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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549
                            ------------------------

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

              [X]   ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
             SECURITIES EXCHANGE ACT OF 1934

                    FOR THE FISCAL YEAR ENDED MARCH 31, 2001

                        COMMISSION FILE NUMBER: 0-25612

                              STARBASE CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                            <C>
                   DELAWARE                                      33-0567363
       (STATE OR OTHER JURISDICTION OF                        (I.R.S. EMPLOYER
        INCORPORATION OR ORGANIZATION)                     IDENTIFICATION NUMBER)

       4 HUTTON CENTRE DRIVE, SUITE 800
            SANTA ANA, CALIFORNIA                                  92707
   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                      (ZIP CODE)
</TABLE>

                                 (714) 445-4400
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

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

          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

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

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

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

     The registrant's revenues for its most recent fiscal year: $41,640,000.

     The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 31, 2001, based on the closing price as reported by
Nasdaq was $153,969,000.

     Number of shares outstanding as of March 31, 2001: Common Stock: 69,386,443

                      DOCUMENTS INCORPORATED BY REFERENCE:
                                     None.

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                               TABLE OF CONTENTS

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                                   PART I

Item 1.   Business....................................................    1
Item 2.   Properties..................................................    7
Item 3.   Legal Proceedings...........................................    7
Item 4.   Submission of Matters to a Vote of Security Holders.........    7

                                  PART II

Item 5.   Market for Registrant's Common Equity.......................    8
Item 6.   Selected Financial Data.....................................    9
Item 7.   Management's Discussion and Analysis of Financial Condition
          and Results of Operations...................................   11
Item 8.   Financial Statements and Supplementary Data.................   21
Item 9.   Changes in and Disagreements with Accountants on Accounting
          and Financial Disclosure....................................   47

                                  PART III

Item 10.  Directors and Executive Officers of The Registrant..........   47
Item 11.  Executive Compensation......................................   50
Item 12.  Security Ownership of Certain Beneficial Owners and
          Management..................................................   56
Item 13.  Certain Relationships and Related Transactions..............   57

                                  PART IV

Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form
          8-K.........................................................   58
</TABLE>

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                                     PART I

FORWARD-LOOKING INFORMATION

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

     - successfully implementing our business strategy;

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

     - our ability to successfully compete in our marketplace.

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

ITEM 1. BUSINESS

OVERVIEW

     We provide end-to-end collaborative products for the development and
management of integrated content and code for eBusiness applications. Our
flagship product, StarTeam, focuses primarily on supporting collaboration,
configuration and change management for code developers. Our recent acquisitions
have added capabilities for Web content management and requirements and test
management. eXpressroom, the content management system from the former
worldweb.net, is built entirely in Java and stores all data in XML. CaliberRM
and CaliberRBT from the former Technology Builders, Inc., provide web-based
requirements management and test-case generation, respectively. Together with
our best-of-breed partner technologies and our new Galaxy Peer-2-Peer
technology, we have extended our solution to provide an integrated,
collaboration suite that covers the complete software code and content
development lifecycle.

     The Starbase Collaboration Suite provides an end-to-end collaborative
development environment supporting not only individual best-of-breed life cycle
products but also providing our customers with a best-fit solution by
integrating with many different products in each stage of the life cycle. This
approach preserves investments our customers may have made in other life cycle
technologies, minimizes the organizational changes and impact and ensures a
faster, more efficient adoption of the whole solution. Depending on individual
customer needs, we can provide a single vendor suite or a best-fit suite
solution.

     The Starbase Collaboration Suite provides a complete collaborative
environment for building enterprise and eBusiness applications, supporting
requirements definition and management, UML design, code and content creation,
test management, configuration and change management and deployment. The
solution can also provide support for budget management with integrated project
estimation and for task and resource planning with integrated project
management.

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

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INDUSTRY OVERVIEW

  Evolution of eBusiness Web Sites

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

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

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

  Challenges of Building eBusiness Web Sites

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

     - Source Code

     - Web Content

     - Multimedia and Graphics

     - Process and Workflow

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

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

     - More contributors to manage and coordinate

     - Contributors are from a broad range of disciplines

     - Different life-cycles for code and content

     - Digital assets can be diverse in nature

     - More digital assets to manage and coordinate

     A critical component of managing code and content is coordinating
collaboration among individuals across a broad range of business disciplines.
These individuals might include, for example, code development participants such
as systems analysts, software designers, programmers, quality assurance
engineers and IT managers as well as content creation participants such as
business managers, graphic designers, product managers, marketing analysts,
executive officers and webmasters. Team members must have access to code

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and/or content information during each step of the development process while
maintaining the ability to actively contribute and communicate in real time. The
nature of this task creates an unprecedented challenge for the enterprise.
Without the ability to collaborate through a single platform that manages the
process for both code and content, effective design and implementation becomes
difficult.

  Enterprise and eBusiness Challenges

     Clearly, the parameters for enterprise and eBusiness development have
changed. There is an overriding competitive need to bring applications to market
faster and ensure the highest level of quality. Accuracy, ease of use and
robustness are even more important with Web applications as Web mistakes are
highly visible. The growth of the Internet and the associated need to conduct
business via the Web, to remain competitive, has forced organizations to rapidly
implement an eBusiness strategy. Many organizations have already moved from
their first generation Web site of simple online brochures developed by a few
individuals, to building their third generation sites. 'Third generation' sites
are powered by sophisticated eBusiness applications that are a complex
combination of both software code and site content, are required to manage
transactions, provide personalization, customer service and integration with
multiple suppliers and are developed by numerous people across multiple
disciplines.

     Whether the focus is on building 'third generation' Web sites or internal
systems, developing applications today is very different from developing
traditional client/server and mainframe software applications. Most businesses
today operate in several different locations and also support remote workers.
Development teams can comprise several hundred contributors -- many more than
the traditional software development team. In addition to the size and location
of team members, there is often a usability challenge to support varying levels
of technical skill from the power developer to the casual business user
providing or approving content. In addition, the application content is more
complex. The different contributors and the many technologies available today
bring the challenge of managing many different types of content elements -- such
as multimedia, graphical images, thousands of lines of text as well as many
different types of code elements such as Java beans, C++, Visual basic. Also,
the rate of changes to Web content is often daily as opposed to a handful of
times a year.

     Successfully addressing these challenges is the critical factor in
determining an organization's success or failure in building robust,
maintainable systems in a competitive timeframe. For eBusiness applications the
process is usually severely underestimated. The skills, the technology,
dispersed teams, the deliverables, the changes, the variety of tools all have to
be managed. The focus is often on the infrastructure for running the Web site
rather than on creation and maintenance of the Web site. However, while a robust
and reliable platform is an obvious necessity, without a high quality
application a Web site could fail.

THE STARBASE SOLUTION

     Our mission is simple -- improving time to market and quality of
applications. By providing next generation technologies, partnering with
technology leaders and supporting tight integrations across technologies, the
Starbase Collaboration Suite is able to provide technology support for a
complete end-to-end collaborative process.

     Our approach is based on providing an end-to-end collaborative development
environment supporting individual best-of-breed lifecycle products that have
several points of integration. We also provide customers with a best-fit
solution by integrating with many different products in each stage of the
lifecycle. This approach preserves customer investment in other technologies,
minimizes the organizational changes and impact and ensures a faster, more
efficient adoption of the whole solution.

PRODUCTS

     The Starbase Collaboration Suite provides technology and process support
for code and content development from requirements through to deployment. The
suite comprises Starbase-owned technologies -- StarTeam Enterprise Edition,
CaliberRM, CaliberRM Professional, Starbase CaliberRBT, Starbase eXpressroom,
CodeWright, GenitorOCS, Surveyor, as well as partner products that we
resell -- Mercury
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TestDirector, Embarcadero GPPro, Software Productivity Center Estimate
Professional and Catalyst Openmake.

     StarTeam Enterprise Edition is a fully integrated configuration and change
management system supporting file management -- version control, labels,
branching/merging, rollback; change management (change requests); topics
-threaded discussion; task management -- resource allocation, MS project and
workflow. It has an open Application Program Interface (API) supporting both
Java and COM scripting.

     CaliberRM is a web-based requirements management system that manages each
requirement as an object. This enables priorities, owners, dependencies,
versioning, requirements status and traceability to other deliverables such as
test cases, use cases design and code to be achieved. The product also provides
collaboration capabilities such as group discussion, email notification, and
glossaries.

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

     Starbase CaliberRBT provides requirements-based testing in the form of
automatically generated test cases that support full coverage with the minimum
number of cases. It documents cause and effect for each test case and also
documents some of the logic for the test where possible.

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

     CodeWright is an editing system for programmers that allows users to
standardize their development environment and alleviate the need to continually
learn the idiosyncrasies of a variety of development GUIs and IDEs.

     Genitor Object Construction Suite (OCS) creates 'objects' from lines of
code and class libraries (currently C++) so that they can be reused/edited using
the OCS design editor and, if necessary, reverse-engineered into the modeling
tool for redesign and regeneration.

     Surveyor reverse engineers any version of C++ into 'English' documentation,
accessible as a Web site, that shows hierarchies of classes, relationships and
other information that can be translated from the code. The C++ code could
potentially be re-engineered into Java.

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

     The following is a list of our partners' products that we resell:

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

     Embarcadero GDPro is a visual modeling, object-oriented analysis and design
tool supporting the unified modeling language (UML). Starting with existing
source code, GDPro's reverse engineering capabilities allow
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one to create UML models that give you insight into what you currently have,
mapping relationships, objects, methods and properties. Or, GDPro can be used to
design a system starting from scratch, followed by automatically generating code
from the new UML-based models.

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

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

SERVICES

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

  Technical Support and Maintenance

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

  Consulting

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

  Training

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

SALES AND MARKETING

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

     We have a base of over 2,800 existing customers who use our products for
the development and management of eBusiness applications, Web sites and
traditional software applications. We have the opportunity to leverage our
existing customer base by selling our recent additions to the Starbase family of
products (CaliberRM, CaliberRM Professional, Starbase CaliberRBT, Starbase
eXpressroom, as well as partner products that we resell -- Mercury TestDirector,
Embarcadero GDPro, Software Productivity Center Estimate Professional and
Catalyst Openmake). Our recent acquisitions of worldweb.net and Technology
Builders Inc. adds direct sales personnel and gives us the opportunity to sell
into their existing customer base.

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

     Our international distributor program is targeted to a wide variety of
dealers/distributors. Annual targets, discounts, territorial coverage and
overall commitment vary by category and geographical region. We currently have a
distributor network that covers 25 countries throughout the world.

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

RESEARCH AND DEVELOPMENT

     We believe that strong research and product development efforts are
essential to enhancing our core technologies and developing additional products.
We have made substantial investments in research and development through both
internal development and technology acquisitions. We are focused on developing
and enhancing our products for eBusiness applications and the production of Web
sites for eCollaboration solutions. Our research and development efforts are
focused on expanding our support for Extensible Markup Language or XML,
additional digital platforms such as hand-held mobile devices and a broader
range of digital devices. Our research and development expenses were $4.4
million, $4.6 million and $12.3 million for the years ended March 31, 1999,
2000, and 2001.

COMPETITION

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

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

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

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

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

     - the ability to manage both code and content;

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

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

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     - the ability to operate on many platforms; and

     - the ability to adhere to emerging industry standards.

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

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

PROPRIETARY RIGHTS

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

EMPLOYEES

     As of March 31, 2001, we had 410 full-time employees. Of these employees,
119 were in Research and Development, 53 were in Administration and 238 were in
Sales and Marketing. Our workforce is not unionized and management believes that
our relations with employees are good.

ITEM 2. PROPERTIES

     Our principal administrative, sales, marketing, support, and research and
development facility is currently located in approximately 43,000 square feet of
space in Santa Ana, California, under a lease that expires in September 2005. We
also lease 16,000 square feet in Beaverton, Oregon, under a lease that expires
in March 2002, which was assumed in the acquisition of Premia Corporation,
37,000 square feet in Alexandria, Virginia, under a lease that expires in
October 2009, which was assumed in the acquisition of worldweb.net, Inc., and
41,000 square feet in Atlanta, Georgia, under a lease that expires in August
2005, which was assumed in the acquisition of Technology Builders, Inc.

     We also lease sales offices through out the U.S. including, Texas,
Colorado, New Jersey, and Massachusetts. Our UK subsidiary leases sales office
space in London metropolitan area.

ITEM 3. LEGAL PROCEEDINGS

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

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

     No matters were submitted to a vote of security holders during the fourth
quarter of 2001.

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                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY

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

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                                                               HIGH      LOW
                                                              ------    -----
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FISCAL YEAR 2000
  Quarter Ended June 30, 1999...............................  $ 3.38    $1.50
  Quarter Ended September 30, 1999..........................  $ 2.97    $1.78
  Quarter Ended December 31, 1999...........................  $15.13    $1.19
  Quarter Ended March 31, 2000..............................  $17.13    $8.50
FISCAL YEAR 2001
  Quarter Ended June 30, 2000...............................  $10.87    $2.18
  Quarter Ended September 30, 2000..........................  $11.62    $4.59
  Quarter Ended December 31, 2000...........................  $ 6.12    $1.93
  Quarter Ended March 31, 2001..............................  $ 4.62    $1.97
</TABLE>

     As of March 31, 2001, based on information received from the transfer agent
of our common stock, the number of stockholders of record was 1,178. We believe
that there are approximately 31,000 stockholders of our common stock held in
street name.

     We have never declared a cash dividend on our common stock or preferred
stock. The Board of Directors presently intends to retain all earnings for use
in our business and therefore does not anticipate paying any cash dividends on
our common stock in the foreseeable future. Payment of dividends on common
stock, if any, would be subject to the discretion of the Board of Directors,
which may consider factors such as our results of operations, financial
condition, capital needs and acquisition strategy, among others. In addition,
under the corporate law of Delaware, we are prohibited from paying dividends
except out of our surplus (retained earnings) or, if there is no surplus, out of
our net profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal year. At March 31, 2001, our balance sheet reflected an
accumulated deficit of $74,857,000.

     (b) In February 2001, we issued an aggregate of 8,300,000 shares of our
common stock to the former stockholders of worldweb.net, Inc. in the connection
of acquisition of worldweb.net, Inc.

     In February 2001, we issued an aggregate of 10,505,280 shares of our common
stock to former stockholders of Technology Builders, Inc. in connection of the
acquisition of Technology Builders, Inc.

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ITEM 6. SELECTED FINANCIAL DATA

     Our consolidated statements of operations data for the years ended March
31, 1999, 2000 and 2001 and the consolidated balance sheet data as of March 31,
1999, 2000, and 2001 have been derived from our consolidated financial
statements which have been audited by Deloitte & Touche LLP, independent
auditors, of which March 31, 2000 and 2001 are included herein. Our statements
of operations data for the years ended March 31, 1997 and 1998 and the balance
sheet data as of March 31, 1997 and 1998 have been derived from our financial
statements for those periods which have been audited by PricewaterhouseCoopers
LLP, independent accountants, and are not included herein. The information set
forth below in not necessarily indicative of the results of future operations
and should be read in conjunction with the consolidated financial statements and
the notes thereto.

