            -             27
Common stock retired                 -           -            -              -
Common stock issued:
  Private placements                 -           -            -            304
  Exercise of options                -           -            -            103
  Finder's Fees                      -           -            -             39
Purchase of treasury shares          -           -          (21)           (21)
Pay-out of fractional       
 share interest                      -           -            -             (1)
Net loss                        (5,893)          -            -         (5,893)
                             ----------- ------------ ------------ -------------
Balance at March 31, 1996      (18,223)          -          (21)            68  
                             ----------- ------------ ------------ -------------
Preferred stock conversion    
 to common                           -           -            -              -
Preferred stock issued               -           -            -            978
Common stock issued:
  Private placements                 -           -            -          5,489
  Exercise of options                -           -            -            281
  Exercise of  warrants              -           -            -          1,630
  Payment of liabilities             -           -            -            252
Costs of common stock  
 registration                        -           -            -            (56)
Options  for services   
 provided                            -           -            -             52
Retirement of 6,261
 treasury shares                   (21)          -           21              -
Net loss                        (5,703)          -            -         (5,703)
                             =========== ============ ============ =============
Balance at March 31, 1997     $(23,947)   $      -     $      -     $    2,991
                             =========== ============ ============ =============


The accompanying notes are an integral partof the consolidated financial statements.

</TABLE>

                                       30
<PAGE>



                              STARBASE CORPORATION
                          (a development stage company)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




1.    DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS
StarBase Corporation (the "Company"), a Delaware corporation,  develops, markets
and supports  team-oriented  product  development  software  that  addresses the
evolving  needs of  personal  computer  users  involved  in  projects  requiring
substantial collaboration. StarBase was founded in 1991 to address the inability
of software development projects to deliver software products on time and within
budget,  initially through the improvement of individual programmer productivity
tools.  During  fiscal  1994,  however,  the  Company  determined  that  a  next
generation of individual  productivity  tools would not be a lasting solution to
the  software  productivity  problem.  Based on focus  group  studies and market
research, StarBase decided to focus entirely on the development and marketing of
software  designed  to  increase  team  productivity,   rather  than  individual
programmer  productivity.  The Company was reorganized in fiscal 1996 to reflect
this change in product and market focus. In line with the reorganization, the 26
person Consulting Division was discontinued.

PRINCIPLES OF CONSOLIDATION
The consolidated  financial  statements  include the accounts of the Company and
its  wholly  owned  subsidiaries.  All  significant  intercompany  balances  and
transactions  have been  eliminated in  consolidation.  During fiscal 1996,  the
Company  closed its remaining  subsidiaries,  thereby  eliminating  the need for
consolidation.  The Company has  retained  "Consolidated"  in the heading of its
financial statements to reflect activity in prior years.

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

FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial  instruments  of the  Company  consist  of cash and cash  equivalents;
accounts, notes and other receivables; accounts payable and accrued liabilities;
long-term  debt  and  capital  leases.  The  carrying  amount  of the  Company's
long-term debt  approximates fair market value based on prevailing market rates.
The Company's  other  financial  instruments  generally  approximate  their fair
values  at March  31,  1997 and 1996  based on the  short-term  nature  of these
instruments.

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

REPORTING CURRENCY
The accompanying financial statements are reported in the currency of the United
States of America,  except for certain  equity  transactions  disclosed in these
Notes to the Consolidated Financial Statements which are denominated in Canadian
dollars and are indicated as CDN$.  The exchange reate for the Canadian dollar
in effect at March 31, 1997 was approximately US$0.73 to CDN$1.00.

PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated  depreciation  and
amortization.  Major renewals and betterments are capitalized; minor maintenance
and repairs are charged to current operations. Depreciation and amortization are
calculated  under the  straight-line  basis over the  shorter  of the  estimated
useful lives of the respective  assets,  generally  three to seven years, or the
related lease term.

                                       31
<PAGE>


IMPAIRMENT OF LONG-LIVED ASSETS
The Company has adopted the  provisions  of Statement  of  Financial  Accounting
Standards No. 121,  "Accounting for the Impairment of Long-Lived  Assets and for
Long-Lived Assets to Be Disposed Of" (SFAS 121). SFAS 121 establishes accounting
standards for the impairment of long-lived assets to be reviewed whenever events
or changes in  circumstances  indicate that the carrying  amount of an asset may
not be  recoverable.  Under the provisions of SFAS 121, the Company  reviews the
recoverability  of long-lived  assets and  intangible  assets by comparing  cash
flows on an undiscounted basis to the net book value of the assets. In the event
the  projected  undiscounted  cash flows are less than the net book value of the
assets,  the carrying values of the assets are written down to their fair value,
less cost to sell. In addition,  SFAS 121 requires that assets to be disposed of
be measured at the lower of cost or fair value, less cost to sell. Adopting SFAS
121 had no effect on the Company's financial statements.

