================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
------------------------

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO .

COMMISSION FILE NUMBER 0-21289
CYBERMEDIA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 95-4347339
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)

3000 OCEAN PARK BLVD., SUITE 2001, SANTA MONICA, CA 90405
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)

(310) 581-4700
(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:
Common Stock, $0.01 Par Value

Indicate by check mark whether the registrant (1) has 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) has 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. [X]

The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 20, 1997, was approximately $65,448,180 based on the
closing price reported for such date on the Nasdaq National Market System. For
purposes of this disclosure shares of Common Stock held by each executive
officer and director and by each holder of 5% or more of the outstanding shares
of Common Stock have been excluded from this calculation because such persons
may be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.

As of March 20, 1997, Registrant had 11,882,140 shares of Common Stock
outstanding.
------------------------

DOCUMENTS INCORPORATED BY REFERENCE

Parts of the Proxy Statement for the Registrant's 1997 Annual Meeting of
Stockholders (the "Proxy Statement") are incorporated by reference into Part III
of this Annual Report on Form 10-K.
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2

PART 1

ITEM 1. BUSINESS

BUSINESS

CyberMedia is a leading provider of automatic service and support software
products for PC users in the Windows environment. The Company's products address
the growing technical support demands of PC users. Dataquest estimates that PC
users made approximately 200 million calls for technical support in 1996. The
Company's products are designed to enable PC users to diagnose and resolve
problems automatically without relying on costly technical support resources.

The Company's products are based on the Company's scalable ActiveHelp
architecture that allows for the support of a broad range of PC products and
related problems and enables the Company's products to be regularly and
automatically updated through the Internet.

CyberMedia is recognized for its successful First Aid family of products
which has sold over 1.0 million units to date. The Company's First Aid products
automatically detect, diagnose and resolve common software conflicts and
configuration errors encountered by users in the Windows environment. The First
Aid title ranked in the top ten of all Windows 95 business software applications
sold in the United States (by number of units) in each month from November 1995
through December 1996 (PC Data).

The Company sells its products to individual and corporate users primarily
through a combination of retail distribution channels and direct mail. The
Company is expanding the marketing and sale of its products through the
Internet, internationally and through strategic relationships.

INDUSTRY BACKGROUND

The PC industry has grown rapidly during the last decade, with Microsoft
Windows emerging as the dominant operating system. As a result of technological
advances and increased functionality, combined with price decreases for entry
level systems, the PC has become a mass market consumer electronics product. The
mass market appeal of PCs has resulted in an average PC user today who is less
technologically sophisticated than the average PC user of the early 1990s.

At the same time that PCs have become more widely adopted, the hardware and
software content of the average PC has become more complex, largely due to the
open environment of the Intel PC-compatible platform. Many PCs today incorporate
high speed processors, hard disk drives, high resolution monitors, sound cards,
graphics boards, CD-ROM drives and other peripherals, which together provide
significantly enhanced processing, storage and multimedia capabilities. The
widespread availability of these increasingly powerful computers has in turn
driven demand for increasingly complex software operating systems and
applications that can take advantage of these enhanced hardware capabilities.

In today's typical Windows-based PC configuration, the integration of a
wide range of hardware and software components from different vendors has
resulted in an increase in both the number and types of system errors and
technical difficulties. The Company believes that a significant portion of
problems commonly encountered by PC users are configuration errors and software
conflicts that occur when users add new software applications or devices to
their computers. One typical problem affects Dynamic Link Library ("DLL") files
and subroutines, which perform important printing, spell checking and other
widely used functions. When a new software program is installed, these files are
sometimes moved without the user's knowledge, thereby causing existing
applications to no longer function properly. Other problems can occur for a
variety of reasons, including incorrectly removing applications and accidentally
deleting shared files. The

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likelihood of such problems is increased in a multimedia environment where
changes in system configurations occur frequently due to the addition of new
games, sound cards, CD-ROM drives and video cards. The complexities introduced
by the accelerating adoption of the Internet has created additional
difficulties, including modem and network configuration problems. Even
experienced PC users can encounter difficulty installing and using new devices
and software because the existing system often must be reconfigured in order to
eliminate the resulting internal conflicts. Additionally, a large number of PC
technical problems are related to new versions of software that are incompatible
with software and device drivers that are already installed on the PC.

Due to the dramatic increase in the complexity of today's PC environment
and the growth in the number of PC users, approximately 200 million calls were
received at technical support centers nationwide in 1996, resulting in
expenditures of nearly $4 billion (Dataquest). At the same time, in response to
cost pressures in a competitive environment and an often unmanageable level of
technical support calls, many software and hardware vendors are scaling back or
completely eliminating the technical support that they once provided free of
charge with their products. Many vendors now offer fee-based technical support
services, such as 900 telephone numbers and per-incident support plans. However,
customers who select such services often obtain busy signals or encounter
lengthy delays before receiving assistance, resulting in widespread
dissatisfaction among users. Further, such support is typically vendor-specific
and is not designed to resolve compatibility issues or conflicts between
products from multiple vendors.

PC software and hardware vendors have typically released updated software
and device drivers to correct bugs discovered since the latest product release,
improve existing features, ensure compatibility with new devices or add new
features. These updates and "patches" have traditionally been provided free of
charge to users who request them and are distributed via the mail or posted to a
vendor's bulletin board. However, most vendors have been unwilling to incur the
costs of tracking, notifying and shipping product to all users who require such
updates or patches. As a result, PC users are frequently unaware of the
existence or location of vendor-provided updates and patches that can
significantly enhance the performance of their systems.

The Internet is emerging as a medium for vendors to quickly and
cost-effectively distribute software updates and patches. Today, many types of
software updates, from the Windows 95 Service Pack to new hardware device
drivers and bug fixes, are available free over the Internet from a wide range of
vendors. The accessibility of the Internet is enabling new releases of software
to be made available with such rapidity that software is becoming almost
"versionless." However, despite the potential benefits of the Internet as a
distribution medium, to date there is no central, vendor-neutral source for
locating software updates and patches. PC users must still manually log-on to
each vendor's Web site and check for new updates or patches. Few PC users have
the time or technical knowledge required to identify, locate, download and
install the updates and patches that apply to their PCs.

PC users and software and hardware vendors share a common need for the
timely resolution of technical support problems. PC users need a readily
accessible, vendor-neutral, easy-to-use solution that automatically identifies
and fixes their most commonly experienced problems. Software and hardware
vendors need to reduce their technical support burden and costs and to find
channels to rapidly and cost-effectively disseminate updates and patches.

THE CYBERMEDIA SOLUTION

The CyberMedia solution provides automatic service and support for PC users
and reduces support costs for software and hardware vendors. The Company has
developed an innovative, vendor-neutral, automated approach to technical support
that enables the Company to deliver among the most comprehensive and easy-to-use
software support solutions available today for Windows-based PC users. The
Company's products are based on its scalable ActiveHelp architecture that allows
for the support of a broad range of PC products and related problems and enables
the Company's products to be regularly and automatically updated through the
Internet.

CyberMedia's First Aid products automatically detect, diagnose and resolve
common software conflicts and configuration errors arising in the Windows
environment. The First Aid products are designed to reduce

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the need for time consuming technical support calls. The First Aid products
employ a rule-based engine to compare a PC's current configuration with a set of
rules determining how each application or device should be configured under
ideal conditions. The First Aid products access the Company's HelpCentral
knowledge base of general and system-specific information supporting a wide
range of software applications, multimedia cards, modems, video cards and
networks that, in the aggregate, resolve over 37,000 potential combinations of
problems. This knowledge base is regularly updated by the Company and is
accessible to First Aid users over the Internet.

CyberMedia's Oil Change, released in September 1996, is designed to enable
PC users to keep their systems up-to-date, thereby enhancing overall system
performance and avoiding problems frequently encountered as a result of outdated
software and device drivers. Oil Change provides a one-stop solution for PC
users to easily locate many of the most recent software updates and patches
applicable to their systems and download and install them automatically via the
Internet. Oil Change develops a profile of installed software applications and
device drivers on a user's PC and compares this profile with a local knowledge
base residing on the user's PC and the Company's HelpCentral knowledge base of
information on updates and patches available at vendor Web sites. Upon the
user's request, Oil Change retrieves and installs the selected updates and
patches. As of December 31, 1996, the Company's HelpCentral knowledge base
contained information on over 1,200 updates and patches from approximately 200
vendors, including Microsoft, Hewlett-Packard Company ("Hewlett-Packard") and
Creative Labs, Inc. ("Creative Labs").

THE CYBERMEDIA STRATEGY

The Company's objective is to be the leading provider of automatic service
and support software products. Key elements of the Company's business strategy
include:

Maintain Market Leadership in Automatic Service and Support Software. With
the broad market acceptance of its First Aid products, the Company is widely
recognized as a leader in providing automatic service and support for PC users.
The Company seeks to maintain its leadership by being first to market with
innovative products and product upgrades that leverage the Company's proprietary
technology and incorporate feedback from its extensive user base.