<TABLE>
<CAPTION>
                                                                YEAR ENDED MARCH 31,
                                                  ------------------------------------------------
                                                   1997      1998      1999      2000       2001
                                                  -------   -------   -------   -------   --------
                                                       (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                               <C>       <C>       <C>       <C>       <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
  License.......................................  $   968   $ 1,863   $ 5,964   $14,486   $ 31,735
  Service.......................................       71       276       868     3,046      9,905
                                                  -------   -------   -------   -------   --------
          Total revenues........................    1,039     2,139     6,832    17,532     41,640
Cost of revenues:
  License.......................................       96       162       508     1,042      1,330
  Service.......................................       --        --        --     1,480      4,560
  Amortization of intangibles...................       --        --        --        94      2,426
                                                  -------   -------   -------   -------   --------
          Total cost of revenues................       96       162       508     2,616      8,316
                                                  -------   -------   -------   -------   --------
Gross margin....................................      943     1,977     6,324    14,916     33,324
Operating expenses:
  Research and development......................    1,791     2,762     4,437     4,552     12,327
  Sales and marketing...........................    2,969     3,423     7,638     9,097     21,888
  General and administrative....................    2,081     1,947     2,786     3,898      7,231
  Non-cash stock based compensation.............       --        --       177       629      1,502
  In-process research and development...........       --        --        --     2,130      1,200
  Amortization of intangibles...................       --        --        --       377      6,686
                                                  -------   -------   -------   -------   --------
          Total operating expenses..............    6,841     8,132    15,038    20,683     50,834
                                                  -------   -------   -------   -------   --------
Operating loss..................................   (5,898)   (6,155)   (8,714)   (5,767)   (17,510)
Interest and other income (expense).............      198      (877)       32        50        980
                                                  -------   -------   -------   -------   --------
Loss before income taxes........................   (5,700)   (7,032)   (8,682)   (5,717)   (16,530)
Provision for income taxes......................        3         1         1         1         22
                                                  -------   -------   -------   -------   --------
Net loss........................................   (5,703)   (7,033)   (8,683)   (5,718)   (16,552)
Non-cash dividend and accretion of beneficial
  conversion feature............................    1,096     2,832     1,277       549         --
                                                  -------   -------   -------   -------   --------
Net loss applicable to common stockholders......  $(6,799)  $(9,865)  $(9,960)  $(6,267)  $(16,552)
                                                  =======   =======   =======   =======   ========
Basic and diluted net loss per share............  $ (0.62)  $ (0.70)  $ (0.49)  $ (0.19)  $  (0.34)
Basic and diluted weighted average number of
  common shares outstanding.....................   10,938    14,126    20,526    33,412     49,107
</TABLE>

                                        9
<PAGE>   12

<TABLE>
<CAPTION>
                                                                     MARCH 31,
                                                  ------------------------------------------------
                                                   1997      1998      1999      2000       2001
                                                  -------   -------   -------   -------   --------
                                                                   (IN THOUSANDS)
<S>                                               <C>       <C>       <C>       <C>       <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................  $ 2,722   $ 4,167   $ 1,363   $11,448   $ 14,075
Working capital.................................    2,384     3,632     2,308    11,429      1,381
Intangible assets, net..........................       --        --       971    21,074    107,628
Total assets....................................    3,876     5,682     6,605    42,213    149,038
Long-term liabilities...........................       --        38       116       584        359
Total stockholders' equity......................    2,991     4,430     4,462    34,270    118,194
</TABLE>

                                        10
<PAGE>   13

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

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

RESULTS OF OPERATIONS

     The following table summarizes our results of operations as a percentage of
total revenues for the years ended March 31, 1999, 2000 and 2001.

<TABLE>
<CAPTION>
                                                                YEAR ENDED MARCH 31,
                                                              ------------------------
                                                               1999     2000     2001
                                                              ------    -----    -----
<S>                                                           <C>       <C>      <C>
Revenues:
  License...................................................    87.3%    82.6%    76.2%
  Service...................................................    12.7     17.4     23.8
                                                              ------    -----    -----
          Total revenues....................................   100.0    100.0    100.0
Cost of revenues:
  License...................................................     7.4      6.0      3.2
  Service...................................................      --      8.4     11.0
  Amortization of intangibles...............................      --      0.5      5.8
                                                              ------    -----    -----
          Total cost of revenues............................     7.4     14.9     20.0
                                                              ------    -----    -----
Gross profit................................................    92.6     85.1     80.0
Operating expenses:
  Research and development..................................    64.9     26.0     29.6
  Sales and marketing.......................................   111.8     51.9     52.6
  General and administrative................................    40.8     22.2     17.4
  Non-cash stock based compensation.........................     2.6      3.6      3.6
  In-process research and development.......................      --     12.1      2.9
  Amortization of intangibles...............................      --      2.2     16.0
                                                              ------    -----    -----
          Total operating expenses..........................   220.1    118.0    122.1
                                                              ------    -----    -----
Loss from operations........................................  (127.5)   (32.9)   (42.1)
Interest and other income...................................     0.4      0.3      2.4
                                                              ------    -----    -----
Loss before income taxes....................................  (127.1)   (32.6)   (39.7)
Provision for income taxes..................................     0.0      0.0      0.1
                                                              ------    -----    -----
Net loss....................................................  (127.1)   (32.6)   (39.8)
Non-cash dividend and accretion of beneficial conversion
  feature...................................................    18.7      3.1       --
                                                              ------    -----    -----
Net loss applicable to common stockholders..................  (145.8)%  (35.7)%  (39.8)%
                                                              ======    =====    =====
</TABLE>

YEARS ENDED MARCH 31, 1999, 2000 AND 2001

REVENUES

     Revenues were $6.8 million, $17.5 million and $41.6 million for 1999, 2000
and 2001, respectively, representing increases of $10.7 million, or 157.4%, from
1999 to 2000 and $24.1 million, or 137.5%, from 2000 to 2001. One customer
accounted for 10% and 11% of total revenues for 1999 and 2000, respectively, and
no one customer accounted for 10% or more of total revenues for 2001.
International revenues accounted for less than 10% of total revenues in 1999,
2000 and 2001.

     Licenses -- Licenses were $6.0 million, $14.5 million and $31.7 million in
1999, 2000 and 2001, respectively, representing increases of $8.5 million, or
141.7%, from 1999 to 2000, and $17.2 million, or 119.1%, from 2000 to 2001.
Licenses represented 87.3%, 82.6% and 76.2% of total revenues in 1999, 2000 and
2001, respectively. The increase in licenses from 1999 to 2000 was due to an
increase in our sales force. The increase in licenses from 2000 to 2001 was due
to an increase in our sales force along with the new product

                                        11
<PAGE>   14

available through the Premia, worldweb.net and Technology Builders acquisitions.
The acquired products were CodeWright, CaliberRM, CaliberRBT and eXpressroom.

     Services -- Services were $868,000, $3.0 million and $9.9 million in 1999,
2000 and 2001, respectively, representing increases of $2.2 million, or 250.9%,
from 1999 to 2000, and $6.9 million, or 225.2%, from 2000 to 2001. Services
represented 12.7%, 17.4% and 23.8% of total revenues in 1999, 2000 and 2001,
respectively. The increase in services revenues was due to an increase in our
training and consulting organization along with an increase in the number of
software licenses sold with maintenance agreements.

COST OF REVENUES

     License -- License cost of revenues consists primarily of manufacturing and
related costs, such as media, documentation and product assembly. We outsource
manufacturing for all software products, with the exception of our Roundtable
product. License cost of revenues was $508,000, $1.0 million and $1.3 million in
1999, 2000 and 2001, respectively, representing an increase of $500,000, or
105.1%, from 1999 to 2000, and $300,000, or 27.6%, from 2000 to 2001. License
cost of revenues as a percentage of license revenues was 8.5%, 7.2% and 4.2% for
1999, 2000 and 2001, respectively. The decrease in percentage from 1999 to 2000
was primarily due to the elimination of a royalty bearing component of our
product. The decrease in percentage from 2000 to 2001 was primarily due to an
increase in the average size of the Company's sales, thus requiring a fewer
number of manuals and media to be shipped.

     Service -- Service cost of revenues consists of costs associated with
performing training and consulting services Service cost of revenues was $1.5
million and $4.6 million in 2000 and 2001, respectively, representing an
increase of $3.1 million, or 208.1%. Service cost of revenues as a percentage of
service revenue was 48.6% and 46.0% for 2000 and 2001, respectively. The
increases in service costs were due to the increases in the training and
consulting organization. There was no cost of service for 1999.

     Amortization of intangibles -- Amortization of intangibles consists of the
amortization of developed technology associated with the Premia, Genitor,
worldweb.net and Technology Builders acquisitions. Amortization of intangibles
was $94,000 and $2.4 million in 2000 and 2001, respectively, representing an
increase of $2.3 million or 2,480.1%. Amortization of intangibles as a
percentage of total revenue was 0.5% and 5.8% for 2000 and 2001, respectively.
See Note 9 of the Notes to the Consolidated Financial Statements for more
information concerning the purchase price allocation associated with
acquisitions.

OPERATING EXPENSES

     Research and Development -- Research and development expenses were $4.4
million, $4.6 million and $12.3 million in 1999, 2000 and 2001, respectively,
representing increases of $200,000, or 4.5%, from 1999 to 2000, and $7.7
million, or 170.8%, from 2000 to 2001. The increases for these periods were
primarily related to an increase in salaries and related expenses associated
with an increase in software developers and quality assurance personnel as a
result of our acquisitions, along with the cost of hiring outside contractors to
support product development activities. Research and development expenses for
2001 includes a one-time expense of $1.7 million associated with technology
purchase.

     Sales and marketing -- Sales and marketing expenses were $7.6 million, $9.1
million and $21.9 million in 1999, 2000 and 2001, respectively, representing
increases of $1.5 million, or 19.7%, from 1999 to 2000, and $12.8 million, or
140.6%, from 2000 to 2001. The increases for these periods were primarily
related to the increase in salaries and related expenses incurred in expanding
our sales teams, through acquisitions and new hires, from eight to twenty-seven.

     General and administrative -- General and administrative expenses were $2.8
million, $3.9 million and $7.2 million in 1999, 2000 and 2001, respectively,
representing increases of $1.1 million, or 39.9%, from 1999 to 2000, and $3.3
million, or 85.5%, from 2000 to 2001. The increases for these periods were
primarily related to the increase in salaries and related expenses incurred as a
result of our acquisition, along with the building of our infrastructure.

                                        12
<PAGE>   15

     Non-cash stock based compensation -- Non-cash stock based compensation was
$177,000, $629,000 and $1.5 million in 1999, 2000 and 2001, respectively,
representing increases of $452,000, or 255.4%, from 1999 to 2000, and $900,000,
or 138.8%, from 2000 to 2001. Non-cash stock based compensation expense
represents the fair market value of stock options and warrants granted to
non-employees of our common stock at the date of the grant amortized over the
vesting period.

     In-process research and development -- In-process research and development
was $2.1 million and $1.2 million for 2000 and 2001, respectively, representing
a decrease of $900,000, or 43.7%. In-process research and development was based
upon the discounted expected future net cash flows of the products over the
products' expected life, reflecting the estimated state of completion of the
projects and the estimate of the costs to complete the projects. In-process
research and development projects for 2001 were a result of the Technology
Builders acquisition. New project developments underway at Technology Builders
at the time of acquisition included, among other things, CaliberRM 4.0 and
eCaliber. The Company estimated that the percent completion of these projects at
the date of acquisition was 41% and 54% respectively, and that the cost to
complete these projects will aggregate approximately $650,000 and will be
incurred over a two-year period. In-process research and development projects
for 2000 were a result of Premia acquisition. New project developments underway
at Premia at the time of the acquisition included, among other things,
CodeWright 6.5, CodeWright 7.0, DocWright 4.5 and TrackWright 1.0. The Company
estimated that the percent completion of these projects at the date of
acquisition was 89%, 57%, 55% and 69% respectively, and that the cost to
complete these projects will aggregate approximately $1.1 million and will be
incurred over a two-year period. At March 31, 2001, the Company estimated the
completion of these projects was 100%, 100%, 55% and 69%, respectively, and the
cost incurred for the year ended March 31, 2001 was approximately $900,000.

     Amortization of intangibles -- Amortization of intangibles was $373,000 and
$6.7 million for 2000 and 2001, respectively. This included amortization of
goodwill, customer list and assembled workforce associated with the SITE,
Premia, ObjectShare, worldweb.net, and Technology Builders acquisitions. See
Note 9 to the Notes of the Consolidated Financial Statements for more
information concerning the purchase price allocation associated with the
acquisitions. The Company will continue to evaluate the recoverability of its
intangible assets throughout fiscal 2002.

     Interest and other income -- Interest and other income was $32,000, $50,000
and $980,000 in 1999, 2000 and 2001, respectively, representing an increase of
$18,000 from 1999 to 2000, and an increase of $930,000 from 2000 to 2001. The
increase is due to higher interest income resulting from more cash being
available to invest. Interest and other income in 2000 includes an expense of
$250,000 as a result of equity loss from investee (OpenAvenue Inc.)

     Provision for income taxes -- We have incurred minimal income taxes in
1999, 2000 and 2001 due to our cumulative losses. As of March 31, 2001, we have
a net operating loss ("NOL") carryforwards of approximately $93 million and $68
million for federal and state income tax purposes. The NOL carryforwards are
available to offset future taxable income at varying amounts through the year
2021. At March 31, 2001, a 100% valuation allowance has been provided on the net
deferred tax assets since we cannot determine that such are "more likely than
not" to be realized.

     Net loss applicable to common stockholders -- Net loss applicable to common
stockholders for the year ended March 31, 1999 was $10.0 million, consisting of
our net loss of $8.7 million and $1.3 million of non-cash dividend and accretion
of the beneficial conversion feature of preferred stock. Net loss applicable to
common stockholders for the year ended March 31, 2000 was $6.3 million,
consisting of our net loss for the year of $5.8 million and $549,000 of non-cash
dividend and accretion of the beneficial conversion feature of preferred stock.
Net loss applicable to common stockholders for the year ended March 31, 2001 was
$16.6 million, consisting of our net loss for the period.

INFLATION

     Inflation has not had a significant effect on our results of operations or
financial position for the years ended March 31, 1999, 2000 and 2001.

                                        13
<PAGE>   16

LIQUIDITY AND CAPITAL RESOURCES

     We have funded our business, to date, primarily from the issuance of equity
securities. Cash and cash equivalents as of March 31, 2001 were $14.1 million.
At March 31, 2001 we had working capital of $1.4 million.

YEARS ENDED MARCH 31, 2000 AND 2001

     Net cash used in operating activities was $1.5 million and $4.4 million in
2000 and 2001, respectively. The increase was primarily due to an increase in
loss from operations and an increase in accounts receivable resulting from
increased sales, offset by an increase in non-cash stock option compensation
expense and depreciation and amortization expense.