REVENUE RECOGNITION
Software  revenue is  recognized  upon  shipment of the product,  provided  that
collection is probable.  Software maintenance revenue is recorded as deferred 
revenue and  recognized  ratably over the  contractual  maintenance  period,  
generally twelve months.  Consulting  revenue is recognized  ratably as service
are provided based on a fixed  contract  price or on negotiated  hourly rates.
Certain consulting  contracts are terminable by the customer upon thirty days
written notice. In the event contracts  are  terminated, the customer is only
responsible to pay for services and costs incurred through the termination date.

WARRANTIES AND RETURNS
The Company warrants  products  against defects and has a policy  permitting the
return of products under certain circumstances.

CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
The Company is potentially  subject to a  concentration  of credit risk from its
trade accounts,  which are generally not  collateralized,  and notes receivable.
The Company  performs  periodic  credit  reviews of its  customers and maintains
reserves  for  potential  losses for  uncollectible  accounts.  Such losses have
historically  been  within   management's   expectations.   In  fiscal  1996,  a
significant  receivable  write-off was recorded due to the change in product and
market emphasis caused by the reorganization.

One customer represented 43% of total revenue for the year ended March 31, 1997;
two customers  represented 23% and 20% of total revenue for the year ended March
31,  1996.  At March  31,  1997 no one  customer  comprised  greater  than 8% of
outstanding  accounts receivable,  net of allowances,  and one account comprised
54% of Other Receivables. At March 31, 1996, the accounts receivable balance was
not significant.

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

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

                                       32
<PAGE>


INCOME TAXES
During  fiscal 1994,  the Company  adopted  Statement  of  Financial  Accounting
Standards No. 109,  "Accounting for Income Taxes," which requires recognition of
deferred tax assets and liabilities for the expected future tax  consequences of
events that have been  included in the  financial  statements  and tax  returns.
Deferred tax assets and  liabilities  are  determined  based upon the difference
between the financial  statement and tax bases of assets and liabilities,  using
the  enacted  tax rates in  effect  for the year in which  the  differences  are
expected to reverse.  Upon adoption of SFAS 109, the Company determined that the
cumulative effect on the financial statements was not material,  due principally
to the  operating  loss  carryforwards  generated  from  operations  during  the
development stage combined with the inherent  uncertainty in a development stage
enterprise's ability to ultimately recognize the benefits of such carryforwards.

LOSS  PER COMMON SHARE
Loss per common share is calculated by dividing net loss by the weighted average
shares of common stock outstanding  excluding  outstanding common shares held in
escrow (the "Escrow  Shares"),  Notes 3 and 6.  Common stock  equivalents are
considered anti-dilutive and are excluded from the calculation.

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

2.    LIQUIDITY

Management  projects  that the Company will use  approximately  $4.8 million for
operating  activities  during the next fiscal year. Based on these  projections,
the  Company's  cash  position is  insufficient  for the Company to maintain its
current  level of operating  activities  through the end of fiscal  1998.  These
factors,  among others,  raise  substantial doubt about the Company's ability to
continue  as a going  concern.  The  Company  is  currently  in the  process  of
negotiating   approximately  $2.5  million  of  financing  through  the  private
placement of  convertible  debentures  and/or  stock.  In addition,  the Company
anticipates  raising an  additional  $2.5 million from the private  placement of
common and preferred stock during the third quarter of fiscal 1998. There can be
no  assurance  that the Company  will be  successful  in either such  attempt to
obtain additional financing.

3.   RESTATEMENT OF LOSS PER SHARE

During  the year  ended  March 31,  1997,  the  Company  changed  its  method of
calculating  loss per common share to exclude the 1,418,638  outstanding  common
shares held in escrow, which are considereed contingent shares.  In prior years,
the shares held in escrow were  included in the calculation of loss per  common 
share as management believed they would be able to have the shares automatically
released  from  escrow by  amending  the agreement. As of march 31, 1997, the
agreement amendment is pending the approval of regulatory authorities, thus 
these are considered contingent shares should not be included in the calculation
of losses per common share.