Offer Comprehensive, Scalable Solutions. The Company's goal is to offer
comprehensive products that address most common technical support problems faced
by PC users and that are regularly updated to support their evolving needs.
These products are designed to enable PC users to diagnose and resolve problems
automatically without relying on costly technical support resources. The Company
maintains and regularly updates comprehensive knowledge bases of information on
a wide range of PC hardware and software products and related technical support
problems and on available updates and patches for commonly used software
applications and device drivers. These knowledge bases are easily accessible to
users of CyberMedia's products at the Company's Internet site.

Leverage the Internet. The Company believes that the Internet represents
an efficient medium for the delivery of automatic service and support and seeks
to develop products that can be continually updated and delivered over this
medium. The Company is seeking to establish Oil Change as the de facto standard
for PC users to obtain updates and patches to third-party software applications
and device drivers over the Internet. The Company's open architecture approach
enables it to easily and rapidly incorporate support for new updates, patches
and other technical support information as they become available on vendor Web
sites. The Company is exploring potential revenue opportunities using the unique
information and access provided through the Oil Change platform, including the
sale of new full product releases of third-party software and ancillary products
and targeted advertising.

Pursue Strategic Alliances. The Company intends to continue to pursue
strategic alliances with third-party hardware and software vendors to enhance
the functionality and increase the distribution of its automatic service and
support products. The Company is currently pursuing OEM relationships with
leading PC and peripherals vendors, operating systems software companies and
other software vendors to bundle full and limited versions of its products. In
1996, the Company entered into an agreement with Phoenix Technologies Ltd.
("Phoenix"), a leading provider of system-level software for PCs, to market its
products on an OEM basis to manufacturers of PCs and PC-compatible hardware
devices. The Company has also established a

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Medallion Partnership program for its Oil Change product to encourage hardware
and software vendors to communicate information about new updates and patches to
the Company as soon as they become available. The Company also intends to
provide third-party hardware and software vendors with CyberScript, its powerful
scripting language under commercial development, to enable them to incorporate
technical support information on new products directly into the Company's
HelpCentral knowledge bases. The Company believes that these relationships will
increase brand recognition of its products, expand its customer base and provide
early access to leading edge software, multimedia and Internet/on-line
technologies.

Promote Brand Awareness. The Company believes that brand awareness is a
key factor in software purchase decisions and, to that end, the Company strives
to develop products that achieve strong customer appeal, customer loyalty and
long life cycles. The Company seeks to reinforce and strengthen CyberMedia,
First Aid and Oil Change as leading brand names in automatic service and support
by increasing its level of public relations, advertising and direct marketing
activities and by establishing strategic relationships with hardware and
software vendors.

Expand International Presence. The Company continues to invest significant
resources to adapt its automatic service and support products to international
markets and expand its sales and marketing efforts overseas. The Company
currently sells its products internationally through authorized distributors in
the United Kingdom, Australia, Germany and France and is developing localized
versions of certain of its First Aid products for additional international
markets. The Company recently introduced the French and German versions of its
First Aid products and expects to introduce the Japanese version in 1997.

PRODUCTS

The Company's products are designed to enable PC users to diagnose and
resolve problems automatically without relying on costly technical support
resources. The Company's scalable ActiveHelp architecture allows the Company's
products to support a broad range of PC products and related problems and to be
regularly and automatically updated through the Internet. The Company's products
also protect system integrity by creating a backup of all changes to critical
configuration files, enabling a user to restore their PC to a prior
configuration if desired. Each of the Company's products includes a 60-day
unconditional money-back guarantee. CyberMedia has developed the following
ActiveHelp products:

ACTIVEHELP PRODUCTS

SUGGESTED
PRODUCT DATE INTRODUCED STREET PRICE* DESCRIPTION
------------ ----------------- ---------------- ------------------------------------

First Aid
97........ Ver 4.0 -- Nov. $39.95 -$59.95 Automated technical support for
96 configuration errors and software
conflicts occurring on Windows-based
PCs
Oil Change.. Ver 1.0 -- Oct. $ 39.95 Automatically downloads and installs
96 updates and patches to commonly used
software applications and device
drivers via the Internet
Tech Support
Yellow
Pages....... Ver 1.0 -- Jun. $ 19.95 Reference book and CD-ROM with
96 contact information for 2,000
software and hardware vendors

- ---------------
* Actual prices vary depending on local conditions, distribution channels and
other factors.

First Aid

The Company is recognized for its First Aid family of products with over
1.0 million units sold to date. The First Aid family of products is designed to
detect, diagnose and resolve a wide range of software conflicts

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and configuration problems associated with Windows-based PCs, using the
Company's knowledge base of product and vendorspecific technical support
information. This knowledge base, which is installed locally on a PC when First
Aid is installed, can be updated by connecting to CyberMedia's HelpCentral
Internet site, which houses a regularly updated knowledge base.

In 1994, 1995 and 1996, virtually all of the Company's sales were from the
First Aid family, which includes First Aid, First Aid 95, First Aid 95 Deluxe,
First Aid 97 and PC911. The First Aid title has ranked in the top ten of all
Windows 95 software applications sold in the United States (by number of units)
in each month from November 1995 through December 1996 (PC Data). First Aid
products are currently available for Windows 3.1, Windows 95 and Windows for
Workgroups 3.11.

First Aid 97. First Aid 97 was introduced in the fourth quarter of 1996.
First Aid 97 is an upgrade to the existing First Aid products. First Aid 97
combines all of the features of First Aid 95 Deluxe with additional diagnostic
checks and a simplified user interface. In addition, First Aid 97 incorporates
the following new features:

- Allows users to get instant, up-to-date help and advice by clicking on a
picture of a PC component or selecting from a list of common problems or
questions.

- Searches the Internet in the event of a crash to find updates and patches
that may prevent future crashes.

- Helps resolve hard disk problems and makes safety backups of a user's
work with Windows 95 disk repair tools.

- Helps resolve hardware configuration conflicts.

- Fixes additional problems associated with multimedia, Internet/on-line
and software applications.

Oil Change

Oil Change is an Internet-based software product that is designed to
provide a one-stop solution for PC users to locate easily the most recent
software updates and patches applicable to their systems and download and
install them automatically via the Internet. Oil Change enables PC users to keep
their systems up-to-date, thereby enhancing overall system performance and
avoiding problems frequently encountered as a result of outdated software and
device drivers.

Oil Change examines a user's PC and develops a profile of the installed
software applications and hardware device drivers. Oil Change first checks a
local knowledge base, then connects to CyberMedia's HelpCentral server through
the Internet to compare this profile with the Company's regularly updated
central knowledge base of information on updates and patches available at
various vendor Web sites. Oil Change offers the user a list of available updates
and patches and the problems that these updates and patches are intended to
resolve. Upon the user's request, Oil Change retrieves and installs selected
updates and patches.

Oil Change currently supports many of the best selling software
applications and device drivers. The Company has also established a Medallion
Partnership program to encourage hardware and software vendors to communicate
information about new updates and patches to the Company as soon as they become
available. As of September 16, 1996, the Company's HelpCentral knowledge base
contained information on over 1,200 updates and patches from approximately 200
vendors, including Microsoft, Hewlett-Packard and Creative Labs.

Oil Change was released in September 1996 and is available through the
CyberMedia Web site at www.cybermedia.com. The initial version of Oil Change is
designed to run on the Windows 95 platform. The street price for Oil Change is
approximately $39.95 for a one-year subscription, which includes an initial
setup fee.

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Tech Support Yellow Pages

Tech Support Yellow Pages is an easy-to-use reference book and CD-ROM that
allows users to access contact information for over 2,000 hardware and software
vendors. Users can receive updates to the Tech Support Yellow Pages CD-ROM via
downloads from the Company's HelpCentral. The CD-ROM provides users with
Internet access with "hot links" to connect directly to any vendor Web site.

TECHNOLOGY

The Company's proprietary ActiveHelp technology consists of three
components, Agents, HelpCentral and CyberScript, which together provide an open,
scalable architecture for developing and continually updating the Company's
automatic service and support software products.

Each of the Company's products incorporates Agents, client-level software
that detects and solves problems locally at the user's PC. These Agents connect
to CyberMedia's HelpCentral server through the Internet to access centralized
knowledge bases of up-to-date technical support information. Information on
HelpCentral is inputted and continually updated using CyberScript, the Company's
powerful proprietary scripting language. CyberScript enables technical support
information to be easily defined and added to HelpCentral in a standardized
format.

The technology components of CyberMedia's principal product lines, First
Aid and Oil Change, are described below.