     Net cash provided by (used in) investing activities was $498,000 and $(8.8
million) in 2000 and 2001, respectively. The decrease in cash provided by
investing activities was primarily due to an increase in capital expenditures
and cash paid for acquisitions, net of cash received.

     Net cash provided from financing activities was $11.0 million and $15.8
million in 2000 and 2001, respectively. In 2000, we raised $4.2 million from the
sale of common stock, $2.0 million from the exercise of stock options and $5.5
million from the exercise of warrants. In 2001, we raised $17.5 million from the
sale of common stock, $2.6 million from the exercise of stock options and
$428,000 from the exercise of warrants.

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

     We warrant our products against defects for 90 days and have a policy
permitting the return of products within 30 days. Warranty costs and returns,
which are not significant, have historically been within management's
expectations. We have reserved approximately $2.2 million at March 31, 2001 for
future returns and other collection issues.

NEW ACCOUNTING PRONOUNCEMENTS

     In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No.
133, as amended, is effective for all fiscal years beginning after June 15,
2000, and established accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. Under SFAS No. 133, certain contracts that
were not formerly considered derivatives may now meet the definition of a
derivative which would be required to be reported as assets or liabilities and
carried at fair value. The Company adopted SFAS No. 133 effective April 1, 2001.
The adoption of SFAS No. 133 did not have a significant impact on the financial
position, results of operations or cash flows of the Company.

     In December 1999, Staff Accounting Bulletin No. 101 was issued to provide
to staff's views in applying generally accepted accounting principles to revenue
recognition in financial statements. SAB 101 is effective no later than the
fourth fiscal quarter of fiscal years beginning after December 15, 1999. The
Company has adopted this statement and evaluated the impact on consolidated
financial statements and believes it did not and will not have a material impact
on its results of operations or equity.

     In March 2000, the FASB issued Interpretation No. 44 (FIN 44), Accounting
for Certain Transactions Involving Stock Compensation -- an Interpretation of
APB Opinion No. 25. FIN 44 clarifies the definition of an employee for purposes
of applying Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, the criteria for determining whether a plan as a
noncompensatory plan, the accounting sequence of various modifications to the
terms of a previously fixed stock option or award, and the accounting for an
exchange of stock compensation awards in a business combination. This
Interpretation is effective July 1, 2000, but certain conclusions in this
Interpretation cover specific events that occur after either December 15, 1998
or January 12, 2000. The provisions of FIN 44 change the accounting for an
exchange

                                        14
<PAGE>   17

unvested employee stock options and restricted stock awards in a purchase
business combination. The new rules require the intrinsic value of the unvested
awards be allocated to deferred compensation and recognized as a non-cash
compensation expense over the remaining future vesting period. The adoption of
FIN 44 did not have a material impact on the Company's consolidated financial
statements, other than the effect of the application of FIN 44 as it related to
the Company's acquisitions as described in Note 9.

RISK FACTORS

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

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

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

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

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

     - changes in budgets or purchasing patterns of our customers;

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

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

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

     - changes in operating expenses and personnel; and

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

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

     Since our inception, we have had a history of losses and as of March 31,
2001, we had an accumulated deficit of $74,857,000. Further, our cash
requirements to run our business have been, and will continue to be,
significant. In the past, we have had negative cash flow from operations. We
anticipate incurring additional losses until we can successfully develop, market
and distribute our products. Developing software products is difficult and time
consuming and requires the coordinated participation of various technical and
marketing personnel and, at times, independent third-party suppliers. This
development process often encounters unanticipated delays and expenses. The
likelihood of the success of our business must be considered in light of the
problems, expenses, difficulties, complications and unforeseen delays frequently
encountered in connection with the development of new software technologies.
Further, our ability to achieve or sustain our revenue or profit goals depends
on a number of factors outside of our control, including the extent to which:

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

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

     - our customers promote our product.

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

                                        15
<PAGE>   18

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

     For the year ended March 31, 2001, we generated 50% of our total revenues
and 67% of our licensing revenues from licenses of our StarTeam product line. We
believe that revenues generated from StarTeam will continue to account for a
large percentage of our revenues for the foreseeable future. A decline in the
price of, or demand for, StarTeam would have a material adverse effect on our
business, operating results and financial condition. The following events may
reduce the demand for StarTeam:

     - competition from other products;

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

     - negative publicity or evaluation of our company; or

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

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

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

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

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

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

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

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

     Our success depends on our ability to attract and retain qualified,
experienced employees. We compete in a relatively new market and there are a
limited number of people who have acquired the skills needed to provide the
services that our clients demand. We compete for experienced engineering, sales
and consulting personnel with Internet professional services firms, software
vendors, consulting firms and professional services companies. Since we may
issue options as compensation to recruit employees, the volatility of the market
price of our common stock may make it difficult for us to attract and retain
highly qualified employees.
                                        16
<PAGE>   19

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

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

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

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

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

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

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

     - rapid technological advances;

     - evolving industry standards, including operating systems;

     - changes in end-user requirements; and

     - frequent new product introductions and enhancements.

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

                                        17
<PAGE>   20

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

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

WE MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE OUR RECENT ACQUISITION OF
WORLDWEB.NET, INC.

     We acquired worldweb.net, Inc. on February 20, 2001. The success of this
acquisition will depend on our ability to:

     - successfully integrate and manage worldweb.net's technology and
       operations;

     - retain worldweb.net's software developers;

     - develop and market new products and enhance existing products based on
       worldweb.net's technology; and

     - retain worldweb.net's customer base.

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

WE MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE OUR RECENT ACQUISITION OF
TECHNOLOGY BUILDERS, INC.

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

     - successfully integrate and manage Technology Builders' technology and
       operations;

     - retain Technology Builders' software developers;

     - develop and market new products and enhance existing products based on
       Technology Builders' technology; and

     - retain Technology Builders' customer base.

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

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

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

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

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

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

                                        18
<PAGE>   21

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

     - assumption of liabilities of an acquired company.

     Any of these risks could significantly harm our business, operating results
or financial condition or result in dilution to our stockholders.

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

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

     - costs of customizing products for foreign countries;

     - foreign currency risks;

     - dependence on local vendors;

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

     - longer sales cycles; and

     - import and export restrictions and tariffs.

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

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

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

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

     - hire, train and retain qualified personnel;

     - continue to expand and upgrade core technologies; and

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

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

WE MAY BE UNABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS

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

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

     As the number of entrants into our market increases, the possibility of a
patent infringement claim against us grows. For example, we inadvertently may be
infringing a patent of which we are unaware. In addition, because patent
applications can take many years to issue, there may be a patent application now
pending of which we are unaware, which will cause us to be infringing such
patent when it issues in the future.
                                        19
<PAGE>   22

To address any patent infringement claims, we may have to enter into royalty or
licensing agreements on commercial terms that are not favorable to us. A
successful claim of product infringement against us, or our failure to license
the infringed or similar technology, may cause us to delay or cancel shipment of
our products or result in significant costs. This could hurt our revenues and
profitability and result in a material adverse effect on our business, operating
results and financial condition. In addition, any infringement claims, with or
without merit, would be time-consuming and expensive to litigate or settle and
could divert management attention from administering our core business.

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

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

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

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

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

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

WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS

     We expect cash on hand, cash equivalents, our line of credit and cash from
future operations to meet our current working capital and capital expenditure
needs. We may need to raise additional funds for other purposes and we cannot be
certain that we would be able to obtain additional financing on favorable terms,
if at all. If we cannot raise necessary funds on acceptable terms, we may not be
able to develop or enhance our products, take advantage of future opportunities
or respond to competitive pressures or unanticipated capital requirements, which
could have a material adverse effect on our business, operating results and
financial condition.
                                        20
<PAGE>   23

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Consolidated Financial Statements of Starbase Corporation:
  Independent Auditors' Report..............................   22
  Consolidated Balance Sheets at March 31, 2001 and 2000....   23
  Consolidated Statements of Operations for the years ended
     March 31, 2001, 2000 and 1999..........................   24
  Consolidated Statements of Comprehensive Operations for
     the years ended March 31, 2001, 2000 and 1999..........   25
  Consolidated Statements of Cash Flows for the years ended
     March 31, 2001, 2000 and 1999..........................   26
  Consolidated Statements of Stockholders' Equity for the
     years ended March 31, 2001, 2000 and 1999..............   27
  Notes to Consolidated Financial Statements................   28
</TABLE>

                                        21
<PAGE>   24

                          INDEPENDENT AUDITORS' REPORT

To The Board of Directors and
Stockholders of StarBase Corporation:

     We have audited the accompanying consolidated balance sheets of Starbase
Corporation and its subsidiaries (the Company) as of March 31, 2001 and 2000,
and the related consolidated statements of operations, comprehensive operations,
stockholders' equity, and cash flows for each of the three years in the period
ended March 31, 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements based on our audits.

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

     In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Starbase Corporation and its
subsidiaries at March 31, 2001 and 2000, and the results of their operations and
their cash flows for each of the three years in the period ended March 31, 2001,
in conformity with accounting principles generally accepted in the United States
of America.

/s/ DELOITTE & TOUCHE LLP

Costa Mesa, California
May 7, 2001

                                        22
<PAGE>   25

                              STARBASE CORPORATION

                          CONSOLIDATED BALANCE SHEETS
                       (IN THOUSANDS, EXCEPT SHARE DATA)

                                     ASSETS

<TABLE>
<CAPTION>
                                                              MARCH 31,    MARCH 31,
                                                                2001         2000
                                                              ---------    ---------
<S>                                                           <C>          <C>
Current assets:
  Cash and cash equivalents.................................  $ 14,075     $ 11,448
  Restricted cash...........................................       257           39
  Marketable securities.....................................         3           11
  Accounts receivable, net of allowances of $2,166 (2001)
     and $202 (2000)........................................    16,148        6,696
  Notes and other receivables, net of allowance of $760
     (2001) and $707
     (2000).................................................       200           26
  Prepaid expenses and other assets.........................     1,183          568
                                                              --------     --------
          Total current assets..............................    31,866       18,788
Property and equipment, net.................................     7,953        1,526
Intangible assets, net......................................   107,628       21,074
Note receivable from officer................................       104           99
Long-term notes receivable..................................        16           --
Long-term restricted cash...................................     1,216           39
Other non-current assets....................................       255          687
                                                              --------     --------
          Total assets......................................  $149,038     $ 42,213
                                                              ========     ========
            LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................  $ 11,104     $  1,358
  Accrued compensation......................................     3,381        1,475
  Other accrued liabilities.................................     6,706          390
  Deferred revenue..........................................     8,950        4,017
  Current portion of long-term obligations..................       344          119
                                                              --------     --------
          Total current liabilities.........................    30,485        7,359
Long-term liabilities:
  Long-term obligations, less current portion...............       238           49
  Long-term deferred revenue................................       121          535
                                                              --------     --------
          Total long-term liabilities.......................       359          584
                                                              --------     --------
          Total liabilities.................................    30,844        7,943
Commitments and contingencies (Note 10)
Stockholders' equity:
  Preferred stock, $.01 par value; 10,000,000 shares
     authorized, none issued and outstanding at March 31,
     2001 and 2000..........................................        --           --
  Common stock, $.01 par value; 100,000,000 shares
     authorized, 69,386,443 and 44,315,610 issued and
     outstanding at March 31, 2001 and 2000.................       694          443
  Notes receivable..........................................      (219)          --
  Deferred non-cash compensation............................      (662)          --
  Additional paid-in capital................................   193,321       92,242
  Accumulated deficit.......................................   (74,857)     (58,305)
  Accumulated other comprehensive loss......................       (83)        (110)
                                                              --------     --------
     Net stockholders' equity...............................   118,194       34,270
                                                              --------     --------
          Total liabilities and stockholders' equity........  $149,038     $ 42,213
                                                              ========     ========
</TABLE>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                        23
<PAGE>   26

                              STARBASE CORPORATION

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                  YEARS ENDED MARCH 31,
                                                              ------------------------------
                                                                2001       2000       1999
                                                              --------    -------    -------
<S>                                                           <C>         <C>        <C>
Revenues:
  License...................................................  $ 31,735    $14,486    $ 5,964
  Service...................................................     9,905      3,046        868
                                                              --------    -------    -------
          Total revenues....................................    41,640     17,532      6,832
Cost of Revenues:
  License...................................................     1,330      1,042        508
  Service...................................................     4,560      1,480         --
  Amortization of intangibles...............................     2,426         94         --
                                                              --------    -------    -------
          Total cost of revenues............................     8,316      2,616        508
                                                              --------    -------    -------
Gross margin................................................    33,324     14,916      6,324
Operating Expenses:
  Research and development..................................    12,327      4,552      4,437
  Sales and marketing.......................................    21,888      9,097      7,638
  General and administrative................................     7,231      3,898      2,786
  Non-cash stock based compensation.........................     1,502        629        177
  In-process research and development.......................     1,200      2,130         --
  Amortization of intangibles...............................     6,686        377         --
                                                              --------    -------    -------
          Total operating expenses..........................    50,834     20,683     15,038
                                                              --------    -------    -------
  Operating loss............................................   (17,510)    (5,767)    (8,714)
  Interest and other income.................................       980         50         32
                                                              --------    -------    -------
Loss before income taxes....................................   (16,530)    (5,717)    (8,682)
  Provision for income taxes................................        22          1          1
                                                              --------    -------    -------
Net loss....................................................   (16,552)    (5,718)    (8,683)
  Non-cash dividend and accretion of beneficial conversion
     feature................................................        --        549      1,277
                                                              --------    -------    -------
Net loss applicable to common stockholders..................  $(16,552)   $(6,267)   $(9,960)
                                                              ========    =======    =======
Per share data:
  Basic and diluted net loss per common share...............  $  (0.34)   $ (0.19)   $ (0.49)
                                                              ========    =======    =======
  Basic and diluted weighted average common shares
     outstanding............................................    49,107     33,412     20,526
                                                              ========    =======    =======
</TABLE>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                        24
<PAGE>   27

                              STARBASE CORPORATION

              CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                  YEARS ENDED MARCH 31,
                                                              ------------------------------
                                                                2001       2000       1999
                                                              --------    -------    -------
<S>                                                           <C>         <C>        <C>
Net loss....................................................  $(16,552)   $(5,718)   $(8,683)
Other comprehensive loss:
  Foreign currency translation adjustments..................        35         --         --
  Unrealized loss on available for sale securities..........        (8)      (110)        --
                                                              --------    -------    -------
          Total comprehensive loss..........................  $(16,525)   $(5,828)   $(8,683)
                                                              ========    =======    =======
</TABLE>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                        25
<PAGE>   28