                                       33
<PAGE>


The effects of the above change  applied  retroactively  to the year ended March
31, 1996 are as follows:

                                                           Weighted Average
                                      Loss per common      number of common
                                           share          shares outstanding
                                     -------------------  -------------------

   As previously reported             $      (0.81)             7,244
   Effect of retroactive change              (0.20)            (1,419)
                                     ===================  ===================
   As adjusted                        $      (1.01)             5,825
                                     ===================  ===================



4.    COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS

(In thousands)                                        March 31,
                                         ------------------------------------
                                                1997               1996
                                         ------------------ -----------------
PROPERTY AND EQUIPMENT
Computer hardware                        $        888               869
Furniture and fixtures                            164               125
Computer software                                 132               115
Leasehold improvements                             29                41
                                          ------------------ -----------------
                                                1,213             1,150
Less accumulated depreciation
 and amortization                                (689)             (490)
                                          ------------------ -----------------

                                          $       524        $      660
                                          ================== =================


ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Trade accounts payable                    $       431               910
Accrued professional fees                         179               135
Accrued wages and bonuses                         139                70
Other accrued expenses                            136               260
                                          ------------------ -----------------
                                          $       885             1,375
                                          ================== =================


ACCOUNTS RECEIVABLE
Trade accounts receivable                 $       183                47
Less allowance for doubtful accounts              (65)              (44)
                                           ------------------ -----------------
                                          $       118                 3
                                           ================== =================



5.   INCOME TAXES

The Company has not recorded a current or deferred  provision for federal income
taxes  for any  period  to date,  as a  result  of  losses  incurred  since  its
inception.  The provision for income taxes  represents the minimum  required for
state taxes. At March 31, 1997, the Company had net operating loss carryforwards
of  approximately  $23.4  million and $11.6 million for federal and state income
tax purposes,  respectively,  expiring in varying  amounts through the year 2012
which are  available to offset  future  federal and state  taxable  income.  The
ability of the  Company to utilize  the  federal  and state net  operating  loss
carryforwards may be subject to annual  limitations under certain  provisions of
the  Internal  Revenue  Code,  as a result of the reverse  acquisition,  private
placements of common stock and issuance of stock options.

                                       34
<PAGE>


Deferred tax assets (liabilities) consist of the following:

  (In thousands)                                             March 31,
                                                     -------------------------
                                                        1997          1996
                                                     ------------ ------------
  Deferred tax assets:
   Net operating loss carryforwards                  $   9,285          7,004
   Accounts and notes receivable allowances                 26             18
   Accrued expenses                                         14            176
   Deferred income                                          41              -
   Deferred tax asset valuation allowance               (9,366)        (7,198)
                                                     ------------ ------------
                                                             -              -
  Deferred tax liabilities                                   -              -
                                                     ------------ ------------
Net deferred tax assets (liabilities):               $       -              -
                                                     ============ ============

6.  EQUITY TRANSACTIONS

The Company has  authorized  50,000,000  shares of common  stock and  10,000,000
shares of preferred  stock with a par value of $0.01 per share. Of the preferred
stock,  2,500,000 have been designated as Series B preferred  stock, of which no
shares are issued and  outstanding  at March 31, 1997,  and 366,666  shares have
been  designated  as  Series C  preferred  stock,  of which  25,000  shares  are
outstanding at March 31, 1997.

On May 13, 1996, a private  placement  of common  stock was  completed.  In this
private  placement,  2,099,832  Units were issued,  each Unit  consisting of one
share of common stock and one non-transferable  warrant to purchase one share of
common stock.  The warrants were  exercisable at $2.00 per share through January
31, 1997, which date was subsequently  amended to April 30, 1997, and thereafter
exercisable  at $2.50 per share through  January 31, 1998,  after which date the
warrants expire.

As a result of the May 13, 1996 private placement of common stock, the 2,227,946
shares of the  Company's  Series B  preferred  stock,  issued  in a fiscal  1996
private  placement,   automatically  converted  into  2,227,946  shares  of  the
Company's common stock.

In June 1996, the private  placement of Series C preferred  stock was completed.
In this private  placement,  365,496 Units were issued,  each Unit consisting of
one  share of  Series C  preferred  stock and one  non-transferable  warrant  to
purchase one share of common stock.  The warrants were  exercisable at $2.00 per
share through January 31, 1997, which date was subsequently amended to April 30,
1997,  and thereafter  exercisable at $2.50 per share through  January 31, 1998,
after which date the warrants expire.