First Aid

Agent. The First Aid Agent's primary function is to detect and solve
software conflicts and configuration problems locally at the user's PC. The
Agent can be activated directly by the user or set to run in the background to
be activated automatically upon the occurrence of certain events such as General
Protection Faults or system crashes. Once activated, the First Aid Agent gathers
data from the PC and then utilizes a rule-based diagnostic engine to compare a
PC's current configuration with a set of rules determining how each application
or device should be configured under ideal conditions. The First Aid Agent
includes a local version of the Company's HelpCentral knowledge base of systems,
software and hardware-related configuration information. If a problem cannot be
resolved locally, the First Aid Agent can connect to CyberMedia's HelpCentral
server through the Internet to update the local knowledge base with the
Company's up-to-date central knowledge base. Once a problem has been diagnosed,
the Agent displays the likely cause and proposed solution and presents the user
with an "AutoFix" button. If the user selects this option, the Agent will then
automatically implement the solution.

HelpCentral. To support the First Aid Agent, CyberMedia's HelpCentral
knowledge base maintains up-to-date general and system-specific information
supporting a wide range of software applications, multimedia cards, modems,
video cards, and networks that, in the aggregate, resolve over 37,000 potential
combinations of problems. Hardware and software products are described in terms
of the configuration required for them to function properly. For example, a
software application is described in terms of the program files and DLLs that it
requires, and a multimedia card is described by the drivers and configuration
entries it requires. Vendor-specific information is also maintained on the
HelpCentral knowledge base, including addresses, telephone numbers and Web
addresses for over 2,000 hardware and software vendors. The information
maintained at HelpCentral is currently updated on a regular basis to support new
products and changes in vendor information.

Oil Change

Agent. The Oil Change Agent scans a user's PC to determine the installed
software applications and device drivers and builds a profile of every software
file, its location and current revision level. Once the profile has been
developed, the Oil Change Agent first contacts a local knowledge base residing
on the user's PC, then contacts CyberMedia's HelpCentral server through the
Internet to compare this profile with the Company's regularly updated knowledge
base of information on updates and patches available at various vendor Web

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sites. The Agent displays all newer updates or patches and downloads those that
the user selects directly from the vendor's Web site. The Agent then unpacks and
installs the downloaded updates and patches. To ensure safety, the Agent creates
a backup of all changes, enabling a user to restore to the prior configuration
if desired.

HelpCentral. To support the Oil Change Agent, HelpCentral maintains
up-to-date information on new updates and patches for commonly used software
applications and device drivers. Information provided for each update and patch
is described in terms of its on-line location, the revision levels it represents
and its installation instructions. The information maintained at HelpCentral is
updated regularly by Company programmers who monitor new postings of upgrades
and patches on the Internet. The Company's Medallion Partners also communicate
information about new updates and patches to the Company via the Internet as
soon as they become available at their Web sites. The information is then
authenticated by the Company and added to the HelpCentral knowledge base. As of
December 31, 1996, the Company's HelpCentral knowledge base contained
information on over 1,200 updates and patches from approximately 200 vendors,
including Microsoft, Hewlett-Packard and Creative Labs.

CyberScript. A key component of CyberMedia's technology is CyberScript, a
powerful proprietary scripting language that enables product-specific knowledge
and other technical support information to be defined and added to HelpCentral
in a standardized format. In the future, the Company intends to publish the
specifications for CyberScript and make it available to third-party hardware and
software vendors to enable them to incorporate technical support information on
new products directly into the Company's HelpCentral knowledge bases. The
Company intends to develop easy-to-use interfaces and other development tools
for CyberScript so that it can be used by third parties with only minimal
training.

DISTRIBUTION AND MARKETING

Distribution

Domestic. The Company's principal domestic channels of distribution are
through software distributors for resale to the retail sales channel and through
direct mail. In addition, the Company's products can be ordered through the
Company's Web site. Sales to the Company's top three distributors, Navarre,
Ingram Micro and Micro Central, accounted for approximately 25%, 25% and 9%,
respectively, of the Company's net revenues in 1996, and 9%, 16% and 19%,
respectively, of net revenues in 1995. The Company's products are currently
available at more than 9,000 locations through major retailers, including
CompUSA Inc., Sam's Club, Micro Center, Egghead Software, Computer City, Fry's
Electronics, Inc., Office Depot, Inc., Best Buy and Price Costco Inc.

The Company maintains a stock balancing policy that allows distributors and
retailers to return products for credit. In addition, the Company provides price
protection to its distributors in the event the Company reduces its prices. The
Company establishes reserves, including reserves under the Company's stock
balancing policy, based on estimated future returns of products, taking into
account promotional activities, the timing of new product introductions,
distributor and retailer inventories of the Company's products and other
factors. Product returns or obligations resulting from the Company's price
protection policy that exceed the Company's reserves could adversely affect the
Company's business, results of operations and financial condition.

During 1995 and 1996, direct sales accounted for approximately 40% and 33%,
respectively, of net revenues. Sales through direct mail are outsourced to
third-party mailing and fulfillment houses. The Company sells First Aid 95
Deluxe, Network Version through a limited direct sales organization comprised of
telesales, catalog and sales representatives to corporate customers.

International. Internationally, the Company markets its products through
authorized distributors in the United Kingdom and Australia who resell to retail
stores and through retailers. During 1996 international

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sales accounted for approximately 10% of the Company's net revenues. The Company
developed localized versions of certain of its First Aid products for the
French, German and United Kingdom markets. The Company expects to introduce
additional localized versions in 1997.

Marketing

The Company's marketing strategy in retail distribution channels has
typically focused on high impact product packaging, end-caps and rebate coupons.
In addition, the Company seeks to increase market share and brand recognition
through public relations activities involving introducing its products to local
user groups and obtaining press coverage in regional and national trade and
technical publications. From time to time, the Company utilizes aggressive
direct mail campaigns targeted specifically at Windows-based PC users. Beginning
in the second quarter of 1996, the Company has been engaged in an advertising
campaign using print and radio to increase end-user awareness and stimulate
purchases. The Company continues to use such advertising to promote its
products.

CyberMedia's marketing activities also include participation in trade and
computer shows and cooperative advertising programs directly with certain
distributors and retailers, whereby the Company receives marketing opportunities
through advertisements, brochures, and catalogs initially paid for by the
distributors. The Company provides for expenses related to these programs in
amounts established in the individual distributor agreements or in modifications
thereto. Additionally, the Company from time to time offers rebates to end users
who purchase the Company's products.

The Company's sales and marketing force as of December 31, 1996 consisted
of 37 people, all of whom receive salaries, commissions, and/or incentive bonus
compensation. The Company's in-house marketing department coordinates most of
the design and development of the Company's product packaging, advertisements
and promotional items.

Strategic Alliances

CyberMedia seeks to continue to establish strategic alliances with
third-party hardware and software vendors to enhance the functionality and
increase the distribution of its automatic service and support products. The
Company is pursuing OEM relationships with leading PC and peripherals vendors,
operating systems software companies and other software vendors to bundle full
and limited versions of its products.

In September 1996, CyberMedia entered into a Distribution Agreement with
Phoenix. Under the terms of the Agreement, the Company granted Phoenix the
exclusive right to distribute First Aid and a limited version of Oil Change,
together with any upgrades, updates, enhancements and future releases and
versions thereof, to manufacturers of PCs. The Company granted Phoenix
non-exclusive distribution rights to distribute and sublicense the
above-mentioned products to all other PC-compatible hardware device
manufacturers. CyberMedia and Phoenix also agreed to negotiate an agreement to
develop add-on products to First Aid for resale and distribution into the OEM
and other channels. The Company believes that Phoenix's worldwide OEM
relationships with leading PC manufacturers will enhance distribution of the
Company's new and existing products.

The Company has also entered into an OEM relationship with Diamond
Multimedia Systems, Inc. to provide a limited version of First Aid 95 Deluxe for
bundling with all of its products and license agreements with NEC Technologies,
Inc., AST and Fujitsu PC Corporation to provide a full version of First Aid 95
for bundling with certain of their products. The Company has also established a
Medallion Partnership program for its Oil Change product to encourage hardware
and software vendors to communicate information about new updates and patches to
the Company as soon as they become available. The Company also intends to make
CyberScript available to third-party hardware and software vendors to enable
them to incorporate technical support information on new products directly into
the Company's HelpCentral knowledge bases. The Company believes that these
relationships will increase brand recognition of its products, expand its
customer base and provide early access to leading edge software, multimedia and
Internet/on-line technologies.

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TECHNICAL SUPPORT

The Company provides free telephone support to purchasers of its software
products during its regular business hours. End users are able to consult
directly with software support personnel with respect to software use, hardware
problems and peripheral needs or receive on-line support. The Company provides a
substantial amount of its technical support through on-line forums, such as
America Online, Inc. and CompuServe. In addition, the Company plans to offer its
corporate clients a variety of fee-based options, providing a range of service
levels designed to meet their technical support requirements. In Europe,
technical support is provided through third parties. As of December 31, 1996,
the Company had 20 professionals in technical support.