                              STARBASE CORPORATION

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                  YEARS ENDED MARCH 31,
                                                              ------------------------------
                                                                2001       2000       1999
                                                              --------    -------    -------
<S>                                                           <C>         <C>        <C>
Cash Flows from Operating Activities:
 Net loss...................................................  $(16,552)   $(5,718)   $(8,683)
 Adjustments to reconcile net loss to cash used in operating
   activities:
   Depreciation and amortization............................    10,187        865        386
   In-process research and development......................     1,200      2,130         --
   Provision for doubtful accounts..........................     1,038        754         66
   Loss on disposition of property and equipment............        (3)         5          7
   Non-cash stock based compensation........................     1,502        629        177
   Gain on sales of available for sale securities...........        --        (78)        --
   Equity in loss of investee...............................        --        250         --
   Changes in operating assets and liabilities, net of
     effects of acquisition:
     Accounts receivable....................................    (6,313)    (3,535)    (2,251)
     Notes and other receivables............................       (56)      (722)        36
     Prepaid expenses and other assets......................        42       (203)       156
     Other non-current assets...............................         2       (529)      (156)
     Accounts payable and accrued liabilities...............     5,204      1,592        314
     Deferred revenue.......................................      (643)     3,105        397
                                                              --------    -------    -------
       Net cash used in operating activities................    (4,392)    (1,455)    (9,551)
Cash Flows from Investing Activities:
 Decrease (increase) in restricted cash.....................        39         40       (118)
 Proceeds from sale of available for sale securities........        --      1,141         --
 Investment in equity investee..............................        --       (250)        --
 Cash paid for acquisitions, net of cash acquired...........    (4,039)        57         --
 Proceeds from sale of property and equipment...............        29         --         --
 Capital expenditures.......................................    (4,816)      (490)      (600)
                                                              --------    -------    -------
       Net cash (used in) provided by investing
       activities...........................................    (8,787)       498       (718)
Cash Flows from Financing Activities:
 Proceeds from sale of preferred stock......................        --         --      7,053
 Proceeds from issuance of common stock:
   From private placements..................................    17,500      4,225         60
   For payment of expenses..................................        --         --        152
   Exercise of options......................................     2,557      2,030         61
   Exercise of warrants.....................................       428      5,495        581
 Payment of financing related costs.........................    (1,570)      (575)      (358)
 Payments on debt obligations...............................    (3,144)      (133)       (84)
                                                              --------    -------    -------
       Net cash provided by financing activities............    15,771     11,042      7,465
Effect of exchange rate changes on cash and cash
 equivalents................................................        35         --         --
                                                              --------    -------    -------
Net increase (decrease) in cash and cash equivalents........     2,627     10,085     (2,804)
Cash and cash equivalents, beginning of year................    11,448      1,363      4,167
                                                              --------    -------    -------
Cash and cash equivalents, end of year......................  $ 14,075    $11,448    $ 1,363
                                                              ========    =======    =======
Supplemental Cash Flow Information:
 Interest paid..............................................  $     35    $    31    $    16
                                                              ========    =======    =======
 Income taxes paid..........................................  $     22    $     1    $     1
                                                              ========    =======    =======
Non-cash investing and financing transactions:
 Non-cash preferred stock and common stock dividends........              $   549    $ 1,277
                                                                          =======    =======
 Conversion of preferred stock to common stock..............              $    48    $    85
                                                                          =======    =======
 Capitalized lease and insurance financing..................  $    171    $    90    $   268
                                                              ========    =======    =======
 Change in net unrealized loss on securities available for
   sale.....................................................  $      8    $   110
                                                              ========    =======
 Common stock for offering expense..........................              $   231
                                                                          =======
 Marketable securities received in exchange for accounts
   receivable...............................................                         $   121
                                                                                     =======
 Issuance of common stock for developed technology..........                         $   987
                                                                                     =======
</TABLE>

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

   The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                        26
<PAGE>   29

                              STARBASE CORPORATION

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>

                                     PREFERRED STOCK    COMMON STOCK     ADDITIONAL                   DEFERRED
                                     ---------------   ---------------    PAID-IN     ACCUMULATED     NON-CASH       NOTES
                                     SHARES   AMOUNT   SHARES   AMOUNT    CAPITAL       DEFICIT     COMPENSATION   RECEIVABLE
                                     ------   ------   ------   ------   ----------   -----------   ------------   ----------
<S>                                  <C>      <C>      <C>      <C>      <C>          <C>           <C>            <C>
BALANCE AT MARCH 31, 1998..........   3,773    $ 38    18,580    $186     $ 46,284     $(42,078)       $  --         $  --
Preferred stock conversion to
 common............................  (3,191)    (32)    8,500      85          (53)          --           --            --
Preferred stock issued -- Series
 D.................................      --      --        --      --           (8)          --           --            --
Preferred stock issued -- Series
 E.................................      --      --        --      --          (26)          --           --            --
Preferred stock issued -- Series
 F.................................      --      --        --      --           (4)          --           --            --
Preferred stock issued -- Series
 G.................................       3      --        --      --        2,866           --           --            --
Preferred stock issued -- Series
 H.................................       3      --        --      --        2,938           --           --            --
Preferred stock issued -- Series
 I.................................       1      --        --      --          884           --           --            --
Options and warrants issued for
 services provided.................      --      --        --      --          177           --           --            --
Common stock issued:
 Exercise of options...............      --      --        49      --           61           --           --            --
 Exercise of warrants..............      --      --       688       7          623           --           --            --
 Asset purchase....................      --      --       625       6          981           --           --            --
 Private placement.................      --      --        38      --           58           --           --            --
 Payment of liabilities............      --      --       156       2          150           --           --            --
Non-cash dividend and accretion of
 beneficial conversion feature.....      --      --        --      --        1,277       (1,277)          --            --
Net loss...........................      --      --        --      --           --       (8,683)          --            --
                                     ------    ----    ------    ----     --------     --------        -----         -----
BALANCE AT MARCH 31, 1999..........     589       6    28,636     286       56,208      (52,038)          --            --
                                     ------    ----    ------    ----     --------     --------        -----         -----
Preferred stock conversion to
 common............................    (589)     (6)    4,775      48          (42)          --           --            --
Options and warrants issued for
 services provided.................      --      --        --      --          629           --           --            --
Common stock issued:
 Exercise of options...............      --      --     1,510      15        2,015           --           --            --
 Exercise of warrants..............      --      --     4,893      49        5,446           --           --            --
 Acquisition.......................      --      --     1,869      19       23,813           --           --            --
 Private placement.................      --      --     2,504      25        4,200           --           --            --
Payment of financing related
 costs.............................      --      --       129       1         (576)          --           --            --
Non-cash dividend and accretion of
 beneficial conversion feature.....      --      --        --      --          549         (549)          --            --
Unrealized loss on available for
 sale securities...................      --      --        --      --           --           --           --            --
Net loss...........................      --      --        --      --           --       (5,718)          --            --
                                     ------    ----    ------    ----     --------     --------        -----         -----
BALANCE AT MARCH 31, 2000..........      --      --    44,316     443       92,242      (58,305)          --            --
                                     ------    ----    ------    ----     --------     --------        -----         -----
Options and warrants issued for
 services provided.................      --      --        --      --        1,480           --           22            --
Common stock issued:
 Exercise of options...............      --      --     1,052      11        2,546           --           --            --
 Exercise of warrants..............      --      --       221       2          426           --           --            --
 Acquisitions......................      --      --    20,586     206       80,045           --           --            --
 Private placement.................      --      --     3,211      32       17,468           --           --            --
Payment of financing related
 costs.............................      --      --        --      --       (1,570)          --           --            --
Deferred non-cash compensation for
 assumed options...................      --      --        --      --          684           --         (684)           --
Notes receivable for exercise of
 options...........................      --      --        --      --           --           --           --          (219)
Foreign currency translation
 adjustment........................      --      --        --      --           --           --           --            --
Unrealized loss on available for
 sale securities...................      --      --        --      --           --           --           --            --
Net loss...........................      --      --        --      --           --      (16,552)          --            --
                                     ------    ----    ------    ----     --------     --------        -----         -----
BALANCE AT MARCH 31, 2001..........      --    $ --    69,386    $694     $193,321     $(74,857)       $(662)        $(219)
                                     ======    ====    ======    ====     ========     ========        =====         =====

<CAPTION>
                                      ACCUMULATED
                                         OTHER           TOTAL
                                     COMPREHENSIVE   STOCKHOLDERS'
                                         LOSS           EQUITY
                                     -------------   -------------
<S>                                  <C>             <C>
BALANCE AT MARCH 31, 1998..........      $  --         $  4,430
Preferred stock conversion to
 common............................         --               --
Preferred stock issued -- Series
 D.................................         --               (8)
Preferred stock issued -- Series
 E.................................         --              (26)
Preferred stock issued -- Series
 F.................................         --               (4)
Preferred stock issued -- Series
 G.................................         --            2,866
Preferred stock issued -- Series
 H.................................         --            2,938
Preferred stock issued -- Series
 I.................................         --              884
Options and warrants issued for
 services provided.................         --              177
Common stock issued:
 Exercise of options...............         --               61
 Exercise of warrants..............         --              630
 Asset purchase....................         --              987
 Private placement.................         --               58
 Payment of liabilities............         --              152
Non-cash dividend and accretion of
 beneficial conversion feature.....         --               --
Net loss...........................         --           (8,683)
                                         -----         --------
BALANCE AT MARCH 31, 1999..........         --            4,462
                                         -----         --------
Preferred stock conversion to
 common............................         --               --
Options and warrants issued for
 services provided.................         --              629
Common stock issued:
 Exercise of options...............         --            2,030
 Exercise of warrants..............         --            5,495
 Acquisition.......................         --           23,832
 Private placement.................         --            4,225
Payment of financing related
 costs.............................         --             (575)
Non-cash dividend and accretion of
 beneficial conversion feature.....         --               --
Unrealized loss on available for
 sale securities...................       (110)            (110)
Net loss...........................         --           (5,718)
                                         -----         --------
BALANCE AT MARCH 31, 2000..........       (110)          34,270
                                         -----         --------
Options and warrants issued for
 services provided.................         --            1,502
Common stock issued:
 Exercise of options...............         --            2,557
 Exercise of warrants..............         --              428
 Acquisitions......................         --           80,251
 Private placement.................         --           17,500
Payment of financing related
 costs.............................         --           (1,570)
Deferred non-cash compensation for
 assumed options...................         --               --
Notes receivable for exercise of
 options...........................         --             (219)
Foreign currency translation
 adjustment........................         35               35
Unrealized loss on available for
 sale securities...................         (8)              (8)
Net loss...........................         --          (16,552)
                                         -----         --------
BALANCE AT MARCH 31, 2001..........      $ (83)        $118,194
                                         =====         ========
</TABLE>

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

                                        27
<PAGE>   30

                              STARBASE CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  Nature of operations

     Starbase Corporation, a Delaware corporation (the Company), provides
end-to-end collaborative products for the development and management of content
and code for eBusiness applications. The Company develops, markets, and supports
a complete family of user-friendly software products that support the continuous
cycle of creating, linking and managing digital assets, which comprise complex
eBusiness applications. The Company's products enable users with differing
technical and functional backgrounds to collaborate on the production of Web
sites and eBusiness initiatives from multiple locations. The Company's
professional services organization provides implementation, consulting and
training expertise.

  Basis of presentation

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

  Foreign currency translation

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

  Cash and cash equivalents

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

  Restricted cash

     On September 17, 1998, the Company pledged $118,000 of cash for an
irrevocable letter of credit related to the lease of new office space that was
classified as restricted cash on the balance sheet. The letter of credit will be
reduced by 33.33% each year and will expire on July 2, 2001. At March 31, 2001,
the balance of the letter of credit was $39,000.

     The Company assumed a balance of $1,124,069 of restricted cash as a result
of the acquisition of worldweb.net, Inc. (worldweb) (Note 9). The cash was
pledged as collateral in connection with the lease of worldweb's operating
facility.

     The Company assumed a balance of $309,000 of restricted cash as a result of
the acquisition of Technology Builders, Inc. (TBI) (Note 9). The cash was
pledged as collateral in connection with the lease of TBI's operating facility.

  Marketable securities

     The Company accounts for marketable securities in accordance with Statement
of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities. This standard requires the Company to
classify and account for investments in equity securities that have readily
determinable fair values and all debt securities as follows: (1) debt securities
that the Company has the intent and the ability to hold to maturity are
classified as held-to-maturity securities and are reported at amortized

                                        28
<PAGE>   31
                              STARBASE CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

cost; (2) debt and equity securities that are bought and held principally for
the purpose of selling them in the near-term are classified as trading
securities and are reported at fair value, with unrealized gains and losses
included in earnings; and (3) debt and equity securities not classified as
held-to-maturity securities or trading securities are classified as
available-for-sale securities and reported at fair value, with unrealized gains
and losses excluded from earnings and reported as a separate component of
stockholders' equity.

     In March 1999, the Company received marketable equity securities in
exchange for accounts receivable valued at $121,000. As of March 31, 2001, the
fair market value of the security was $3,000. The unrealized loss of $118,000
has been recorded as a separate component of stockholders' equity.

  Accounts receivable

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

     Activity related to the allowance account for the years ended March 31,
2001, 2000 and 1999 is as follows:

<TABLE>
<CAPTION>
                                      BALANCE AT    CHARGES TO                                  BALANCE AT
                                      BEGINNING     COSTS AND         FROM                        END OF
                                      OF PERIOD      EXPENSES     ACQUISITIONS    DEDUCTIONS      PERIOD
                                      ----------    ----------    ------------    ----------    ----------
                                                                 (IN THOUSANDS)
<S>                                   <C>           <C>           <C>             <C>           <C>
Year ended March 31, 2001:
  Allowance for doubtful accounts...     $909         $1,229          $979          $(191)        $2,926
Year ended March 31, 2000:
  Allowance for doubtful accounts...     $155         $  838          $ --          $ (84)        $  909
Year ended March 31, 1999:
  Allowance for doubtful accounts...     $ 89         $   75          $ --          $  (9)        $  155
</TABLE>

  Inventories

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

  Property and equipment

     Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation and amortization are calculated under the
straight-line basis over the shorter of the estimated useful lives of the
respective assets, generally three to seven years, or the related lease term. At
March 31, 2001 and 2000 property and equipment included equipment under capital
leases, net of accumulated amortization, of $173,000 and $87,000, respectively.

  Impairment of long-lived assets

     The Company accounts for the impairment and disposition of long-lived
assets in accordance with SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. In accordance
with SFAS No. 121, long-lived assets to be held are reviewed for events or
changes in circumstances which indicate that their carrying value may not be
recoverable. The Company periodically reviews the carrying value of long-lived
assets to determine whether or not an impairment to such value has occurred, and
has determined, based on its most recent assessment, that there was no
impairment at March 31, 2001.

                                        29
<PAGE>   32
                              STARBASE CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

  Intangible assets

     Developed technology (Notes 2 and 9) is recorded at cost and amortized on a
straight-line basis over two to five years. Accumulated amortization was
$2,932,000 and $308,000 at March 31, 2001 and 2000, respectively.

     Goodwill arising from acquisitions (Notes 2 and 9) is amortized on a
straight-line basis over five years. Accumulated amortization was $6,327,000 and
$173,000 at March 31, 2001 and 2000, respectively.