The Series C preferred stock is not redeemable and has a liquidation  preference
of $3.00 per share. The holders of the Series C preferred stock are not entitled
to receive any  dividends  nor,  except as  otherwise  provided by law, are they
entitled  to vote upon any matter  relating  to the  business  or affairs of the
Corporation  or for any other  purpose.  The holders were also  granted  certain
registration  rights as a part of the private placement.  Each share of Series C
preferred  stock is convertible,  at the option of the holder,  at any time into
the Company's  common stock,  of which the conversion rate will be determined by
dividing $3.00 by the Conversion Price. The Conversion Price shall be the lesser
of (a) $3.00 per share or (b) 80% of the average closing bid price of the common
stock as reported by Bloomberg,  L.P. for shares traded in the United States for
the five  consecutive  trading days preceding the conversion  date. At March 31,
1997,  340,496 of the Series C preferred  stock had been  converted into 428,621
shares of common stock.

PRIVATE PLACEMENTS
In the last  two  fiscal  years,  the  Company  has sold  2,465,328  (1997)  and
2,363,946 (1996) Units in private placement transactions.  With the exception of
the June 27, 1996 private placement, each such Unit consists of one share of the

                                       35
<PAGE>


Company's  preferred  stock  convertible  into one share of common stock, or one
share of the Company's common stock and, in either case, one warrant to purchase
an additional share of common stock. Each Unit sold in the June 27, 1996 private
placement consisted of one share of the Company's  preferred stock,  convertible
into  shares of the  Company's  common  stock at any time,  at the option of the
holder, using a predetermined  formula.  The warrants are generally  exercisable
within two years of the original grant date. A summary of the private  placement
transactions follows:

<TABLE>
<CAPTION>

                                                                                             Finder's
                       Shares                             Warrants                           Fees in
 Closing Date          Issued       Price Per Share        Issued         Exercise Price      Shares
------------------   ----------  -----------------------  -----------  -------------------- ----------
<S>                  <C>         <C>                      <C>          <C>                  <C> 

March 9, 1993            56,632             CDN$3.96        56,632           CDN$3.96  (A)      -
March 24, 1993           22,000             CDN$4.56        22,000           CDN$4.56  (A)    1,100
April 26, 1993          160,666             CDN$4.68       160,666           CDN$4.68  (B)    3,333
April 26, 1993           65,666             CDN$4.68        65,666           CDN$4.68  (B)      -
May 11, 1993             16,000             CDN$6.24        16,000           CDN$6.24  (A)    1,569
July 8, 1993             40,533     $4.62  (CDN$5.88)       40,533    $4.62 (CDN$5.88) (A)    2,872
August 31, 1993          95,238     $5.25  (CDN$6.91)      100,008    $5.25 (CDN$6.91) (B)    4,770
December 19, 1994       208,716     $4.92  (CDN$6.60)      208,716    $4.92 (CDN$6.60) (A)    8,266
December 20, 1994     2,750,000                $1.00             0               N/A            -
March 31, 1995          255,000             CDN$7.35       255,000           CDN$7.35  (A)      -
September 8, 1995       136,000     $2.24  (CDN$3.05)      136,000    $2.24 (CDN$3.05) (A)      -
January 31, 1996      2,227,946                $2.00     2,227,946              $2.00  (C)   19,445
May 13, 1996          2,099,832                $3.00     2,099,832              $2.00  (C)      -
June 27, 1996           365,496                $3.00       365,496              $2.00  (C)      -

<FN>
(A) Warrant  exercise  price in second year is equal to 115% of initial  warrant
    exercise price.
(B) One year warrant term.
(C) Warrant exercise price after January 31, 1997, subsequently amended to  
    April 30, 1997, is $2.50 and expires after January 31, 1998.