PRODUCT DEVELOPMENT

The Company believes that significant investment in product development is
required in order to remain competitive, accelerate the rate of product
introductions, incorporate new technologies, and sustain and improve the quality
of its products. In addition to engineering and quality assurance, the Company's
product development activities include the identification and validation of a
product's potential commercial success, as well as the incorporation of new
technologies in new products. The Company seeks to gain pre-release access to
and develop expertise in current and future versions of Windows and other
leading hardware and software products in order to develop and release such
products on a timely basis. The Company incorporates market research into the
design and development of its products to anticipate the evolving technical
support needs of PC users. In addition, the Company works closely with hardware
and software manufacturers to identify their technical support requirements and
to incorporate this feedback into the development of the Company's products.
These efforts are critical in enabling the Company to be competitive, improve
quality and consistency, update its current products and bring new products to
market quickly.

The Company's principal current product development efforts include: (i)
enhancing its HelpCentral knowledge bases to provide support for new third-party
products and updates and patches to current applications, (ii) broadening the
appeal of First Aid and Oil Change products in the corporate and international
markets by providing support for the Windows NT operating system and developing
localized products for international markets, (iii) developing additional
products that address evolving automatic service and support requirements, and
(iv) developing CyberScript for use by third parties to incorporate information
about their products into the Company's knowledge base.

The Company utilizes work-for-hire software engineers in India to update
its knowledge bases to support new third-party products, updates and patches and
to develop a Windows NT version of its First Aid 95 Deluxe, Network Version. The
Company has exclusive ownership of all products developed by such engineers and
has no royalty obligations to these engineers.

Research and development expenses during 1994, 1995 and 1996 were
approximately $544,000, $964,000 and $3.3 million, respectively. As of December
31, 1996, the Company had 48 full-time employees in research and development.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Factors That May Affect Future Results -- New Product Development
and Technological Change."

COMPETITION

The PC software industry is intensely competitive and characterized by
short product life cycles and new product introductions. The Company competes
with software companies of varying sizes and resources, including McAfee
Associates, Inc., Quarterdeck Corporation, Symantec Corp. and others. The
Company believes that a number of software companies will be introducing
automatic service and support software products in the near future that will
compete with the Company's products. The Company expects that potential future
competitors may include other software vendors, including Internet software
vendors. Many of the Company's existing and potential competitors have
substantially greater financial, technical and marketing resources than the
Company. Moreover, there are no proprietary barriers to entry that could keep
existing and potential competitors from developing similar products or selling
competing products in the Company's markets. To the extent that the Company's
competitors bundle their software products with leading hardware,

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11

application software or operating system vendors, or if one or more of the
operating system vendors, such as Microsoft, developed its own technical support
software and incorporated such functionality into its products, the Company's
business, results of operations and financial condition could be materially
adversely affected. There can be no assurance that the Company will be able to
compete successfully with existing or potential competitors. Increased
competition may result in the loss of shelf space or a reduction in demand or
sell-through of the Company's products, any of which could have a material
adverse effect on the Company's business, results of operations and financial
condition.

Microsoft's position as a large, well-capitalized software company with a
dominant share of the market for PC operating system software could enable it to
develop products that compete effectively with those of the Company. In
particular, Microsoft is incorporating "Plug and Play" capabilities into future
versions of its operating systems. Plug and Play capabilities are designed to
allow PC users to add on any computer peripheral (such as a modem, video or
sound card) to a Windows-based system and enable that peripheral to work
immediately, without concern for software configuration errors or driver
conflicts. In addition, to the extent that Microsoft incorporates functionality
comparable, or perceived as comparable, to that offered by the Company into its
Windows products (or separately offers comparable products), sales of the
Company's products could be materially adversely affected. There can be no
assurance that any such action by Microsoft or others would not render the
Company's products noncompetitive or obsolete.

The Company's products also compete indirectly against alternative sources
of technical support, such as the technical support departments of hardware and
software vendors. Additionally, the Internet provides hardware and software
vendors with a new medium to offer technical support services. The Company
expects that many vendors will provide Internet-based technical support services
to support their existing and future products. The availability of these
technical support services could materially dilute the value of the Company's
products and have a material adverse effect on the Company's market position,
business, results of operations and financial condition. See "-- Industry
Background."

The Company believes that the principal competitive factors in the software
industry are product features and quality, reliability, ease of use, brand name
recognition, access to distribution channels and price. Although the Company
believes it competes favorably with respect to these factors, there can be no
assurance that the Company will continue to do so. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Factors That
May Affect Future Results -- Competition."

PROPRIETARY RIGHTS

The Company's success is heavily dependent upon its proprietary software.
The Company relies primarily on a combination of copyright, trademark and trade
secret laws, employee confidentiality and nondisclosure agreements and
third-party nondisclosure agreements and other methods of protection common in
the industry to protect its proprietary rights. The Company licenses its
products primarily under "shrink wrap" license agreements that are not signed by
licensees and therefore may be unenforceable under the laws of certain
jurisdictions. In addition, the Company has two United States patent
applications pending and intends to seek international and further United States
patents on its technology. There can be no assurance that patents will issue
from the Company's pending applications or that any claims allowed from the
pending patent applications or those hereafter filed will be of sufficient scope
or strength, or be issued in all countries where the Company's products can be
sold, to provide meaningful protection or any commercial advantage to the
Company or that any patents which may be issued to the Company will not be
challenged and invalidated. In addition, existing copyright laws provide only
limited protection. Despite the Company's efforts to protect its proprietary
rights, unauthorized parties may attempt to copy or otherwise obtain and use
products or technology that the Company considers proprietary, and third parties
may develop similar technology

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independently. Policing unauthorized use of the Company's products is difficult,
and while the Company is unable to determine the extent to which piracy of its
software products exists, software piracy can be expected to be a persistent
problem. There can be no assurance that the Company's means of protecting its
proprietary rights will be adequate. In addition, there can be no assurance that
the Company's competitors will not independently develop technologies and
products that are substantially equivalent or superior to those of the Company
without violating the Company's proprietary rights.

As the number of software products in the industry increases and the
functionality of these products increasingly overlaps, software developers may
become increasingly subject to infringement claims. From time to time, the
Company has received communications from third parties asserting that certain
products may infringe upon the intellectual property rights of others. To date,
no such claim has resulted in litigation or the payment of any damages. However,
there can be no assurance that existing or future infringement claims against
the Company with respect to current or future products will not result in costly
litigation or require the Company to enter into royalty bearing licenses with
third parties or to discontinue use of certain portions of the Company's
technology if licenses are not available on acceptable terms.

While the Company's international sales were insignificant prior to 1996,
international sales increased in 1996 and the Company continues to devote
substantial resources to expand the international distribution of its products.
The laws of some foreign countries either do not protect the Company's
proprietary rights or offer only limited protection for those rights. The
Company has not registered its copyrights in any foreign countries. While in
most foreign countries registration is not required in order to receive
copyright protection, the ability to bring an enforcement action and obtain
certain remedies depends on compliance with that country's copyright laws.
Consequently, the Company's failure to register its copyrights abroad may make
enforcement of these rights more difficult or reduce the available remedies in
any enforcement action. In addition, the Company has not to date pursued foreign
registration of its trademarks due to the significant costs involved and, as a
result, the Company may not be able to prevent a third party from using its
trademarks in many foreign jurisdictions.

OPERATIONS

The production of the Company's software products includes diskette
duplication, purchased component assembly, printing of user manuals and final
packaging. The Company contracts with outside parties to perform these functions
to the Company's specifications and quality standards. The Company currently
does not have long-term agreements with any of these parties. Although the
Company believes that alternative resources exist or can be obtained, a
disruption of the Company's relationship with any of these outside parties could
adversely affect the Company's business, results of operations and financial
condition until replacement sources are established. In addition, any material
changes in product and service quality and pricing or failure to adhere to the
Company's specifications by these outside parties could adversely affect the
Company's business, results of operations and financial condition. The Company
has attempted to mitigate the risk of any such disruption by maintaining certain
levels of "safety stock" inventories and using second source vendors in certain
limited situations. In the past, the Company has experienced material
difficulties and delays in the manufacture and assembly of its products. There
can be no assurance that the Company will not continue to experience such
difficulties in the future. As of December 31, 1996, the Company had a total of
three employees in operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Factors That May Affect Future
Results -- Reliance on Outside Resources."

BACKLOG

The Company normally ships products within one week after receipt of an
order. As a result, the Company has relatively little backlog at any time and
does not consider backlog to be a significant indicator of future performance.

EMPLOYEES

At December 31, 1996, the Company employed a total of 130 full-time
employees, including three in operations, 37 in sales and marketing, 20 in
technical support, 48 in research and development and 22 in

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13

finance and administration. The Company also employs, from time to time, a
number of temporary and part-time employees as well as consultants on a contract
basis. The Company has experienced rapid growth in the past year and intends to
hire additional personnel during the next twelve months in each of these areas.
The Company's future success will depend in part on its ability to attract,
train, retain and motivate highly qualified employees, who are in great demand.
There can be no assurance that the Company will be successful in attracting and
retaining such personnel. The Company's employees are not represented by a
collective bargaining organization, and the Company has never experienced a work
stoppage or strike. The Company considers its employee relations to be good. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Factors That May Affect Future Results -- Management of Growth;
Dependence on Key Personnel."

EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of the Company and their ages as of December 31,
1996 were as follows:

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

Unni S. Warrier............. 42 President, Chief Executive Officer and Chairman of
the Board
Leonard L. Backus........... 44 Vice President, International Sales
Jeffrey W. Beaumont......... 44 Vice President, Finance and Chief Financial Officer
Srikanth Chari.............. 44 Vice President, Marketing
Brad Kingsbury.............. 33 Vice President, Engineering
Anne T. Lam................. 39 Vice President, Business Development
Charles M. Valentine........ 58 Vice President, Sales

Mr. Warrier has served as President, Chief Executive Officer and Chairman
of the Board of the Company since co-founding the Company in November 1991. From
February 1991 to November 1991, he served as an independent consultant. From May
1989 to February 1991, he served as President and Chief Executive Officer of
NetLabs, Inc., a maker of UNIX network management products, which Mr. Warrier
co-founded. Mr. Warrier holds a B. Tech. in Physics from the Indian Institute of
Technology of Kanpur, India and a M. Tech. in Computer Science from the Indian
Institute of Technology of Madras, India. Mr. Warrier has also completed
coursework for a Ph.D in Computer Science from the University of California, Los
Angeles.

Mr. Backus has served as Vice President, International Sales of the Company
since April 1996. Prior to joining the Company, from October 1995 to April 1996,
he served as a Principal for Technology Marketing Alliance, a consulting
company. Prior to that, Mr. Backus served as Vice President, International Sales
and Marketing, of MediaVision Technology, Inc., a computer hardware manufacturer
from July 1994 to October 1995, and as Director of International Sales of
MediaVision Technology, Inc. from February 1991 to July 1994. Mr. Backus holds a
B.S. in Electrical Engineering from the University of Washington and an M.S. in
Electrical Engineering from the University of Southern California.

Mr. Beaumont has served as Vice President, Finance and Chief Financial
Officer of the Company since December 1995. From June 1995 to December 1995, he
served as an independent consultant to various companies. Prior to joining the
Company, from October 1994 to June 1995, he served as Chief Financial Officer of
Blyth Holdings, Inc., a software development company. From August 1989 to
October 1994, Mr. Beaumont served as Chief Financial Officer at Davidson &
Associates, Inc., an educational software development company. Mr. Beaumont
holds a B.A. in History from Hamilton College and an M.B.A. from the University
of Michigan.

Dr. Chari has served as Vice President, Marketing since co-founding the
Company in November 1991. From November 1991 to August 1996, Dr. Chari also
served as a director of the Company. From July 1990 to October 1991, he served
as Director of Marketing for NetLabs, Inc. Dr. Chari holds a B. Tech. in
Electrical Engineering from the Indian Institute of Technology of Delhi, India,
an M.B.A. from the Indian Institute of Management of Ahmedabad, India and a
Ph.D. in Business from the University of California, Los Angeles.

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14

Mr. Kingsbury has served as Vice President, Engineering of the Company
since April 1996. Prior to joining the Company, from July 1985 to April 1996, he
served in various positions at Symantec Corporation, a software utilities
company, most recently as Chief Technologist and General Manager of the
Anti-Virus Business Unit. Mr. Kingsbury holds a B.S. in Computer Science from
California State University, Northridge.

Ms. Lam has served as Vice President, Business Development since
co-founding the Company in November 1991. From November 1991 to August 1996, Ms.
Lam also served as a director of the Company. From May 1989 to October 1991, she
served as Director, Strategic Sales of NetLabs, Inc, a company which she
co-founded. Ms. Lam holds a B.S. and an M.S. in Computer Science from the
University of California, Los Angeles.

Mr. Valentine has served as Vice President, Sales of the Company since
September 1996. Prior to joining the Company, from June 1992 to September 1996,
he served as Strategic Accounts Director of Microsoft, a software company. From
April 1990 to June 1992, Mr. Valentine served as Vice President, Sales of Fox
Software, Inc., a database software company. Mr. Valentine holds a B.S. in
Industrial Management from the Georgia Institute of Technology.

ITEM 2. PROPERTIES

The Company leases approximately 28,000 square feet of office space in
Santa Monica, California and approximately 4,000 square feet in San Jose,
California. These facilities serve as the Company's headquarters and include all
Company functions except outside sales. The Company is currently exploring
expansion opportunities and believes that suitable additional or alternative
space will be available in the future on commercially reasonable terms as
needed.

ITEM 3. LEGAL PROCEEDINGS

None.

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 the fiscal year covered by this report.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION FOR COMMON EQUITY

The Company's Common Stock has been traded on the Nasdaq National Market
System under the symbol "CYBR" since the Company's initial public offering on
October 22, 1996. The following table sets forth for the periods indicated the
high and low closing sale prices for the Common Stock.

HIGH LOW
------ ------

1996
Fourth Quarter (from October 22, 1996)................... $25.50 $14.25
1997
First Quarter (through March 20, 1997)................... $20.75 $ 9.00

On March 20, 1997, the closing price on the Nasdaq National Market for the
Company's Common Stock was $9.00 per share. As of March 20, 1997, there were
approximately 198 holders of record of the Company's Common Stock.

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DIVIDEND POLICY

The Company has never paid cash dividends on its Common Stock. The Company
currently intends to retain any earnings for use in its business and does not
anticipate paying cash dividends in the foreseeable future. In addition, the
payment of cash dividends by the Company to its stockholders is currently
prohibited by the Company's bank line of credit. See Note 6 of Notes to
Consolidated Financial Statements.

ITEM 6. SELECTED FINANCIAL DATA

The selected financial data presented below as of December 31, 1995 and
1996 and for each of the years in the three-year period ended December 31, 1996
are derived from the financial statements of the Company, which financial
statements have been audited by KPMG Peat Marwick LLP, independent certified
public accountants. The financial statements as of December 31, 1995 and 1996,
and for each of the years in the three-year period ended December 31, 1996, and
the auditor's report thereon, are included elsewhere herein. Balance sheet data
as of December 31, 1994 is derived from audited financial statements not
included herein. The statements of operations data for the years ended December
31, 1992 and 1993 and the balance sheet data as of December 31, 1992 and 1993
have been derived from the unaudited financial statements of the Company, which
are not included herein. The results of operations for the year ended December
31, 1996 are not necessarily indicative of results to be expected for any future
period. The selected financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements and Notes thereto
included elsewhere herein.

YEAR ENDED DECEMBER 31,
---------------------------------------------------
1992 1993 1994 1995 1996
------ ------ ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

STATEMENTS OF OPERATIONS DATA:
Net revenues................................. $ 20 $ 55 $ 241 $ 4,797 $38,524
Cost of Revenues............................. -- 14 106 2,103 11,991
------ ------ ------- ------- -------
Gross profit............................... 20 41 135 2,694 26,533
OPERATING EXPENSES:
Research and development..................... 250 468 544 964 3,300
Sales and marketing.......................... 27 220 439 4,036 24,125
General and administrative................... 75 84 247 987 2,941
------ ------ ------- ------- -------
Total operating expenses................... 352 772 1,230 5,987 30,366
------ ------ ------- ------- -------
Loss from operations......................... (332) (731) (1,095) (3,293) (3,833)
Interest, net................................ (1) -- (19) (58) 351
------ ------ ------- ------- -------
Loss before income taxes..................... (333) (731) (1,114) (3,351) (3,482)
Income tax expense........................... -- 1 1 1 1
------ ------ ------- ------- -------
Net loss..................................... $ (333) $ (732) $(1,115) $(3,352) $(3,483)
------ ------ ------- ------- -------
Net loss per share(1)........................ $(0.04) $(0.09) $ (0.14) $ (0.43) $ (0.42)
------ ------ ------- ------- -------
Shares used in per share calculation......... 7,794 7,826 7,839 7,855 8,231

DECEMBER 31,
---------------------------------------------------
1992 1993 1994 1995 1996
------ ------ ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Total assets................................. 178 25 189 3,855 56,450
Note payable, long-term...................... -- -- 500 500 --
Total stockholders' equity (deficiency)...... 120 (610) (1,155) 7 43,668

- ---------------
(1) See Note 1 of Notes to Financial Statements for per share calculations.

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

The discussion in Management's Discussion and Analysis of Financial
Condition and Results of Operations contains trend analysis and other
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. Actual results could differ materially from those set forth in such
forward looking statements as a result of the factors set forth under "Factors
That May Affect Future Results" and other risks detailed from time to time in
the Company's reports filed with the Securities and Exchange Commission.