     Customer lists arising from acquisitions (Notes 2 and 9) is amortized on a
straight-line basis over two to four and one-half years. Accumulated
amortization was $166,000 and $2,000 at March 31, 2001 and 2000, respectively.

     Assembled workforce arising from acquisitions (Notes 2 and 9) is amortized
on a straight-line basis over four to five years. Accumulated amortization was
$175,000 and $5,000 at March 31, 2001 and 2000, respectively.

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

  Revenue recognition

     Revenues from sales of software licenses, which generally do not contain
multiple elements, are recognized upon shipment of the related products, if the
requirement of Statement of Position (SOP) 97-2, Software Revenue Recognition,
as amended, are met. If the requirements of SOP 97-2, including evidence of an
arrangement, delivery, fixed or determinable fee, collectibility, or
vendor-specific objective evidence about the value of an element are not met at
the date of shipment, revenue recognition is deferred until such elements are
known or resolved. Software maintenance revenue is deferred and recognized
ratably over the contractual maintenance period, generally one year. Maintenance
contracts greater than one year are recorded as long-term deferred revenue.
Revenue from training and consulting is recognized after the related services
have been performed.

  Warranty and sales returns

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

  Advertising expense

     The Company expenses all advertising costs as incurred, and such costs were
$1.3 million, $752,000, and $630,000 for the years ended March 31, 2001, 2000
and 1999, respectively.

  Research and development

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

  Income taxes

     The Company follows the provisions of SFAS No. 109, Accounting for Income
Taxes, which requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have

                                        30
<PAGE>   33
                              STARBASE CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

been included in the financial statements and tax returns. Deferred tax assets
and liabilities are determined based upon the difference between the financial
statement and tax bases of assets and liabilities, using the enacted tax rates
in effect for the year in which the differences are expected to reverse. A
valuation allowance is provided when it is more likely than not that deferred
tax assets will not be realized.

  Fair value of financial instruments

     The Company's balance sheets include the following financial instruments:
cash and cash equivalents, restricted cash, accounts receivable, notes and other
receivables, accounts payable, and accrued liabilities. The Company considers
the carrying value of cash and cash equivalents, accounts receivable, notes
receivable, accounts payable, and accrued liabilities in the financial
statements to approximate fair value for these financial instruments because of
the relatively short period of time between origination of the instruments and
their expected realization. Based on interest rates currently available, the
fair value of the notes receivable and the Company's other financial instruments
generally approximate their fair values at March 31, 2001 and 2000.

  Stock-based compensation

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

  Net loss per share

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

     For the year ended March 31, 2001, net loss and net loss applicable to
common stockholders was $16,552,000. For the year ended March 31, 2000, net loss
applicable to common stockholders was $6,267,000, representing net loss of
$5,718,000, plus non-cash dividend and accretion of a beneficial conversion
feature of $549,000 consisting of $501,000 associated with the Series H
Preferred Stock, and $48,000 associated with the Series I Preferred Stock. For
the year ended March 31, 1999, net loss applicable to common stockholders was
$9,960,000, representing net loss of $8,683,000, plus non-cash dividend and
accretion of beneficial conversion feature of $1,277,000 consisting of $156,000
associated with Series D Preferred Stock, $187,000 associated with Series E
Preferred Stock, $275,000 associated with Series G Preferred Stock, $643,000
associated with Series H Preferred Stock and $16,000 associated with Series I
Preferred Stock.

     Potentially dilutive securities, which consist of options to purchase
6,487,914 shares of common stock at prices ranging from $0.625 to $14.63 per
share, warrants to purchase 893,085 shares of common stock at prices ranging
from $0.73 to $6.81 per share and 1,418,638 common shares held in escrow were
not included in the computation of diluted loss per share because such inclusion
would have been antidilutive for the year ended
                                        31
<PAGE>   34
                              STARBASE CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2001. Potentially dilutive securities, which consist of options to
purchase 2,832,465 shares of common stock at prices ranging from $0.625 to
$13.07 per share, warrants to purchase 239,669 shares of common stock at prices
ranging from $0.73 to $2.00 per share, and 1,418,638 common shares held in
escrow were not included in the computation of diluted loss per share because
such inclusion would have been antidilutive for the year ended March 31, 2000.
Potentially dilutive securities, which consist of options to purchase 2,091,067
shares of common stock at prices ranging from $0.625 to $3.44 per share,
warrants to purchase 2,984,388 shares of common stock at prices ranging from
$0.59 to $3.25 per share, and 1,418,638 common shares held in escrow were not
included in the computation of diluted loss per share because such inclusion
would have been antidilutive for the year ended March 31, 1999.

  Use of estimates

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

  Comprehensive income (loss)

     For the year ended March 31, 2001, the difference between net loss and
comprehensive net loss was an unrealized loss for available-for-sale securities
of $8,000, and foreign currency translation adjustments of $35,000. For the year
ended March 31, 2000, the difference between net loss and comprehensive net loss
was an unrealized loss for available-for-sale securities of $110,000. There was
no difference between net loss and comprehensive net loss for the years ended
March 31, 1999.

  New accounting pronouncements

     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133, as
amended, is effective for all fiscal years beginning after June 15, 2000, and
established accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. Under SFAS No. 133, certain contracts that were not formerly
considered derivatives may now meet the definition of a derivative which would
be required to be reported as assets or liabilities and carried at fair value.
The Company adopted SFAS No. 133 effective April 1, 2001. The adoption of SFAS
No. 133 did not have a significant impact on the financial position, results of
operations or cash flows of the Company,

     In December 1999, Staff Accounting Bulletin No. 101 was issued to provide
to staff's views in applying generally accepted accounting principles to revenue
recognition in financial statements. SAB 101, is effective no later than the
fourth fiscal quarter of fiscal years beginning after December 15, 1999. The
Company has adopted this statement and evaluated the impact on the consolidated
financial statements in the year ended March 31, 2001, and such adoption did not
have a material impact on the consolidated financial statements.

     In March 2000, the FASB issued Interpretation No. 44 (FIN 44), Accounting
for Certain Transactions Involving Stock Compensation -- an Interpretation of
APB Opinion No. 25. FIN 44 clarifies the definition of an employee for purposes
of applying Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, the criteria for determining whether a plan as a
noncompensatory plan, the accounting sequence of various modifications to the
terms of a previously fixed stock option or award, and the accounting for an
exchange of stock compensation awards in a business combination. This
Interpretation became effective July 1, 2000 but certain conclusions in this
Interpretation cover specific events that occur after either December 15, 1998
or January 12, 2000. The provisions of FIN 44 changed the accounting for an
exchange of unvested employee stock options and restricted stock awards in a
purchase business combination.
                                        32
<PAGE>   35
                              STARBASE CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The new rules require the intrinsic value of the unvested awards be allocated to
deferred compensation and recognized as a non-cash compensation expense over the
remaining future vesting period. The adoption of FIN 44 did not have a material
impact on the Company's consolidated financial statements, other than the effect
of the application of FIN 44 as it related to the Company's acquisitions as
described in Note 9.

  Risks and uncertainties

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

 2. COMPOSITION OF CERTAIN BALANCE SHEET AND STATEMENT OF OPERATIONS CAPTIONS

<TABLE>
<CAPTION>
                                                         MARCH 31,    MARCH 31,
                                                           2001         2000
                                                         ---------    ---------
                                                             (IN THOUSANDS)
<S>                                                      <C>          <C>
Property and equipment:
  Computer hardware....................................  $  2,498      $ 1,836
  Furniture and fixtures...............................     2,000          628
  Computer software....................................     3,394          239
  Motor vehicle........................................        32           32
  Leasehold improvements...............................     1,735          251
                                                         --------      -------
                                                            9,659        2,986
Less accumulated depreciation and amortization.........    (1,706)      (1,460)
                                                         --------      -------
                                                         $  7,953      $ 1,526
                                                         ========      =======
Intangible assets:
  Patents and trademarks...............................  $     20      $    20
  Manufacturing/sale license...........................       470           --
  Developed technology.................................    22,233        7,073
  Customer lists.......................................     2,761          161
  Assembled workforce..................................     4,868          368
  Goodwill.............................................    86,904       13,959
                                                         --------      -------
                                                          117,256       21,581
Less accumulated amortization..........................    (9,628)        (507)
                                                         --------      -------
                                                         $107,628      $21,074
                                                         ========      =======
</TABLE>

     Amounts recorded for non-cash stock based compensation for the years ended
March 31, 2001, 2000 and 1999 relate to the following consolidated statement of
operation categories:

<TABLE>
<CAPTION>
                                                      MARCH 31,    MARCH 31,    MARCH 31,
                                                        2001         2000         1999
                                                      ---------    ---------    ---------
                                                                (IN THOUSANDS)
<S>                                                   <C>          <C>          <C>
Research and development............................   $   50        $ --         $ --
Sales and marketing.................................       95          --           --
General and administrative..........................    1,357         629          177
                                                       ------        ----         ----
                                                       $1,502        $629         $177
                                                       ======        ====         ====
</TABLE>

                                        33
<PAGE>   36
                              STARBASE CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 3. CAPITAL LEASES AND LONG-TERM OBLIGATIONS

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

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

<TABLE>
<CAPTION>
                                                         (IN THOUSANDS)
<S>                                                      <C>
Years ending March 31:
  2002.................................................      $ 184
  2003.................................................         97
  2004.................................................         27
  2005.................................................          1
                                                             -----
          Total minimum lease payments.................        309
Less amount representing interest......................        (33)
                                                             -----
Present value of minimum lease payments................        276
Less current maturities................................       (160)
                                                             -----
                                                             $ 116
                                                             =====
</TABLE>

     As a result of the acquisition of TBI (Note 9), the Company assumed the
long-term obligations as follows:

<TABLE>
<S>                                                         <C>
Various notes payable, due monthly or quarterly
  installments ranging from $825 to $7,182 at interest
  rates ranging from 8.5% to 10.0%........................  $305,900
</TABLE>

     Principal payments related to such notes are as follows:

<TABLE>
<CAPTION>
                                                         (IN THOUSANDS)
<S>                                                      <C>
Years ending March 31:
  2002.................................................       $184
  2003.................................................         54
  2004.................................................         15
  2005.................................................         --
  2006.................................................         --
  Thereafter...........................................         53
                                                              ----
          Total principal payments.....................       $306
                                                              ====
</TABLE>

                                        34
<PAGE>   37
                              STARBASE CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 4. INCOME TAXES

     The provision for income taxes for the years ended March 31, 2001, 2000 and
1999 is comprised of the following:

<TABLE>
<CAPTION>
                                              MARCH 31,       MARCH 31,      MARCH 31,
                                                 2001           2000           1999
                                             ------------    -----------    -----------
<S>                                          <C>             <C>            <C>
Current:
  Federal..................................  $         --    $        --    $        --
  State....................................        21,923            800            800
                                             ------------    -----------    -----------
                                                   21,923            800            800
Deferred:
  Federal..................................    (9,612,823)    (4,721,369)    (2,672,629)
  State....................................    (1,629,521)      (957,843)      (409,925)
                                             ------------    -----------    -----------
                                              (11,242,344)    (5,679,212)    (3,082,554)
Valuation allowance........................    11,242,344      5,679,212      3,082,554
                                             ------------    -----------    -----------
          Total provision..................  $     21,923    $       800    $       800
                                             ============    ===========    ===========
</TABLE>

     The reported provision for income taxes for the years ended March 31, 2001,
2000 and 1999 differs from the amount computed by applying the statutory federal
income tax rate of 35% to the loss before income taxes as follows:

<TABLE>
<CAPTION>
                                                      MARCH 31,    MARCH 31,    MARCH 31,
                                                        2001         2000         1999
                                                      ---------    ---------    ---------
<S>                                                   <C>          <C>          <C>
Benefit computed at statutory rates.................   (35.00)%     (35.00)%     (35.00)%
Increase (reduction) resulting from:
  State tax.........................................     0.01%        0.01%       (3.06)%
  Goodwill..........................................    15.56%       14.71%          --
  Other.............................................     0.84%        2.46%        0.40%
  Change in valuation allowance.....................    18.60%       17.83%       37.67%
                                                       ------       ------       ------
                                                         0.01%        0.01%        0.01%
                                                       ======       ======       ======
</TABLE>

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

<TABLE>
<CAPTION>
                                                     MARCH 31,    MARCH 31,    MARCH 31,
                                                       2001         2000         1999
                                                     ---------    ---------    ---------
                                                               (IN THOUSANDS)
<S>                                                  <C>          <C>          <C>
Net operating loss carryforwards...................  $ 37,933     $ 17,040     $ 14,451
State taxes........................................        --           --         (711)
Research credit carryforwards......................     1,805        1,286          990
Deferred revenue...................................       327        1,761          289
Other accrueds.....................................     2,806          833          222
Amortization of intangibles........................   (10,709)          --           --
                                                     --------     --------     --------
Net deferred income tax assets.....................    32,162       20,920       15,241
Valuation allowance................................   (32,162)     (20,920)     (15,241)
                                                     --------     --------     --------
Net deferred tax assets............................  $      0     $      0     $      0
                                                     ========     ========     ========
</TABLE>

     As of March 31, 2001, a valuation allowance of $32.2 million has been
provided based upon the Company's assessment of the future realizability of
certain tax deferred assets, as it is more likely than not that sufficient
taxable income will not be generated to realize these temporary differences.

                                        35
<PAGE>   38
                              STARBASE CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     At March 31, 2001, approximately $4.3 million of the valuation allowance is
attributable to the potential tax benefit of stock option transactions, which
will be credited directly to stockholders' equity if realized.

     At March 31, 2001, the Company had net operating loss carryforwards of
approximately $93 million and $63 million for federal and state income tax
purposes, respectively, which are available to offset future federal and state
taxable income. These federal and state net operating loss carryforwards begin
to expire in 2008 and 2001, respectively. The ability of the Company to utilize
the federal and state net operating loss carryforwards may be subject to annual
limitations under certain provisions of the Internal Revenue Code, as a result
of ownership changes.

 5. RELATED PARTY TRANSACTIONS

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

     During the quarter ended September 30, 1999, the Company invested $250,000
for 900,000 shares of common stock, or 47%, of OpenAvenue Inc ("OpenAvenue"),
which was subsequently reduced to 21% as of March 31, 2000, due to the issuance
of additional equity by OpenAvenue. OpenAvenue is an Internet portal company for
open-source knowledge and effort sharing over the Internet providing a meeting
and work place for virtual development teams acting in concert on distributed
projects. The Company accounts for this ownership under the equity method of
accounting for investments in common stock and through the year ended March 31,
2000, the Company's equity in losses of OpenAvenue reduced the net investment to
zero. In addition, the Company agreed to loan OpenAvenue up to $750,000 on a
short-term basis until OpenAvenue's financing arrangements are completed. As of
March 31, 2001, the amount outstanding from the loan was $759,817. The loan
balance is fully reserved for as of March 31, 2001, because of the uncertainty
of repayment and such provision is included in selling, general and
administrative expense in the year ended March 31, 2001.