Finder's fees issued in connection  with stock offerings were offset against the
related proceeds.
</FN>
</TABLE>


WARRANTS
Warrant activity for the two years ended March 31, 1997 is as follows:

                                                                Warrant Price
                                               Shares             Per Share
                                           --------------   --------------------

Outstanding at March 31, 1995                  520,899

Issued in connection with stock offerings    2,478,696        US$2.00, CDN$3.05
Exercised                                            -
Expired                                        (50,000)       CDN$7.05 -   8.10
                                         ----------------
Outstanding at March 31, 1996                2,949,595

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



                                       36
<PAGE>



CONVERSION OF NOTES PAYABLE
During fiscal 1997,  investors  converted  notes payable with an aggregate  face
value of $227,583 into 58,333 and 25,000  shares of the  Company's  common stock
and Series C preferred  stock,  respectively.  The notes  converted  into common
stock had a face  value of  $152,583  and were from  three  directors.  The note
payable  converted,  by an  investor,  into Series C preferred  stock had a face
value of  $75,000  and was  converted  at a price of $3.00 per  Unit.  Each Unit
consisted  of one share of Series C preferred  stock and one warrant to purchase
one share of common stock.  The warrants are currently  exercisable at $2.00 per
share through April 30, 1997 and $2.50 per share through January 31, 1998, after
which date the warrants expire.

COMMON STOCK PENDING AUTHORIZATION
Common stock pending  authorization at March 31, 1996 represented  common shares
to be issued in payment for consulting fees to an independent  consultant.  Such
issuance occurred in September 1996.

TREASURY SHARES
In connection  with the  acquisition  of  Roundtable,  Inc. in 1994, the Company
authorized  a loan to the  selling  principal.  On May  31,  1995,  the  Company
canceled the note receivable in the amount of $60,000 plus accrued interest,  in
return for 6,261 shares of the  Company's  stock  pursuant to the original  loan
agreement.  A portion of the  receivable,  $44,766,  was  written-off due to the
difference  between  the  market  price of the  stock on that date and the stock
redemption  price in the note.  On  November  8, 1996 the  treasury  shares were
retired.

ESCROW  SHARES
At March 31,  1997,  1,418,638  common  shares  are held in escrow  subject to a
performance  escrow  agreement  dated  October 15,  1992.  These  shares will be
released upon the  Company's  attainment  of certain cash flow  requirements  or
returned to the Company for  cancellation on October 21, 2002,  whichever occurs
first.  The  Company  is  attempting  to modify  the  agreement  to result in an
automatic release provision back to the shareholders rather than the Company.

7.   EMPLOYEE BENEFIT PLAN

Effective  April 1, 1992, the Company adopted a 401(k) savings plan covering all
employees.  Employees  who work for the Company are eligible  for  participation
after three  months of service.  Company  contributions  to the savings plan are
made at the discretion of the Company's Board of Directors.  The Company made no
contributions in 1997 and 1996.

8.   STOCK OPTION PLANS

The Company has stock a option plan that provide for the grant of  non-qualified
and  incentive  stock  options to all  directors,  officers and employees of the
Company.  This plan was originally  established  by the Company's  predecessors,
NeuroStar and PNA, and has been amended and restated by the Company. Options are
granted at exercise prices equal to the fair market value of the common stock on
the date of grant.  Generally,  twenty-five percent of the options are available
for  exercise  at the end of one  year,  while  the  remainder  of the  grant is
exercisable ratably over the next thirty-six month period, provided the optionee
remains in service to the Company.  The weighted-average  remaining  contractual
life of  options  outstanding  at March  31,  1997 was  nine  years.  A total of
2,833,333  shares of common  stock have been  authorized  for the grant of stock
options.


                                       37
<PAGE>


Stock option activity for the two years ended March 31, 1997 is as follows:

                                              Number         Option price
                                             Of Shares       per share (US$)
                                            -------------   -----------------
Outstanding at March 31, 1995                1,236,835        3.90 - 10.10

Granted                                      1,900,347        2.21 -  5.80
Lapsed or canceled                          (1,471,560)       2.21 -  6.09
Exercised                                      (28,172)               3.90
Adjustment for 1 for 3 reverse split               (55)
                                            -------------
Outstanding at March 31, 1996                1,637,395        2.21 - 10.10

Granted                                      1,345,280        1.43 -  4.44
Lapsed or canceled                            (773,795)       2.21 - 10.10
Exercised                                     (126,838)       2.21 -  2.42
                                            -------------
Outstanding at March 31, 1997                2,082,042        1.43 -  5.46
                                            =============
Exercisable at March 31, 1997                  717,803        1.74 -  5.46
                                            =============

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) 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 effects of  increasing  the Company's net (loss) for
the years ended March 31, 1997 and 1996 to the pro forma  amounts of  $5,946,000
and $6,472,000,  respectively,  with a corresponding pro forma loss per share of
$0.54  and  $1.11,  respectively.   These  pro  forma  amounts  were  determined
estimating  the  fair  value  of  each  option  on  its  grant  date  using  the
Black-Scholes  option-pricing  model.  Assumptions  of no  dividend  yield,  the
Federal Reserve Board's 5 year treasury  constant maturity interest rate for the
month of grant,  5 years  expected  life and an expected  rate of  volatility of
45.8% were applied to all grants for each year presented.  The  weighted-average
fair value at grant date for the options  granted during 1997 and 1996 was $1.38
and $1.10 per option, respectively.