OVERVIEW

CyberMedia is a leading provider of software products that provide
automatic service and support to PC users in the Windows environment. The
Company commenced operations in November 1991 and introduced its first automatic
service and support product, Win Win, in 1993. The Company introduced the first
Windows 95 compatible version of its First Aid product line in September 1995.
During 1995 and 1996, over 90% of the Company's net revenues were attributable
to sales of its First Aid products. Any decline in the demand for First Aid
products, failure to achieve market acceptance of upgrades to such products or
failure of net revenues derived from such products to meet the Company's
expectations, whether as a result of competition, technological change or other
factors, would have a material adverse effect on the Company's business, results
of operations and financial condition. See "Business -- Product Concentration."

The Company recently introduced First Aid 97, an upgrade of its First Aid
95 products in the fourth quarter of 1996. Additionally, in October 1996, the
Company introduced Oil Change, a product that automatically updates many
software applications and device drivers over the Internet. To date, Oil Change
has generated less than 5% of the Company's revenues and the Company does not
expect it to generate significant net revenues for at least the near future.

The Company has a limited operating history upon which to base an
evaluation of its business and prospects. From inception to December 31, 1996,
the Company generated net sales of approximately $43.6 million, of which $38.5
million, or 88% of such amount, was generated in 1996. The Company has incurred
net losses in each of the last five fiscal years. At December 31, 1996, the
Company had an accumulated deficit of $9.0 million. With the introduction of
First Aid 95, the Company began focusing on building its product line and
establishing brand name awareness of its products, which has resulted in
significantly increased operating expenses. The Company anticipates that its
operating expenses will continue to increase significantly in the future as a
result of efforts to expand its sales and marketing operations, including
international sales, to fund greater levels of product development and to
increase its administrative infrastructure. The Company intends to fund
increases in operating expenses primarily from cash generated from operations
and, to the extent necessary, funds available from the Company's line of credit.
In addition, during 1996, the Company's net revenues and operating expenses
increased rapidly as compared to prior periods. There can be no assurance that
the Company's net revenues will continue to remain at or increase from the
levels experienced in 1996 or that net revenues will not decline. The Company's
prospects must be considered in light of the risks encountered by companies with
limited operating histories, particularly companies in new and rapidly evolving
markets. Future operating results will depend upon many factors, including the
demand for the Company's software products, the level of product and price
competition, the Company's success in expanding its direct and indirect
distribution channels, the Company's success in attracting and retaining
motivated and qualified personnel, the growth of activity on the Internet and
the Web, the ability of the Company to develop and market new products and to
control costs and general economic conditions. Many of these factors are beyond
the Company's control. There can be no assurance that the Company will be
successful in addressing such risks. See "-- Limited Operating History and
History of Operating Losses" and "-- Potential Fluctuations in Quarterly
Results; Seasonality."

The Company sells its First Aid products primarily to distributors for
resale to the retail channel as well as directly to consumers through direct
mail. In addition, the Company sells its products through software catalogs
throughout the United States and Canada. Sales to the Company's top three
distributors, Navarre, Ingram Micro and Micro Central, accounted for
approximately 25%, 25% and 9%, respectively, of the

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Company's net revenues in 1996 and 9%, 16% and 19%, respectively, of net
revenues in 1995. Net revenues from direct mail sales in 1995 and in 1996
represented approximately 40% and 30%, respectively, of net revenues in each of
these periods, with the balance of net revenues primarily attributable to sales
through distributors. Net revenues in prior periods were primarily attributable
to sales through distributors. Sales from direct mail have historically operated
at lower profitability levels than sales from distributors. Accordingly,
quarterly shifts in the mix of sales through distributors and through direct
sales could cause fluctuations in the Company's profitability. There can be no
assurance that the mix of sales or the relative profitability by distribution
channel will remain at current levels in the future.

The Company monitors the levels of purchases and returns on a customer by
customer basis and, to date, returns have been within management's expectations.
Sales are made subject to rights of return and reserves are established at time
of shipment for future return of product based on product history, analysis of
retail sell-through and other factors. In addition, the Company may allow
certain concessions, such as price protection, to maintain its relationship with
retailers and distributors and its access to distribution channels.

Revenues are recognized upon the shipment of products to distributors,
resellers and end users. With the introduction of First Aid 95 in September
1995, CyberMedia implemented a policy of offering customers updates to its First
Aid products over the Internet at no additional cost. Given this policy and
because updates are a fundamental and integral part of its First Aid products,
the Company defers a portion of all First Aid 95, First Aid 95 Deluxe, First Aid
97 and Oil Change and recognize revenue ratably over estimated update periods,
generally one year from the date of sale. At December 31, 1996 the Company's
balance sheet included $4.0 million of unearned revenues to reflect future
support commitments and other unspecified enhancements to First Aid and Oil
Change. To the extent that revenues from these products continue to grow on a
quarterly basis, the total amount of deferred revenue will continue to increase
and be reported on the balance sheet as unearned revenue.

In accordance with Statement of Financial Accounting Standards No. 86, the
Company is required to capitalize eligible computer software development costs
upon the achievement of technological feasibility, subject to net realizable
value considerations. To date, the Company has charged all such costs to product
development expenses because such costs have not been material.

RESULTS OF OPERATIONS

The following table sets forth, as a percentage of net revenues, statement
of operations data for the periods indicated:

YEAR ENDED DECEMBER 31,
---------------------------
1994 1995 1996
------ ------ -----

Net revenues.............................................. 100.0% 100.0% 100.0%
Cost of revenues.......................................... 44.0 43.8 31.1
------ ----- -----
Gross profit............................................ 56.0 56.2 68.9
OPERATING EXPENSES:
Research and development.................................. 225.7 20.1 8.6
Sales and marketing....................................... 182.2 84.1 62.6
General and administrative................................ 102.5 20.6 7.6
------ ----- -----
Total operating expenses................................ 510.4 124.8 78.8
------ ----- -----
Interest, net............................................. (7.9) (1.2) 0.9
------ ----- -----
Loss before income taxes.................................. (462.3) (69.8) (9.0)
------ ----- -----
Income tax expense........................................ 0.4 -- --
Net loss.................................................. (462.7)% (69.8)% (9.0)%
------ ----- -----

Net Revenues. Net revenues were $241,000, $4.8 million and $38.5 million
in 1994, 1995 and 1996, respectively, representing a $33.7 million increase for
1996 over 1995. The Company's net revenues consist of

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18

license fees for its software products, less provision for returns. The majority
of the Company's net revenues have been derived from domestic sales in the
United States, with international sales representing approximately 10% in 1996
and less than 5% of net revenues in 1995 and 1994. The Company sells its
products primarily to distributors for resale to retailers as well as directly
to consumers through direct mail and through software catalogs. The growth in
net revenues in 1995 was largely attributable to the introduction of First Aid
95, the expansion of the Company's retail distribution channels and direct mail
marketing activities and increased unit volume as a result of the market's
growing awareness and acceptance of First Aid 95. The growth in net revenues in
1996 was largely attributable to increased market acceptance of First Aid 95,
the introduction of First Aid 95 Deluxe in March 1996 and the introduction of
First Aid 97 in November 1996. In addition, introduction of Oil Change and
localized German, French and United Kingdom versions of First Aid during the
second half of 1996 contributed to revenue growth. The Company does not believe
that the historical growth rates of its net revenues will be sustainable or are
indicative of future results. See "-- Dependence on the Internet,"
"-- Dependence on Distribution Channels," "-- Risk of Product Returns" and
"-- Risks Associated with Global Operations."

Cost of Revenues. Cost of revenues were $106,000, $2.1 million and $12.0
million in 1994, 1995 and 1996, respectively, representing a $9.9 million
increase in 1996. Cost of revenues consists primarily of the cost of product
media, product duplication, documentation, order fulfillment and royalty
expenses. Total royalty expenses were less than 5% of net revenues in each of
these periods. The increases in cost of revenues were due primarily to increased
unit shipments of the Company's products. See "-- Liquidity and Capital
Resources."

Gross Margin. Gross margins were 56%, 56% and 69% in 1994, 1995 and 1996,
respectively. Gross margins in the third and fourth quarters of 1995 and in 1996
were negatively affected by the deferral of a portion of First Aid 95, First Aid
95 Deluxe, First Aid 97 and Oil Change net revenues pursuant to the Company's
revenue recognition policy, without a deferral of associated costs. To the
extent that revenues from these products continue to grow gross margins will
continue to be negatively affected. Gross margins in 1996 were positively
affected by a decrease in the percentage of net revenues represented by direct
sales, which generated a lower gross margin than sales through distributors
during the period.

Research and Development. Research and development expenses increased by
77% from $544,000 in 1994 to $964,000 in 1995 and by 242% to $3.3 million in
1996, representing 225.7%, 20.1% and 8.6% of net revenues in these years,
respectively. Research and development expenses consist primarily of personnel
costs and, to a lesser extent, payment to third parties for contract services,
required to conduct the Company's development efforts. The increase in research
and development expenses in each of these periods was primarily attributable to
an increase in personnel as the Company increased its product development
efforts to accelerate the timing of new product introductions and upgrades. The
Company believes that significant investments in product development are
required to remain competitive. As a consequence, the Company anticipates that
it will continue to devote substantial resources to research and development.