     The Company also entered into a software license agreement with OpenAvenue,
where a one-time license fee of $1,000,000 will be paid in equal quarterly
installments over the next twelve months. The Company recognized revenue of
$500,000 during the three month period ended December 31, 1999, and deferred
recognition of the remaining $500,000 because the ability to collect the second
$500,000 was not certain. Under the same agreement, the Company will also
provide maintenance and support services for the licensed software for an annual
fee of $180,000, which will also be paid in equal quarterly installments over
the next twelve months. The Company recorded the annual maintenance fee as
deferred revenue and will recognize it ratably over the applicable twelve month
period. During the year ended March 31, 2001, the Company determined the
remaining balance due from OpenAvenue was uncollectable and reversed the
outstanding accounts receivable balance and offsetting deferred revenue. As of
March 31, 2001, deferred revenue and accounts receivable balances were zero.

     In fiscal 1995, the Board of Directors authorized the Company to loan
William Stow III, President and CEO of Starbase, the sum of $126,000. Principal
and accrued interest aggregated $103,915 and $99,087 at March 31, 2001 and 2000,
respectively. The loan is evidenced by a promissory note and is collateralized
by shares of the Company's common stock, which are owned by Mr. Stow. The note
bears interest at a rate of

                                        36
<PAGE>   39
                              STARBASE CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6.34% per annum, payable at maturity. The maturity date was originally November
4, 1998, and during the year ended March 31, 2001, the maturity date on the note
was extended to November 4, 2001.

     During the year ended March 31, 2001, the Company paid $12,563 for
consulting services to a Director.

 6. EQUITY TRANSACTIONS

     The Company has authorized 100,000,000 shares of common stock and
10,000,000 shares of preferred stock with a par value of $0.01 per share. There
was no preferred stock outstanding at March 31, 2001.

     The Company accounts for the beneficial conversion feature of convertible
preferred stock in accordance with Emerging Issues Task Force Issue No. 98-5.
Under Issue No. 98-5, the beneficial conversion feature of convertible preferred
stock is recognized as a dividend and additional paid-in capital. The amount of
the beneficial conversion feature is measured at the date of the issuance of the
convertible security as the difference between the conversion price and the
market value of the common stock into which the security is convertible. This
amount is recorded as a non-cash dividend, with a corresponding increase to
additional paid-in capital, and is recognized over the period from issuance date
to the date the preferred stock is first convertible. For the years ended March
31, 2000 and 1999, the non-cash dividend and accretion of beneficial conversion
feature was $549,000 and $1,277,000, respectively. There was no non-cash
dividend and accretion of beneficial conversion feature for the year ended March
31, 2001.

  Activity for the year ended March 31, 2001

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

  Activity for the year ended March 31, 2000

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

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

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

                                        37
<PAGE>   40
                              STARBASE CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

  Activity for the year ended March 31, 1999

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

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

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

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

     On January 19, 1999, the Company entered into an accounts receivable
purchase agreement with Silicon Valley Bank for up to $2,000,000 of receivables.
In conjunction with the agreement, the Company issued 55,452 warrants to
purchase shares of common stock at $1.08 exercisable through January 19, 2004.
At March 31, 2001, the Company has not sold any of its receivables pursuant to
this agreement. The fair value of these warrants using the Black-Scholes pricing
model at the date of grant was $47,312 and was recorded as compensation expense.

     Effective March 16, 1999, the Company completed a private placement of
1,000 shares of Series I Preferred Stock for $1,000,000. The Series I Preferred
Stock is not redeemable and has a liquidation

                                        38
<PAGE>   41
                              STARBASE CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

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

  Warrants

     Warrant activity for the years ended March 31, 1999, 2000 and 2001 was as
follows:

<TABLE>
<CAPTION>
                                                                  WARRANT PRICE
                                                      SHARES        PER SHARE
                                                    ----------    -------------
<S>                                                 <C>           <C>
Outstanding at March 31, 1998.....................   2,177,722    $1.25 - $1.80
Granted...........................................   1,494,592    $0.59 - $3.25
Expired...........................................    (687,926)   $0.75 - $1.00
                                                    ----------
Outstanding at March 31, 1999.....................   2,984,388    $0.59 - $3.25

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

Granted...........................................     884,910    $3.88 - $6.81
Expired...........................................      (9,387)   $0.75 - $1.59
Exercised.........................................    (222,107)   $1.25 - $2.00
                                                    ----------
Outstanding at March 31, 2001.....................     893,085    $0.73 - $6.81
                                                    ----------
Exercisable at March 31, 2001.....................     893,085    $0.73 - $6.81
                                                    ----------
</TABLE>

 7. STOCK OPTION PLAN

     The Company's stock option plan (the 1996 Plan) provides for the grant of
non-qualified and incentive stock options to directors, officers and employees
of the Company. Options are granted at exercise prices equal to the fair market
value of the common stock on the date of grant. Generally, twenty-five percent
of the options are available for exercise at the end of one year, while the
remainder of the grant is exercisable ratably over the next thirty-six month
period, provided the optionee remains in service to the Company. The
weighted-average remaining contractual life of options outstanding at March 31,
2001 was 8.5 years. A total of 2,833,333 shares of common stock have been
authorized under the 1996 Plan, of which 1,409,454 were outstanding at March 31,
2001. In addition, the Company has granted non-qualified stock options, of which
18,912,315 were outstanding at March 31, 2001.

                                        39
<PAGE>   42
                              STARBASE CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     As a result of the acquisition of Premia Corporation (Premia) (Note 9), the
Company assumed all of the outstanding options granted under the Premia ISO
stock option plan (Premia Plan). At the date of acquisition, there were 270,084
options outstanding at a weighted average exercise price of $1.48, of which
213,451 were exercisable at a weighted average exercise price of $1.48. As of
March 31, 2001, there were 198,226 options outstanding at a weighted average
exercise price of $1.48, of which 169,934 were exercisable at a weighted average
exercise price of $1.48.

     As a result of the acquisition of Technology Builders, Inc. (TBI) (Note 9),
the Company assumed all of the outstanding options granted under the Technology
Builders, Inc Amended and Restated Stock Option and Incentive Stock Option Plan
(TBI Plan). At the date of acquisition, there were 1,220,498 options outstanding
at a weighted average exercise price of $1.24, of which 787,951 were exercisable
at a weighted average exercise price of $0.89.

     Stock option activity for the years ended March 31, 1999, 2000 and 2001 was
as follows:

<TABLE>
<CAPTION>
                                                                    WEIGHTED-
                                                                 AVERAGE EXERCISE
                                                     SHARES           PRICE
                                                   ----------    ----------------
<S>                                                <C>           <C>
Outstanding at March 31, 1998....................   3,420,527         $1.44

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

Granted..........................................   7,167,508         $6.20
Assumed in acquisition...........................     270,084         $1.48
Lapsed or canceled...............................    (639,455)        $2.33
Exercised........................................  (1,509,425)        $1.34
                                                   ----------
Outstanding at March 31, 2000....................  11,836,123         $4.17

Granted..........................................  10,862,909         $4.04
Assumed in acquisition...........................   1,220,498         $1.24
Lapsed or canceled...............................  (1,132,223)        $5.33
Exercised........................................  (1,052,538)        $2.43
                                                   ----------
Outstanding at March 31, 2001....................  21,734,769         $3.95
                                                   ----------
Exercisable at March 31, 2001....................   6,487,914         $2.73
                                                   ----------
</TABLE>

                                        40
<PAGE>   43
                              STARBASE CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Stock option summary information at March 31, 2001 is as follows:

<TABLE>
<CAPTION>
                                OPTIONS OUTSTANDING                     OPTIONS EXERCISABLE
                  -----------------------------------------------   ---------------------------
                              WEIGHTED-AVERAGE
   RANGE OF                      REMAINING       WEIGHTED-AVERAGE              WEIGHTED-AVERAGE
EXERCISE PRICES     SHARES    CONTRACTUAL LIFE    EXERCISE PRICE     SHARES     EXERCISE PRICE
---------------   ----------  ----------------   ----------------   ---------  ----------------
<S>               <C>         <C>                <C>                <C>        <C>
$0.50 - $ 1.00     2,250,408     7.2 years            $ 0.67        1,664,264       $ 0.68
$1.01 - $ 1.50     3,996,456     7.5 years            $ 1.32        2,129,583       $ 1.31
$1.51 - $ 2.00     1,528,916     7.3 years            $ 1.69          981,368       $ 1.66
$2.01 - $ 2.50     1,006,956     8.6 years            $ 2.14          352,480       $ 2.08
$2.51 - $ 3.00       996,043     8.7 years            $ 2.61          159,286       $ 2.70
$3.01 - $ 3.50     2,649,833     9.7 years            $ 3.35           81,666       $ 3.45
$3.51 - $ 4.00     4,190,695     9.5 years            $ 3.79           84,800       $ 3.89
$4.01 - $ 4.50       415,000     8.2 years            $ 4.13           73,436       $ 4.05
$4.51 - $ 5.00       480,000     9.5 years            $ 4.69          183,743       $ 4.66
$5.01 - $20.00     4,220,462     8.6 years            $10.21          777,288       $11.90
                  ----------                                        ---------
                  21,734,769                                        6,487,914
                  ==========                                        =========
</TABLE>

  Accounting for stock-based compensation

     Pursuant to SFAS No. 123, Accounting for Stock-Based Compensation, the
Company is required to disclose the effects on the net loss and per share data
as if the Company had elected to use the fair value approach to account for all
its employee stock-based compensation plans. Had the compensation cost for the
Company's plan been determined using the fair value method, the compensation
expense would have had the effect of increasing the Company's net loss
applicable to common stockholders for the years ended March 31, 2001, 2000 and
1999 to the pro forma amounts of $25,216,000, $7,932,000 and $10,611,000,
respectively, with a corresponding pro forma net loss per common share of $0.51,
$0.24 and $0.52, respectively. These pro forma amounts were determined
estimating the fair value of each option on its grant date using the
Black-Scholes option-pricing model. Assumptions of no dividend yield, the
average of the Federal Reserve Board's 3-year and 5-year treasury constant
maturity interest rate for the month of grant, 4 years expected life and an
expected rate of volatility of 100.0% were applied to all grants for the years
ended March 31, 2001, 2000 and 1999. The weighted-average fair value at grant
date for the options granted during the years ended March 31, 2001, 2000 and
1999 was $2.72, $4.46 and $0.78 per option, respectively.

 8. OPERATING SEGMENT INFORMATION

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

     The Company's reportable operating segments include software licenses and
services. The software licenses operating segment develops and markets the
Company's end-to-end collaborative products for the development of integrated
content and code for eBusiness applications. The services segment provides
after-sale support for software products and fee-based training and consulting
services related to the Company products.

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

                                        41
<PAGE>   44
                              STARBASE CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Reportable operating segment data for the years ended March 31, 2001, 2000,
and 1999 was as follows:

<TABLE>
<CAPTION>
                                                         LICENSES    SERVICES     TOTAL
                                                         --------    --------    -------
                                                                 (IN THOUSANDS)
<S>                                                      <C>         <C>         <C>
Year ended March 31, 2001:
  Revenues.............................................  $31,735      $9,905     $41,640
  Cost of revenues.....................................    3,756       4,560       8,316
                                                         -------      ------     -------
       Gross margin....................................  $27,979      $5,345     $33,324
                                                         =======      ======     =======
Year ended March 31, 2000:
  Revenues.............................................  $14,486      $3,046     $17,532
  Cost of revenues.....................................    1,136       1,480       2,616
                                                         -------      ------     -------
       Gross margin....................................  $13,350      $1,566     $14,916
                                                         =======      ======     =======
Year ended March 31, 1999:
  Revenues.............................................  $ 5,964      $  868     $ 6,832
  Cost of revenues.....................................      508          --         508
                                                         -------      ------     -------
       Gross margin....................................  $ 5,456      $  868     $ 6,324
                                                         =======      ======     =======
</TABLE>

     For the year ended March 31, 2001, no one customer represented greater than
10% of total revenue. For the year ended March 31, 2000, one customer
represented 11% of total revenue. For the year ended March 31, 1999, one
customer represented 10% of total revenue. At March 31, 2001, no one customer
comprised greater than 10% of outstanding accounts receivable. At March 31, 2000
one customer comprised 14% of outstanding accounts receivable and at March 31,
1999, no one customer comprised greater than 10% of outstanding accounts
receivable.

 9. ACQUISITIONS

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

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

     Premia's operating results have been included in the Company's financial
statements from the date of acquisition. Goodwill and assembled workforce are
being amortized on a straight-line basis over five years and recorded as an
operating expense. Developed technology is being amortized on a straight-line
basis over four years and recorded as a cost of revenues. Customer list is being
amortized on a straight-line basis over four and one-half years and recorded as
an operating expense. In-process research and development was expensed at the
date of acquisition. The in-process research and development arose from new
product projects that were
                                        42
<PAGE>   45
                              STARBASE CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

under development at the date of acquisition and expected to eventually lead to
new products but had not yet established technological feasibility and for which
no future alternative use was identified. The valuation of the in-process
research and development projects was based upon the discounted expected future
net cash flows of the products over the products expected life, reflecting the
estimated stage of completion of the projects and the estimate of the costs to
complete the projects.