9.   COMMITMENTS AND CONTINGENCIES

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

                                                       Non-cancelable
Year ending March 31,                                 Operating Leases
                                                     -------------------
                                                       (In thousands)
         1998                                        $          190
         1999                                                    20
         2000                                                    16
         2001                                                    16
         2002                                                    16
                                                     -------------------
Total payments                                       $          258
                                                     ===================

Rent expense totaled $245,000 (1997); $424,000 (1996); $282,000 (1995).

During   fiscal  1997,   accounts   payable  and  accrued   expenses   decreased
substantially as a result of cash made available  through an equity  transaction
during the last quarter of fiscal year 1996,  which allowed the Company to begin
paying down its liabilities.  As of March 31, 1997, the related past due amounts
have been paid.


                                       38
<PAGE>

10.  RELATED PARTIES

During  fiscal 1996,  the Company  borrowed  58,333  unrestricted  shares of its
common stock from three directors.  Of the total shares borrowed,  33,333 shares
were  sold in the open  market by the  Company  and the  proceeds  were used for
general  corporate  purposes and 25,000 shares were used as  remuneration  for a
consultant. The three directors agreed to accept restricted shares in repayment,
which were issued September 5, 1996.

In fiscal 1995,  the Board of Directors  authorized  the Company to loan William
Stow III, President and CEO of StarBase, the sum of $126,000. At March 31, 1997,
the   principal   and  accrued   interest   amounts  were  $76,153  and  $8,466,
respectively.  The loan is  evidenced  by a  promissory  note and is  secured by
shares of the Company's  common stock,  which are owned by Mr. Stow. The note is
payable on  November  4, 1998 and bears  interest  at a rate of 6.34% per annum,
payable at maturity.

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

On January 11, 1997, the Company  entered into  consulting  agreements  with Mr.
Alan M. Davis, former President and CEO, and Mr. Robert W. Leimena, former Chief
Financial  Officer  of the  Company.  Amounts  paid were  $85,000  and  $75,000,
respectively.


11.    SUPPLEMENTAL CASH FLOWS INFORMATION

                                                         Year ended March 31,
                                                       ------------------------
(IN THOUSANDS)                                            1997          1996
--------------
                                                       ----------    ----------
  Interest paid                                      $       21      $      39
  Income taxes paid                                           3              1

Non-cash investing and financing transactions:
  Conversion of Series A preferred stock to
     common stock                                             -          2,710
  Conversion of Series B preferred stock to
     common stock (Note 6)                                   22              -
  Conversion of Series C preferred stock to
     common stock (Note 6)                                    4              -
  Conversion of promissory notes to equity (Note 6)          75            745
  Conversion of loans from officers to equity (Note 6)      153            137
  Common stock issued as finder's fees                       40             39
  Retirement of treasury shares (Note 6)                     21             21
  Reduction in assets through termination of 
     capital lease                                            -             75
  Common stock Issued for services                          127              -
  Options for  services provided                             51              -


                                       39
<PAGE>


12.    SUBSEQUENT EVENTS

In June 1997, the Company offered,  to the holders of the Company's  outstanding
warrants,  to exchange all the issued and outstanding warrants for shares of the
Company's  common  stock.  Each warrant  holder accepting the offer by midnight,
Pacific Standard Time, on June 30, 1997,  the expiration date of the offer, will
receive one share of common stock for every  three warrants held.  The warrants 
which remain unexchanged subsequent to the offer expiry date will continue under
the original terms of each warrant.





                                       40
<PAGE>


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

Not applicable.



                                       41
<PAGE>


                                    PART III


ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Except as set  forth  below,  the  information  required  by this Item is hereby
incorporated  by reference to the  Company's  definitive  proxy  statement to be
filed within 120 days after the end of the Company's fiscal year ended March 31,
1997.