Sales and Marketing. Sales and marketing expenses grew from $439,000 in
1994 to $4.0 million in 1995 and by 502.5% to $24.1 million in 1996,
representing 182.2%, 84.1% and 62.6% of net revenues in these years,
respectively. Sales and marketing expenses consist primarily of costs of all
sales and marketing personnel, sales commissions, co-op and other advertising
costs, postage and printing costs associated with direct mail sales, package
design costs, trade show costs and costs of preparing promotional materials. The
increases in the dollar amount of sales and marketing expenses in each of these
periods were due primarily to increases in direct mail marketing, costs
associated with new product introductions, increased co-op advertising and
increases in the number of sales and marketing personnel employed to address new
sales opportunities and to support the introduction of new products. The Company
expects that sales and marketing expenditures will increase in absolute dollars
in the future as it invests in expanding its third-party distribution channels,
introduces new products and expands its operations outside the United States.

General and Administrative. General and administrative expenses increased
304% from $247,000 in 1994 to $1.0 million in 1995 and 198% to $2.9 million in
1996, representing 102.5%, 20.6% and 7.6% of net revenues in these years,
respectively. General and administrative expenses consist primarily of personnel
costs for finance, administration, operations and general management, as well as
legal, accounting and facilities

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19

expenses. The increase in the dollar amount of general and administrative
expenses during these periods was due principally to growth in the
infrastructure of the Company's finance, administrative and operations groups in
order to support the Company's expanded operations. The decrease in general and
administrative expenses as a percentage of net revenues during these periods was
due primarily to the growth in net revenues. The Company expects that its
general and administrative expenses will increase in absolute dollars in the
future as it expands its staffing, information systems and infrastructure and
takes on additional responsibilities related to being a publicly traded company.

Interest, Net. Interest expense, net was $19,000, $58,000, and ($351,000)
in 1994, 1995 and 1996, respectively. Interest, net consists of interest income
and interest expense. The increase in interest income during the year ended
December 31, 1996 resulted from the high cash balances arising after the
Company's initial public offering.

Income Tax Expense. Due to the losses before income taxes for each of the
years ended December 31, 1994, 1995 and 1996, the Company recorded minimum state
franchise tax. The Company had federal net operating loss carryforwards of
approximately $3.1 million in 1996 to offset future taxable income. These loss
carry-forwards expire at various dates beginning in the year 2006 and are
subject to certain limitations as prescribed by Section 382 of the Internal
Revenue Code of 1986, as amended.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, the Company has financed its operations primarily through
private sales of Preferred Stock totaling $10.5 million and a grant of $318,000
administered by the ICICI. Furthermore, in October 1996, the Company completed
an initial public offering of 2,875,000 shares of Common Stock (including the
underwriters' over-allotment of 375,000 shares) at $16.00 per share. Net
proceeds to the Company were approximately $41.5 million. In 1994, 1995 and
1996, the Company used $795,000, $2.5 million and $8.3 million of cash,
respectively, in operating activities. In 1994, 1995 and 1996, the Company used
net cash in operating activities primarily to fund net losses and increases in
accounts receivable associated with increased net revenues, partially offset by
increases in accounts payable, accrued expenses and unearned revenues.

In 1994, 1995 and 1996, the Company's investing activities consisted of
purchases of furniture, fixtures and equipment, primarily PCs and accessories in
the amount of $13,000, $67,000 and $1.0 million, respectively. The Company
expects that its capital expenditures will increase as the Company's employee
base continues to grow. At December 31, 1996, the Company had no material
commitments for capital expenditures.

To date, the Company has not invested in derivative securities or any other
financial instruments that involve a high level of complexity or risk.
Management expects that in the future cash in excess of current requirements
will be invested in short-term, interest-bearing, investment grade securities.

At December 31, 1996, the Company had $39.3 million in cash and cash
equivalents and $42.7 million of working capital. The Company also had available
a $3.0 million revolving line of credit secured by the assets of the Company
which expires in April 1997. Borrowings under the credit facility are limited to
the lesser of $3.0 million or a percentage of eligible accounts receivable, as
defined in the credit agreement. See Note 6 of Notes to Financial Statements.

FACTORS THAT MAY AFFECT FUTURE RESULTS

Limited Operating History and History of Operating Losses. The Company has
only a limited operating history upon which to base an evaluation of its
business and prospects. The Company commenced operations in November 1991 and
introduced its first automatic service and support product, Win Win, in 1993.
The Company introduced the first Windows 95 compatible version of its First Aid
product line in September 1995. During 1996, both the Company's net revenues and
operating expenses, particularly sales and marketing expenditures, increased
rapidly compared to prior periods. From inception to December 31, 1996, the
Company generated net revenues of $43.6 million, of which $38.5 million, or 88%,
was generated in the year ended December 31, 1996. The Company has incurred net
losses in each of the last five fiscal years and for the year ended December 31,
1996, resulting in an accumulated deficit of $9.0 million at December 31, 1996.

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In addition, since 1992, the Company's operating expenses have increased
significantly as a result of efforts to expand its sales and marketing
operations, including international sales, to fund greater levels of product
development and to increase its administrative infrastructure. Management
believes that it is not more likely than not that the Company will generate
future taxable income sufficient to realize the benefits of existing deferred
assets as of December 31, 1996. See Note 7 of Notes to Financial Statements for
further discussion of income taxes. There can be no assurance that the Company's
net revenues will continue to remain at or increase from the level experienced
in the year ended December 31, 1996 or that net revenues will not decline. The
Company anticipates that in the future it will make significant investments in
its operations, particularly to support sales activities, and that as a result,
operating expenses will increase significantly. The Company intends to make such
investments on an ongoing basis, primarily from cash generated from operations
and, to the extent necessary, funds available from the Company's line of credit,
as the Company develops and introduces new products and expands into new markets
such as international, corporate and OEM markets. If net revenues do not
correspondingly increase, the Company is likely to continue to incur net losses
and its financial condition will be materially adversely affected. The Company
achieved profitability for the first time in the fourth quarter of 1996 and
there can be no assurance that the Company will be able to sustain profitability
on a quarterly basis or annual basis. Furthermore, operating results for future
periods are subject to numerous uncertainties. The Company's prospects must be
considered in light of the risks encountered by companies with limited operating
histories, particularly companies in new and rapidly evolving markets. In
addition, the Company's future operating results will depend upon, among other
factors, the demand for the Company's software products, the level of product
and price competition, the Company's success in expanding its direct and
indirect distribution channels, the Company's success in attracting and
retaining motivated and qualified personnel, the ability of the Company to
expand its international sales, develop and market new products and product
upgrades and manage product transitions, the ability of the Company to control
costs, the growth of activity on the Internet and the World Wide Web (the
"Web"), and general economic conditions. Many of these factors are beyond the
Company's control. If the Company is not successful in addressing such risks,
the Company will be materially adversely affected. See "--Potential Fluctuations
in Quarterly Results; Seasonality," "-- Product Concentration" and
"-- Developing Market."

Potential Fluctuations in Quarterly Results; Seasonality. The Company's
quarterly operating results have fluctuated in the past and are expected to
fluctuate significantly in the future. These fluctuations may arise as a result
of a number of factors, including the number and timing of new product
introductions, upgrades and product enhancements by the Company or its
competitors, purchasing patterns of distributors and customers, marketing and
promotional programs, pricing and other competitive pressures, order deferrals
and product returns in anticipation of new products or upgrades to existing
products, the mix of distribution channels through which the Company's products
are sold, the Company's decisions regarding hiring and other expenses, market
acceptance of the Company's products, market acceptance of commerce over the
Internet, technological limitations of the Internet, the developing nature of
the market for the Company's products, general economic conditions and other
factors. The Company generally ships products as orders are received and,
accordingly, the Company has historically operated with relatively little
backlog. As a result, quarterly revenues will depend predominantly on the volume
and timing of orders received during a particular quarter, both of which are
difficult to forecast. With the introduction of First Aid 95, the Company
significantly increased its level of operating expenses. The Company anticipates
that its operating expenses will continue to increase substantially in the
future as a result of efforts to expand its sales and marketing operations,
including expanding its international sales, to fund greater levels of product
development, and to increase its administrative infrastructure. To the extent
that such expenses precede or are not subsequently followed by increased net
revenues, the Company's business, results of operations and financial condition
will be materially adversely affected. A relatively high percentage of the
Company's expenses is fixed in the short term and the Company is generally
unable to adjust spending in a timely manner to compensate for shortfalls in net
revenues. In addition, the consumer software industry in which the Company
operates has seasonal elements. In recent years, the consumer software industry
has experienced relatively higher demand for software products in the fourth
quarter due to year-end holiday buying and relatively lower demand in the summer
months. If net revenues fall below the Company's expectations, expenditure
levels as a percentage of total net revenues could be disproportionately high,
and operating results would be immediately and adversely affected.