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

     On April 13, 2000, the Company, through a wholly owned subsidiary, acquired
all of the outstanding common stock of ObjectShare, Inc. (ObjectShare), in
exchange for 1,210,838 shares of the Company's common stock valued at
$8,842,000, transaction costs of $1,065,000 (payable in 100,000 shares of the
Company's common stock valued at $506,000 and cash of $559,000) and the
assumption of net liabilities of $972,000. The net liabilities assumed include a
write-down of $279,000 of property to its estimated fair market value and the
assumption of $253,000 of severance liabilities which was settled by the
issuance of 49,985 shares of the Company's common stock. The acquisition was
accounted for as a purchase, and the purchase price of $9,907,000 was allocated
a follows:

<TABLE>
<CAPTION>
                                                         (IN THOUSANDS)
<S>                                                      <C>
Current assets.........................................     $   179
Goodwill...............................................      10,879
Long-term assets.......................................          42
Liabilities assumed....................................      (1,193)
                                                            -------
          Total purchase price.........................     $ 9,907
                                                            =======
</TABLE>

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

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

<TABLE>
<CAPTION>
                                                         (IN THOUSANDS)
<S>                                                      <C>
Current assets.........................................      $   34
Developed technology...................................       2,459
Long-term assets.......................................           4
Liabilities assumed....................................         (34)
                                                             ------
          Total purchase price.........................      $2,463
                                                             ======
</TABLE>

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

     On February 20, 2001, the Company acquired all of the outstanding capital
stock worldweb.net, Inc. (worldweb) in exchange for 8,300,000 shares of the
Company's common stock valued at $30,000,000, cash in-

                                        43
<PAGE>   46
                              STARBASE CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

lieu of shares of $557,000, and cash transaction costs of $1,286,000. The
acquisition was accounted for as a purchase, and the purchase price of $31,843
was allocated as follows:

<TABLE>
<CAPTION>
                                                         (IN THOUSANDS)
<S>                                                      <C>
Current assets.........................................     $ 1,008
Fixed assets...........................................       2,255
Developed technology...................................       4,600
Assembled workforce....................................       1,200
Goodwill...............................................      30,004
Long-term assets.......................................       1,001
Liabilities assumed....................................      (8,225)
                                                            -------
          Total purchase price.........................     $31,843
                                                            =======
</TABLE>

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

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

<TABLE>
<CAPTION>
                                                         (IN THOUSANDS)
<S>                                                      <C>
Current assets.........................................     $  4,029
Fixed assets...........................................          920
Developed technology...................................        8,100
Assembled workforce....................................        3,300
Customer list..........................................        2,600
Goodwill...............................................       32,063
In-process research and development....................        1,200
Long-term assets.......................................          339
Liabilities assumed....................................      (12,646)
Notes receivable for stock options exercise............          219
                                                            --------
          Total purchase price.........................     $ 40,124
                                                            ========
</TABLE>

     TBI's operating results have been included in the Company's consolidated
financial statements from the date of acquisition. Developed technology will be
amortized on a straight-lie basis over three years and recorded as cost of
revenues. Assembled workforce will be amortized on a straight-line basis over
five years and recorded as an operating expense. Customer list will be amortized
on a straight-line basis over two years and recorded as an operating expense.
Goodwill will be amortized on a straight-line basis over five years and recorded
as an operating expense. The in-process research and development arose from new
product projects that were under development at the date of acquisition and
expected to eventually lead to new products but had not yet established
technological feasibility and for which no future alternative use was
identified. The valuation of the in-process research and development projects
was based upon the discounted expected future

                                        44
<PAGE>   47
                              STARBASE CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

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

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

<TABLE>
<CAPTION>
                                                           YEARS ENDED MARCH 31,
                                                         --------------------------
                                                            2001           2000
                                                         -----------    -----------
                                                         (IN THOUSANDS, EXCEPT PER
                                                               SHARE AMOUNTS)
<S>                                                      <C>            <C>
Net revenues...........................................    $ 69,636       $ 49,609
Net loss...............................................     (58,625)       (54,938)
Net loss applicable to common stockholders.............       (1.19)         (1.64)
</TABLE>

10. COMMITMENTS AND CONTINGENCIES

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

     Minimum rental commitments under lease agreements at March 31, 2001 are as
follows:

<TABLE>
<CAPTION>
                                                         NON-CANCELABLE
                                                        OPERATING LEASES
                                                        ----------------
                                                         (IN THOUSANDS)
<S>                                                     <C>
Year ending March 31,
  2002................................................      $ 3,817
  2003................................................        3,579
  2004................................................        3,469
  2005................................................        3,546
  2006................................................        2,661
  Thereafter..........................................        4,874
                                                            -------
          Total payments..............................      $21,946
                                                            =======
</TABLE>

     Rent expense for the years ended March 31, 2001, 2000 and 1999 totaled
$1,276,000, $503,000, and $388,000, respectively.

                                        45
<PAGE>   48
                              STARBASE CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

     The following table sets forth certain unaudited quarterly financial data
for the fiscal years ended March 31, 2000 and 2001. The information has been
prepared on the same basis as the Consolidated Financial Statements and all
necessary adjustments have been included in the amounts stated below to present
fairly the selected quarterly information when read in conjunction with
Consolidated Financial Statements and the Notes thereto. Historical quarterly
financial results and trends may not be indicative of future results.

<TABLE>
<CAPTION>
                                                                         QUARTERS ENDED
                                     ---------------------------------------------------------------------------------------
                                     JUNE 30,   SEPT. 30,   DEC. 31,   MAR. 31,   JUNE 30,   SEPT. 30,   DEC. 31,   MAR. 31,
                                       1999       1999        1999       2000       2000       2000        2000       2001
                                     --------   ---------   --------   --------   --------   ---------   --------   --------
                                                            (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                  <C>        <C>         <C>        <C>        <C>        <C>         <C>        <C>
Revenues...........................  $ 3,493     $ 3,712     $4,133    $ 6,193    $ 7,041     $ 8,444    $ 9,540    $16,614
Gross margin.......................    3,047       2,924      3,523      5,422      5,607       6,700      7,691     13,325
Loss before income taxes...........     (705)     (1,164)      (974)    (2,872)    (3,887)     (3,386)    (2,883)    (6,373)
Net loss applicable to common
  stockholders.....................   (1,301)     (1,118)      (974)    (2,872)    (3,888)     (3,386)    (2,904)    (6,373)
                                     =======     =======     ======    =======    =======     =======    =======    =======
Basic and diluted net loss per
  common
  share............................  $ (0.05)    $ (0.04)    $(0.03)   $ (0.07)   $ (0.09)    $ (0.07)   $ (0.06)   $ (0.11)
                                     -------     -------     ------    -------    -------     -------    -------    -------
</TABLE>

12. SUBSEQUENT EVENTS

     In May 2001, the Board of Directors authorized the Company to loan Mr.
Phillip E. Pearce, a member of the Board of Directors, the sum of $150,000. The
loan is evidenced by a promissory note and bears interest at a rate of 8% per
annum, payable at maturity. The maturity date on the note is February 28, 2002.

                                        46
<PAGE>   49

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

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

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

EXECUTIVE OFFICERS AND DIRECTORS

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

<TABLE>
<CAPTION>
                NAME                   AGE                         POSITION(S)
                ----                   ---                         -----------
<S>                                    <C>    <C>
William R. Stow III(1)(2)............  56     Chief Executive Officer and Chairman of the Board
Donald R. Farrow(2)(4)...............  55     Executive Vice President and Director
Alan D. Kucheck......................  49     Vice President, Engineering
Douglas S. Norman....................  37     Chief Financial Officer and Assistant Secretary
James H. Smith.......................  45     Executive Vice President, Customer Group
Lydia J. Patterson...................  50     Vice President, Corporate Marketing
Nicholas C. Kavadellas...............  37     Executive Vice President, Software Products
Frank R. Caccamo(1)(3)(4)............  61     Director
Daniel P. Ginns(3)(4)................  51     Director
Phillip E. Pearce (4)................  72     Director
John R. Snedegar(2)(3)...............  51     Director
Barry W. Sullivan(1).................  59     Director
</TABLE>

---------------
(1) Member of the Compensation Committee

(2) Member of the Nominating Committee

(3) Member of the Audit Committee

(4) Member of the Merger and Acquisition Committee

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

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

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

     FRANK R. CACCAMO has served as a member of our board of directors since
November 1998. Mr. Caccamo is a consultant. Mr. Caccamo was the Vice President
and Chief Information Officer of The Reynolds and Reynolds Company from January
1997 through November 1999. Prior to joining Reynolds and Reynolds,

                                        47
<PAGE>   50

Mr. Caccamo was Vice President of Information Systems at Procter & Gamble from
1990 to January 1997. Mr. Caccamo holds a B.A. in Economics from St. Joseph's
College and an M.B.A. from the University of Chicago.

     DANIEL P. GINNS has served as a member of our board of directors since
January 1997. From October 2000, Mr. Ginns has been Chief Executive Officer of
eCollaboratoy Corporation, a company that is a showcase for the promotion and
marketing of product integration solutions using Starbase's proprietary StarTeam
software and products of other companies. From October 1996 to August 2000, Mr.
Ginns was Chairman of the Board and Chief Executive Officer of Datametrics
Corporation, a reporting company which designs, develops and manufactures
printers and computers. From 1989 to 1996, Mr. Ginns was President of Belmont
Capital, Inc., a management and financial advisory firm. Mr. Ginns holds a B.A.
in Economics from Harvard University and an M.B.A. from The Harvard Business
School.

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

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

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

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

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

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

     JAMES H. SMITH has served as our Executive Vice President, Customer Group
since November 1999. From June 1997 to November 1999, Mr. Smith served as Chief
Operating Officer and Executive Vice President of Sales and Marketing at
ObjectShare Inc., a developer of objected-oriented tools and services. From
October 1995 to April 1997, Mr. Smith served as Chief Operating Officer for
Select Software Tools, a provider of object-oriented application development
tools and services. From July 1988 to September 1995, Mr. Smith was Executive
Vice President of Sales and Marketing at Meridian Software (now Rational

                                        48
<PAGE>   51

Software). Mr. Smith holds a Bachelor of Science in Business and Marketing from
the University of Rhode Island.

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

     NICHOLAS C. KAVADELLAS has served as our Executive Vice President, Software
Products since February 2001. Prior to that, from 1994 until February 2001, Mr.
Kavadellas was founder, President and Chief Executive Officer of Technology
Builder, Inc. (TBI), a company which marketed and implemented requirements
management and requirements-based testing systems for the development of
eBusiness and enterprise applications. In addition, TBI resold complementary
partner products, and provided related training and consulting services for both
TBI and partner products. Mr. Kavadellas holds a B.A. in Industrial Management
from the Georgia Institute of Technology.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

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

INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS

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

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

                                        49
<PAGE>   52

ITEM 11. EXECUTIVE COMPENSATION

GENERAL AND SUMMARY COMPENSATION TABLE

     The following table sets forth certain summary information regarding
compensation paid or accrued by the Company to, or on behalf of, the Company's
Chief Executive Officer and the other most highly compensated executive officers
of the Company (Named Executive Officers), for services rendered in all
capacities to the Company during the fiscal years ended March 31, 1999, 2000,
and 2001. Except as otherwise noted, no Named Executive Officer received any
restricted stock award, stock appreciation right or payment under any long-term
incentive plan.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                LONG TERM
                                                                               COMPENSATION
                                                                                  AWARDS
                                                                               ------------
                                                                                SECURITIES
                                                       ANNUAL COMPENSATION      UNDERLYING      ALL OTHER
                                                       --------------------     OPTIONS(1)     COMPENSATION
         NAME AND PRINCIPAL POSITION           YEAR     SALARY      BONUS        (SHARES)          (2)
         ---------------------------           ----    --------    --------    ------------    ------------
<S>                                            <C>     <C>         <C>         <C>             <C>
William R. Stow III..........................  2001    $335,626    $ 86,750       35,000            $--
  Chief Executive Officer, President           2000    $150,000    $  1,000       35,000            $--
  Chairman of the Board and Director           1999    $150,000    $     --      152,000            $--
Donald R. Farrow.............................  2001    $200,000    $ 38,000       35,000            $--
  Executive Vice President,                    2000    $135,307    $  1,000       85,000            $--
  Administration and Director                  1999    $141,538    $     --       60,000            $--
Alan D. Kucheck..............................  2001    $208,657    $ 41,750           --            $--
  Vice President, Engineering                  2000    $130,000    $ 31,000       65,000            $--
                                               1999    $130,000    $ 37,824       25,000            $--
Douglas S. Norman............................  2001    $179,078    $ 50,500           --            $--
  Chief Financial Officer and                  2000    $105,000    $ 16,000       80,000            $--
  Assistant Secretary                          1999    $ 92,850    $ 28,587       30,000            $--
Lydia J. Patterson...........................  2001    $145,000    $ 63,000           --            $--
  Vice President, Corporate Marketing          2000    $ 61,875    $     --      200,000            $--
                                               1999    $     --    $     --           --            $--
James H. Smith...............................  2001    $145,000    $105,500      123,445            $--
  Executive Vice President,                    2000    $ 61,875    $ 10,000      437,000            $--
  Customer Group                               1999    $     --    $     --           --            $--
</TABLE>

---------------
(1) Amounts represent stock options granted for the period shown.

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

                                        50
<PAGE>   53

     The following table sets forth information concerning stock option grants
made during the year ended March 31, 2001, to Named Executive Officers. No stock
appreciation rights were granted to such individual during the fiscal year. In
addition, in accordance with the rules and regulations of the Securities and
Exchange Commission, the following table set forth the hypothetical gains that
would exist for the options based on the assumption that our stock price were to
appreciate annually by 5% and 10%, respectively. The rates do not represent our
estimate or projection of future common stock prices and no assurance can be
given that the share price will appreciate at the rate shown in the table.

           OPTION/SAR GRANTS IN THE FISCAL YEAR ENDED MARCH 31, 2001

<TABLE>
<CAPTION>
                                             INDIVIDUAL GRANTS
                       --------------------------------------------------------------     POTENTIAL REALIZABLE
                          NUMBER OF                                                         VALUE AT ASSUMED
                          SECURITIES      PERCENT OF TOTAL                               ANNUAL RATES OF STOCK
                          UNDERLYING        OPTIONS/SARs       EXERCISE                  PRICE APPRECIATION FOR
                         OPTIONS/SARs        GRANTED TO        OR BASE                        OPTION TERM
                           GRANTED            EMPLOYEES         PRICE      EXPIRATION    ----------------------
        NAME           (# OF SHARES)(1)   IN FISCAL YEAR(2)   ($/SH)(3)       DATE         5%($)       10%($)
        ----           ----------------   -----------------   ----------   ----------    ---------    ---------
<S>                    <C>                <C>                 <C>          <C>           <C>          <C>
William R. Stow
  III................       35,000                *              4.66        9/25/10      102,345      259,576
Donald R. Farrow.....       35,000                *              4.66        9/25/10      102,345      259,576
James H. Smith.......       53,445                *              5.0625      4/13/10       42,278       89,192
                            70,000                *              2.00       12/26/10       88,045      223,124
</TABLE>

---------------
 *  Less than 1%

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

(2) We granted options to purchase a total of 10,862,909 shares of our common
    stock to employees, consultants and Board members and assumed a Technology
    Builders, Inc. option plan which provided the equivalent to purchase
    1,220,498 shares of our common stock during the year ended March 31, 2001.

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

                                        51
<PAGE>   54

OPTION EXERCISES, HOLDINGS AND FISCAL YEAR-END VALUES

     The following table sets forth information concerning the number of shares
covered by both exercisable and unexercisable options held by each of the Named
Executive Officers as of March 31, 2001.

                AGGREGATED OPTION EXERCISES IN FISCAL YEAR 2001
                     AND OPTION VALUES AS OF MARCH 31, 2001

<TABLE>
<CAPTION>
                                                             NUMBER OF SECURITIES
                                                            UNDERLYING UNEXERCISED
                                                                  OPTIONS AT               VALUE OF UNEXERCISED
                                   SHARES                       MARCH 31, 2001            IN-THE-MONEY OPTIONS AT
                                 ACQUIRED ON    VALUE            (# OF SHARES)             MARCH 31, 2001 ($)(1)
                                  EXERCISE     REALIZED   ---------------------------   ---------------------------
             NAME                    (#)         ($)      EXERCISABLE   UNEXERCISABLE   EXERCISABLE   UNEXERCISABLE
             ----                -----------   --------   -----------   -------------   -----------   -------------
<S>                              <C>           <C>        <C>           <C>             <C>           <C>
William R. Stow III............        --          --       434,177         62,613        403,506         74,598
Donald R. Farrow...............        --          --       371,882         30,565        303,690         25,044
Alan D. Kucheck................     2,000       4,070       256,748         66,327        242,122         64,596
Douglas S. Norman..............        --          --       125,292         71,408        130,677         73,086
Lydia J. Patterson.............        --          --        70,833        129,167         40,304         73,496
James H. Smith.................        --          --       215,826        344,619        134,614        273,579
</TABLE>

---------------
(1) Calculated based on the closing price of the Company's common stock as
    reported by Nasdaq on March 31, 2001 of $2.219 per share, less the
    applicable exercise price.