The following  table sets forth  certain  information  concerning  the Company's
directors and executive  officers as of March 31, 1997. The members of the Board
of Directors  (the "Board") are elected to one year terms and are to serve until
the next annual meeting of  stockholders  or until their  successors are elected
and qualified.

            NAME            AGE                  POSITION
    ---------------------  ---- ------------------------------------------------

     William R. Stow III    52   Chief Executive Officer, Chairman of the Board,
                                   Member of Compensation and Stock Option 
                                   Committees

     Donald R. Farrow       51   President, Chief Operating Officer and Director

     Daniel P. Ginns        47   Director and Member of Compensation and Stock
                                   Option Committees

     Alan D. Kucheck        45   Vice President, Engineering

     Phillip E. Pearce      68   Director and Member of Compensation and
                                   Nominating Committees

     Kenneth A. Sexton      42   Director and Member of Audit and Stock Option
                                   Committees

     John R. Snedegar       48   Director and Member of Audit and Nominating
                                   Committees

WILLIAM R. STOW III has served as Chief  Executive  Officer of the Company since
September  1991,  exclusive of the period from August 1996 to January 1997.  Mr.
Stow also served as President of the Company from September 1991 to August 1996,
exclusive of the period from April 1994  through July 1995.  Mr. Stow has served
as a Director of the Company since September 1991, Co-Chairman of the Board from
October 1994 to August 1996 and  Chairman of the Board since  August 1996.  From
February 1986 to October 1991, Mr. Stow held various  senior-level  positions at
Ashton-Tate Corporation, including Vice President of Advanced Development.

DONALD R. FARROW has served as President of the Company  since  January 1997 and
Chief  Operating  Officer and Director of the Company since  February  1997. Mr.
Farrow had been Vice  President,  Sales and  Marketing  since August 1996;  Vice
President,  Sales since May 1996;  and a consultant  to the Company  since March
1996.  Prior to that, Mr. Farrow had been an  independent  consultant as well as
being Vice  President of Sales and Marketing from December 1993 to December 1994
at CommVision  Corporation,  a leading provider of server solutions and Regional
Sales  Manager  from 1987 to 1993 for Novell  Corporation,  the world  leader in
network software.

DANIEL P. GINNS has served as a Director  of the  Company  since  January  1997.
Since October 1996, Mr. Ginns has been Chairman of the Board and Chief Executive
Officer of Datametrics Corporation,  a reporting company which designs, develops
and  manufactures  printers  and  computers.  From 1989 to 1996,  Mr.  Ginns was
President of Belmont Capital, Inc., a management and financial advisory firm.


                                       42
<PAGE>


ALAN D. KUCHECK has served as Vice  President,  Engineering  since January 1995.
From July 1993 to January 1995, Mr. Kucheck served as a Project Director for the
Company.  From August  1990 to March 1993,  Mr.  Kucheck was  Manager,  Software
Development for IMI, Inc., a software development  company.  Prior to that time,
Mr.  Kucheck held various  management  positions  with  several  other  software
development companies.

PHILLIP E. PEARCE is the owner of Phil Pearce & Associates  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 RX  Medical  Services  Corporation,  a
reporting company.

KENNETH A. SEXTON is Vice President,  Finance and  Administration  of Intersolv,
Inc.,  a leading  provider  of open  client/server  solutions.  Prior to joining
Intersolv,  Inc. in 1991, Mr. Sexton held several senior level positions at Life
Technologies  Inc., a biotechnology  company,  and Coopers & Lybrand,  a big six
accounting firm.

JOHN R. SNEDEGAR has served as a Director of the Company since  December  1991.
Since May 1990,  Mr.  Snedegar has served as President,  Director and Chief  
Executive Officer of United  Digital  Network Inc., a diversified 
telecommunications  provider  based in Irving,  Texas.  From March 1981 to May
1992, Mr. Snedegar served as President and Chief Executive  Officer of AmeriTel
Management,  Inc.,  currently known as WCT  Communications,  Inc. Mr. Snedegar
is also a member of the Board of Star Telecommunications,  a reporting company.


ITEM 10. EXECUTIVE COMPENSATION

The information required by this Item is hereby incorporated by reference to the
Company's  definitive  proxy statement to be filed within 120 days after the end
of the Company's fiscal year ended March 31, 1997.


ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item is hereby incorporated by reference to the
Company's  definitive  proxy statement to be filed within 120 days after the end
of the Company's fiscal year ended March 31, 1997.


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item is hereby incorporated by reference to the
Company's  definitive  proxy statement to be filed within 120 days after the end
of the Company's fiscal year ended March 31, 1997.