BOARD COMPENSATION

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

     In addition, Mr. Ginns performed certain consulting services for which he
was compensated $12,563 during fiscal year 2001.

CHANGE IN CONTROL AGREEMENTS

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

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

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

                                        52
<PAGE>   55

                    REPORT OF THE COMPENSATION COMMITTEE ON
                             EXECUTIVE COMPENSATION

OVERVIEW AND PHILOSOPHY

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

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

     - Support the achievement of desired Company performance;

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

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

EXECUTIVE OFFICER COMPENSATION PROGRAM

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

BASE SALARY

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

STOCK OPTION PROGRAM

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

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

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

BENEFITS

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

BONUS

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

                                        53
<PAGE>   56

CHIEF EXECUTIVE OFFICER COMPENSATION

     See Summary Compensation Table.

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

                                          Members of the Compensation Committee

                         REPORT OF THE AUDIT COMMITTEE

     The Audit Committee has reviewed and discussed the audited consolidated
financial statements for the year ended March 31, 2001 with the Company's
management and with Deloitte & Touche, LLP, the Company's independent auditors.
The Audit Committee has also discussed with Deloitte & Touche the matters
required to be discussed by Statement of Auditing Standards No. 61,
Communicating with the Audit Committee.

     Based on the reviews and discussions referred to above, the Audit Committee
recommended to the Board of Directors that the consolidated financial statements
referred to above be included in the Company's Annual Report on Form 10-K for
the year ended March 31, 2001.

                                          Frank R. Caccamo
                                          Daniel P. Ginns
                                          John R. Snedegar

                                          Members of the Audit Committee

FEES PAID TO INDEPENDENT AUDITORS

  Audit Fees

     Deloitte & Touche, LLP (Deloitte) billed us aggregate fees of $114,300 for
professional services rendered for the audit of our annual consolidated
financial statements for the year ended March 31, 2001, and for review of the
consolidated financial statements included in our quarterly reports on Form 10-Q
for the first three quarters of fiscal 2001.

  Financial Information Systems Design and Implementation

     Deloitte did not bill us for financial information systems design and
implementation fees for the year ended March 31, 2001.

  All Other Fees

     Deloitte bill us aggregate fees of $238,665 for other professional services
rendered for the year ended March 31, 2001, including professional services in
connection with our private placement of common stock, tax preparation, tax
consulting, statutory filings, acquisitions and other consulting services.

     The Audit Committee of the Board of Directors has considered whether the
provision by Deloitte of the non-audit service listed above is compatible with
maintaining Deloitte's independence.

                                        54
<PAGE>   57

                          STOCK PERFORMANCE COMPARISON

     The following graph compares the cumulative total stockholder returns for
our common stock with the cumulative total return of the Nasdaq Composite Index:
US and the Computer & Data Processing Index. The presentation assumes $100
invested on March 31, 1996 in our common stock, the Nasdaq Composite Index: US
and the Computer & Data Processing Index with all dividends reinvested. No cash
dividends were declared on our common stock during this period. Stockholder
returns over the indicated period should not be considered indicative of future
stockholder returns.

INDEX GRAPH

<TABLE>
----------------------------------------------------------------------------
                                                                   COMPUTER
                                                      NASDAQ       & DATA
          Measurement Period             STARBASE     COMPOSITE    PROCESSING
        (Fiscal Year Covered)            CORPORATION  INDEX: US    INDEX
<S>                                      <C>          <C>          <C>
----------------------------------------------------------------------------
 Measurement Pt. --
  3/29/96                                  $100         $100         $100
----------------------------------------------------------------------------
 FYE 3/31/97                               $ 29         $111         $110
----------------------------------------------------------------------------
 FYE 3/31/98                               $ 70         $168         $191
----------------------------------------------------------------------------
 FYE 3/31/99                               $ 36         $228         $312
----------------------------------------------------------------------------
 FYE 3/31/00                               $203         $423         $562
----------------------------------------------------------------------------
 FYE 3/31/01                               $ 48         $169         $191
----------------------------------------------------------------------------
</TABLE>

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

                                        55
<PAGE>   58

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth as of May 21, 2001 certain information
regarding the ownership of our voting securities by each stockholder known to
the management to be (i) the beneficial owner of more than 5% of our outstanding
common stock (ii) each of our Directors, (ii) the executive officers named in
the Summary Compensation Table herein under "Executive Compensation" and (iv)
all executive officers and directors as a group. Except as otherwise noted, we
believe that the beneficial owners of the common stock listed below, based on
information furnished by such owners, have sole investment and voting power with
respect to such shares.

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

<TABLE>
<CAPTION>
                                                              NUMBER OF SHARES OF    PERCENTAGE OF
NAME(1)                                                          COMMON STOCK        COMMON STOCK
-------                                                       -------------------    -------------
<S>                                                           <C>                    <C>
William R. Stow III.........................................       1,110,213(2)           1.6%
Donald R. Farrow............................................         399,457(3)             *
Alan D. Kucheck.............................................         282,622(5)             *
Douglas S. Norman...........................................         162,121(6)             *
Lydia J. Patterson..........................................          87,499(4)             *
James H. Smith..............................................         270,760(7)             *
Frank R. Caccamo............................................         127,083(4)             *
Daniel P. Ginns.............................................         320,783(8)             *
Phillip E. Pearce...........................................         177,083(4)             *
John R. Snedegar............................................         207,026(9)             *
Barry W. Sullivan...........................................         127,083(10)            *
Total: All directors and executive officers.................       4,438,359(11)          6.0%
</TABLE>

---------------
  *  Less than 1%

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

 (2) Includes 33,882 shares of common stock held by Mr. Stow. Also includes
     573,119 shares of common stock held by Mr. Stow as trustee of the Stow
     Family Trust, of which 568,124 shares are subject to a Performance Escrow
     Agreement. Also includes 452,730 shares of common stock and 50,482 shares
     of common stock issuable upon the exercise of stock options that are
     currently exercisable or will become exercisable within 60 days after May
     31, 2001 by Mr. Stow and Mrs. Stow, respectively. Mr. Stow disclaims
     beneficial ownership of the shares exercisable by Mrs. Stow.

 (3) Includes 15,000 shares of common stock held by Mr. Farrow. Also includes
     384,457 shares of common stock issuable upon the exercise of stock options
     that are currently exercisable or will become exercisable within 60 days
     after May 31, 2001.

 (4) Represents shares of common stock issuable upon the exercise of stock
     options that are currently exercisable or will become exercisable within 60
     days after May 31, 2001.

 (5) Includes 13,321 shares of common stock held by Mr. Kucheck. Also includes
     269,301 shares of common stock issuable upon the exercise of stock options
     that are currently exercisable or will become exercisable within 60 days
     after May 31, 2001.

 (6) Includes 25,421 shares of common stock held by Mr. Norman of which 13,786
     shares are subject to a Performance Escrow Agreement. Also includes 136,700
     shares of common stock issuable upon the exercise of stock options that are
     currently exercisable or will become exercisable within 60 days after May
     31, 2001.

                                        56
<PAGE>   59

 (7) Includes 6,847 shares of common stock held by Mr. Smith. Also includes
     263,913 shares of common stock issuable upon the exercise of stock options
     that are currently exercisable or will become exercisable within 60 days
     after May 31, 2001.

 (8) Includes 163,200 shares of common stock held by Mr. Ginns and 5,500 shares
     of common stock held by Mrs. Ginns. Also includes 152,083 shares of common
     stock issuable upon the exercise of stock options that are currently
     exercisable or will become exercisable within 60 days after May 31, 2001.
     Mr. Ginns disclaims beneficial ownership of the shares held by Mrs. Ginns.

 (9) Includes 13,753 shares of common stock held by Mr. Snedegar; 1,191 shares
     of common stock held by Mr. Snedegar as trustee for the Snedegar Revocable
     Living Trust; and 1,667 shares held by Norexco Petroleum of which Mr.
     Snedegar is President. Also includes 190,415 shares of common stock
     issuable upon the exercise of stock options that are currently exercisable
     or will become exercisable within 60 days after May 31, 2001.

(10) Includes 7,000 shares of common stock held by Mr. Sullivan. Also includes
     120,083 shares of common stock issuable upon the exercise of stock options
     that are currently exercisable or will become exercisable within 60 days
     after May 31, 2001.

(11) Includes a total of 1,606,461 shares of common stock and 2,831,898 shares
     of common stock issuable upon exercise of stock options held by all
     directors and executive officers of the Company as a group that are
     currently exercisable or will become exercisable within 60 days after May
     31, 2001.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

CERTAIN TRANSACTIONS

     In fiscal 1995, the Board of Directors authorized us to loan William Stow
III, President and CEO of StarBase, the sum of $126,000. Principal and accrued
interest aggregated $103,915 and $99,087, at March 31, 2001 and 2000,
respectively. The loan is evidenced by a promissory note and is collateralized
by shares of the Company's common stock, which are owned by Mr. Stow. The note
bears interest at a rate of 6.34% per annum, payable at maturity. The maturity
date was originally November 4, 1998, and during the year ended March 31, 2001,
the maturity date on the note was extended to November 4, 2001.

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

     In May 2001, the Board of Directors authorized us to loan Mr. Phillip E.
Pearce, member of our Board of Directors, the sum of $150,000. The loan is
evidenced by a promissory note and bears interest at a rate of 8% per annum,
payable at maturity. The maturity date on the note is February 28, 2002.

                                        57
<PAGE>   60

                                    PART IV

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

     (a) EXHIBITS

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

<TABLE>
<CAPTION>
    EXHIBIT                                                                  REF./
    NUMBER                     DESCRIPTION OF DOCUMENT                       PAGE
    -------                    -----------------------                       -----
    <C>      <S>                                                             <C>
      3.1    Amended and Restated Certificate of Incorporation of the         (A)
             Company

      3.2    Amended and Restated Bylaws of the Company                       (B)

      4.1    Form of Registration Rights Agreement                            (C)

     10.1    Form of Warrant (Kaufman Bros., L.P.)                            (D)

     10.2    Form of Securities Purchase Agreement                            (C)

     10.3    Form of Warrant                                                  (C)

     10.5    Form of Agreement and Plan of Merger dated as of February        (E)
             11, 2001 by and among the Registrant, the Merger Subsidiary
             and worldweb.

     10.6    Form of Agreement and Plan of Merger dated as of February        (F)
             16, 2001 by and among the Registrant, the Subsidiary, TBI
             and the Principal Shareholder.

     21.1    Subsidiaries of the Company

     23.1    Consent of Deloitte & Touche LLP, Independent Auditors
</TABLE>

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

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

(C) Incorporated herein by reference to the Company's Form S-3 (file number
    333-47518) filed with the Commission on October 6, 2000.

(D) Incorporated herein by reference to the Company's Form S-3 (file number
    333-42184) filed with the Commission on July 25, 2000.

(E) Incorporated herein by reference to the Company's Form 8-K (file number
    0-25612) filed with the Commission on March 6, 2001.

(F) Incorporated herein by reference to the Company's Form 8-K (file number
    0-25612) filed with the Commission on March 9, 2001.

     (b) REPORTS ON FORM 8-K

     In a report filed on Form 8-K, dated March 6, 2001, the Company reported
the acquisition of worldweb.net, Inc.

     In a report filed on Form 8-K, dated March 9, 2001, the Company reported
the acquisition of Technology Builders, Inc.

     In a report filed on Form 8-K, dated May 8, 2001, the Company reported its
financial results for the quarter and year ended March 31, 2001.

                                        58
<PAGE>   61

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 29th day of
June, 2001.

                                          STARBASE CORPORATION

                                          By:     /s/ DOUGLAS S. NORMAN
                                            ------------------------------------
                                                     Douglas S. Norman
                                                  Chief Financial Officer

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

<TABLE>
<CAPTION>
                      SIGNATURE                                     TITLE                     DATE
                      ---------                                     -----                     ----
<C>                                                    <C>                                <S>
               /s/ WILLIAM R. STOW III                  Chairman of the Board, Chief      June 29, 2001
-----------------------------------------------------      Executive Officer, and
                 William R. Stow III                   President (principal executive
                                                                  officer)

                /s/ DONALD R. FARROW                      Executive Vice President        June 29, 2001
-----------------------------------------------------
                  Donald R. Farrow

                /s/ PHILLIP E. PEARCE                             Director                June 29, 2001
-----------------------------------------------------
                  Phillip E. Pearce

                 /s/ DANIEL P. GINNS                              Director                June 29, 2001
-----------------------------------------------------
                   Daniel P. Ginns

                /s/ JOHN R. SNEDEGAR                              Director                June 29, 2001
-----------------------------------------------------
                  John R. Snedegar

                /s/ FRANK R. CACCAMO                              Director                June 29, 2001
-----------------------------------------------------
                  Frank R. Caccamo

                /s/ BARRY W. SULLIVAN                             Director                June 29, 2001
-----------------------------------------------------
                  Barry W. Sullivan
</TABLE>

                                        59
<PAGE>   62

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT                                                                 REF./
NUMBER                      DESCRIPTION OF DOCUMENT                     PAGE
-------                     -----------------------                     -----
<C>       <S>                                                           <C>
   3.1    Amended and Restated Certificate of Incorporation of the       (A)
          Company

   3.2    Amended and Restated Bylaws of the Company                     (B)

   4.1    Form of Registration Rights Agreement                          (C)

  10.1    Form of Warrant (Kaufman Bros., L.P.)                          (D)

  10.2    Form of Securities Purchase Agreement                          (C)

  10.3    Form of Warrant                                                (C)

  10.5    Form of Agreement and Plan of Merger dated as of February      (E)
          11, 2001 by and among the Registrant, the Merger Subsidiary
          and worldweb.

  10.6    Form of Agreement and Plan of Merger dated as of February      (F)
          16, 2001 by and among the Registrant, the Subsidiary, TBI
          and the Principal Shareholder.

  21.1    Subsidiaries of the Company

  23.1    Consent of Deloitte & Touche LLP, Independent Auditors
</TABLE>

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

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

 (C) Incorporated herein by reference to the Company's Form S-3 (file number
     333-47518) filed with the Commission on October 6, 2000.

(D) Incorporated herein by reference to the Company's Form S-3 (file number
    333-42184) filed with the Commission on July 25, 2000.

 (E) Incorporated herein by reference to the Company's Form 8-K (file number
     0-25612) filed with the Commission on March 6, 2001.

(F) Incorporated herein by reference to the Company's Form 8-K (file number
    0-25612) filed with the Commission on March 9, 2001.