                                       43
<PAGE>



                                     PART IV

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



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

See paragraph (c) below.


(B)      REPORTS ON FORM 8-K

In a report  filed on Form 8-K, dated January 27, 1997,  the Company  reported a
press release  announcing the  resignation of certain  directors and officers of
the Company  effective  January  11,  1997;  the naming of Mr. Don  Farrow,  the
Company's Vice President of Sales and Marketing, as President;  and the addition
of Daniel Ginns,  Chairman and CEO of Datametrics  Corporation,  to the Board of
Directors.

(C)      EXHIBITS

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

<TABLE>
<CAPTION>

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

                                       44
<PAGE>


  10.9     Forms of Common Stock Subscription Agreement and Warrants used in November 1994
           Private Placement.                                                                            (B)
  10.10    Forms of Common Stock Subscription Agreement and Warrants used in March 1995 Private
           Placement.                                                                                    (C)
  10.11    Regional Prototype Defined Contribution Plan and Trust of the Company. (*)                    (A)
  10.12    Fiscal Agency Agreement between the Company and Canaccord Capital Corporation.                (B)
  10.13    Form of Agents' Warrant.                                                                      (B)
  10.14    Silicon Valley Bank Warrant dated December 15, 1994.                                          (B)
  10.15    Secured Promissory Note dated July 1, 1995 from William R. Stow III.                          (E)
  10.16    Forms of Preferred Stock Subscription Agreements and Warrants used in January 1996
           Private Placement, together with a list of equity investors.                                  (E)
  10.17    Amendment No. 1 to the Sublease  dated December 1, 1994 between McDonnell Douglas 
           Travel Company and StarBase Corporation, for  the Company's  Irvine, California
           facilities.                                                                                   (E)
  10.18    Amendment No. 2 to the Sublease dated September 1, 1995 between McDonnell Douglas
           Travel Company and StarBase Corporation, for the Company's Irvine, California
           facilities.                                                                                   (E)
  10.19    Forms of Common Stock Subscription Agreement and Warrants used in July 1995 Private
           Placement, together with a list of equity investors.                                          (E)
  10.20    Form of Warrant used in the May 13, 1996 Private Placement.                                   (D)
  10.21    Form of Subscription Agreement used in the May 13, 1996 Private Placement.                    (D)
  10.22    Form of Preferred  Stock Subscription Agreement and Warrant used in the June 1996
           Private Placement, together with a list of equity investors and placement agent.              (F)
  10.23    Lease dated  November 22, 1996 between The Provider Fund and StarBase Corporation,
           for the Company's Irvine, California facilities.                                              (H)
  23.1     Written consent of Price Waterhouse LLP, Independent Auditors.                                47  
  27       Financial data schedule                                                                       48
-------------------------
<FN>
  
 (A)     Incorporated  herein  by  reference  to  the  Company's  Registration
           Statement  on  Form  SB-2  (file  number  33-68228)  filed  with  the
           Commission on November 2, 1993.

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

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

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

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

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

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

   (H)     Incorporated  herein by reference to the Company's  Form 10-QSB (file
           number 0-25612) filed with the Commission on February 11, 1997.
         * Denotes a management contract or compensatory plan or arrangement.

</FN>



                                       45
<PAGE>




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 30th day of June,
1997.

                                        STARBASE CORPORATION


                                        By: /S/   DONALD R. FARROW
                                           -----------------------------------   
                                                  Donald R. Farrow
                                                  President and
                                                  Chief Operating Officer
                                                  Principal 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/ William R. Stow III                    Chairman of the Board, Chief                June 30, 1997
-------------------------------------    Executive Officer, and Director
         William R. Stow III              (principal executive officer)



/s/ Donald R. Farrow                   President, Chief Operating Officer,             June 30, 1997
-------------------------------------              and Director
          Donald R. Farrow



/s/ Phillip E. Pearce                                Director                          June 30, 1997
-------------------------------------
          Phillip E. Pearce



/s/ Daniel P. Ginns                                  Director                          June 30, 1997
-------------------------------------
           Daniel P. Ginns



/s/ John R. Snedegar                                 Director                          June 30, 1997
-------------------------------------
          John R. Snedegar



/s/ Kenneth A. Sexton                                Director                          June 30, 1997
-------------------------------------
          Kenneth A. Sexton


                                       46
<PAGE>


</TABLE>