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The Company believes that period-to-period comparisons of its operating results
are not meaningful and should not be relied upon as any indication of future
performance. Due to the foregoing factors, among others, it is likely that the
Company's future quarterly operating results from time to time will not meet the
expectations of securities analysts or investors, which may have an adverse
effect on the price of the Company's Common Stock.

Product Concentration. During 1995 and 1996, over 90% of the Company's net
revenues were attributable to sales of its First Aid products. The Company
anticipates that sales of its First Aid products will account for a substantial
majority of its net revenues in 1997. There can be no assurance that net
revenues from the First Aid products will continue to grow at historical rates
or be sustainable at current levels. The Company's future financial performance
will depend in large part on the successful development, introduction and
customer acceptance of new product offerings and enhanced versions of the First
Aid products. There can be no assurance that Oil Change will generate
significant net revenues at any time in the future. Any decline in the demand
for First Aid products, failure to achieve market acceptance of upgrades to such
products or failure of net revenues derived from such products to meet the
Company's expectations, whether as a result of competition, technological change
or other factors, would have a material adverse effect on the Company's
business, results of operations and financial condition. See
"Business -- Products," and "-- Technology."

Management of Growth; Dependence on Key Personnel. The Company's business
has grown rapidly during the past year and such growth has placed and, if
sustained, will continue to place, significant demands on the Company's
management and resources. Recently, the Company has significantly increased the
scale of its operations to support increased sales volumes and to address
critical infrastructure and other requirements. This increase included
substantial investments in sales and marketing to support sales activities and
the hiring of a number of new employees, which have resulted in higher operating
expenses. Between December 1, 1995 and December 31, 1996, the number of Company
employees increased from approximately 20 to approximately 130 and the Company
currently expects to hire many additional employees during 1997. The Company's
ability to manage any future growth, should it occur, will continue to depend
upon the successful expansion of its sales, marketing, research and development,
customer support and administrative infrastructure and the ongoing
implementation and improvement of a variety of internal management systems,
procedures and controls. There can be no assurance that the Company will be able
to attract, manage and retain additional personnel to support any future growth
or will not experience significant problems with respect to any infrastructure
expansion or the attempted implementation of systems, procedures and controls.
Any failure in one or more of these areas would have a material adverse effect
on the Company's business, results of operations and financial condition.

The Company's future success also depends on its continuing ability to
attract and retain highly qualified technical personnel. Competition for such
personnel is intense and there can be no assurance that the Company will be able
to retain its key technical employees or that it will be able to attract and
retain additional highly qualified technical personnel in the future. Any
inability to attract and retain the necessary technical personnel could have a
material adverse effect on the Company's business, results of operations and
financial condition.

The Company is dependent upon certain of its executive officers and has
entered into employment agreements with certain of its executive officers in
order to help assure their retention by the Company. However, there can be no
assurance that any such employment agreements will provide sufficient incentives
for such executive officers to remain with the Company. The Company does not
maintain any key person insurance policies on the lives of any of its executive
officers. The loss of or inability to retain these key executive officers for
any reason could have a material adverse effect upon the Company's business,
results of operations and financial condition.

Competition. The PC software industry is intensely competitive and
characterized by short product life cycles and frequent new product
introductions. The Company competes with software companies of varying sizes and
resources, including McAffee Associates, Inc., Quarterdeck Corporation, Symantec
Corp. and others. The Company believes that a number of software companies will
be introducing automatic service and support software products in the near
future that will compete with the Company's products. The Company

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expects that potential future competitors may include other software vendors,
including Internet software vendors. Many of the Company's existing and
potential competitors have substantially greater financial, technical and
marketing resources than the Company. Moreover, there are no proprietary
barriers to entry that could keep existing and potential competitors from
developing similar products or selling competing products in the Company's
markets. To the extent that the Company's competitors bundle their software
products with leading hardware, application software or operating system
vendors, or if one or more of the operating system vendors, such as Microsoft
Corporation ("Microsoft"), developed its own technical support software and
incorporated such functionality into its products, the Company's business,
results of operation and financial condition could be materially adversely
affected. There can be no assurance that the Company will be able to compete
successfully with existing or potential competitors. Increased competition may
result in the loss of shelf space or a reduction in demand or sell-through of
the Company's products, any of which could have a material adverse effect on the
Company's business, results of operations and financial condition.

In addition, the Company may face increasing pricing pressures from current
and future competitors and, accordingly, there can be no assurance that
competitive pressures will not require the Company to reduce its prices. Any
material reduction in the price of the Company's products would negatively
affect the Company's business, results of operations and financial condition,
and would require the Company to increase unit sales in order to maintain
historic levels of net revenues. There can be no assurance that competitors will
not develop products that are superior to the Company's products or that achieve
greater market acceptance and thereby negatively affect sales of the Company's
products. See "Business -- Distribution and Marketing" and "-- Competition."

Dependence on Microsoft Windows. The Company's success is dependent on the
continued widespread use of the Windows operating systems for PCs. The Company's
First Aid products automatically detect, diagnose and resolve common software
conflicts and configuration errors arising in the Windows operating environment.
Although Windows operating systems are currently used by many PC users, other
companies, including International Business Machines Corporation and Apple
Computer, Inc., have developed or are developing other operating systems that
compete, or will compete, with Windows. In the event that any of these
alternative operating systems become widely accepted in the PC marketplace,
demand for the Company's products could be adversely affected, thereby
materially adversely affecting the Company's business, results of operations and
financial condition. In addition, Microsoft may introduce a new operating system
to replace Windows or could incorporate some or many of the key features of the
Company's First Aid products in new versions of its operating systems, thereby
eliminating the need for users to purchase the Company's products. The inability
to adapt current products or to develop new products for use with any new
operating systems on a timely basis would have a material adverse effect on the
Company's business, results of operations and financial condition.

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23

In addition, the Company's ability to develop products based on Windows
operating systems and release these products immediately prior to, or at the
time of Microsoft's release of new and upgraded Windows products is
substantially dependent on its ability to gain pre-release access to, and to
develop expertise in, current and future versions of Windows. There can be no
assurance that the Company will be able to provide products that are compatible
with future Windows releases on a timely basis, with or without the cooperation
of Microsoft.

Developing Market. The Company's products address the new and rapidly
evolving market for automatic service and support software. The market for
automatic service and support software products has only recently begun to
develop and is characterized by an increasing number of existing and potential
market entrants who are in the process of introducing or developing automatic
service and support software. As is typical in the case of a new and rapidly
evolving market, the demand and market acceptance for recently introduced
products are subject to a high level of uncertainty and risk. It is difficult to
predict the future growth rate and size of this market. There can be no
assurance that the market for the Company's products will develop, that demand
for the Company's products or for automatic service and support software
products in general will increase or that the rate of growth of this demand will
be sustainable or will not decrease. The Company's ability to develop and
successfully market additional products depends substantially on the acceptance
of automatic service and support software by individual and corporate users as
an effective means of addressing their technical support requirements. If the
market fails to develop, develops more slowly than expected or becomes saturated
with competitors, or if the Company's products do not achieve or sustain market
acceptance, the Company's business, results of operations and financial
condition will be materially adversely affected. "Business -- Industry
Background" and "Business -- Products."

New Product Development and Technological Change. Substantially all of the
Company's net revenues have been derived, and substantially all of the Company's
future net revenues are expected to be derived, from the sale of its automatic
service and support software products. The market for automatic service and
support software products is characterized by rapid technological advances,
evolving industry standards in computer hardware and software technology and
frequent new product introductions and enhancements. The Company's products must
be continually updated to address the new and evolving technical support
requirements of third-party hardware and software. Failure to anticipate
technical difficulties that arise from use of these third-party products and
incorporate solutions to such difficulties into the Company's products would
have a material adverse effect on continued market acceptance of the Company's
products. The Company's ability to design, develop, test and support on a timely
basis new software products, updates and enhancements that respond to
technological developments and emerging industry standards is critical to the
Company's future success. There can be no assurance that the Company will be
successful in such efforts or that the Company will not experience difficulties
that could delay or prevent the successful development, introduction and
marketing of new products and enhancements, or that its new products, upgrades
and enhancements will adequately meet the requirements of the marketplace and
achieve market acceptance. The introduction of new products, upgrades or
enhanced versions of existing products is subject to the risk of development
delays due to resource constraints, technological change and other reasons. If
the Company is unable to develop on a timely basis new software products,
upgrades or enhancements to existing products or if such new products, upgrades
or enhancements do not achieve market acceptance, the Company's business,
results of operations and financial condition would be materially adversely
affected. See "Business -- Products," "-- Technology" and "-- Product
Development."

The Company currently employs software engineers in India on a
work-for-hire basis. These engineers are primarily responsible for updating the
Company's knowledge bases for current applications and upgrades. Certain of
these engineers are responsible for adapting the Company's First Aid products to
Windows NT. Any loss of the services of these engineers due to political or
economic instability or for any other reason could adversely affect the
Company's product development efforts and thereby could materially adversely
affect the Company's business, results of operations and financial condition.
See "Business -- Product Development."

Dependence on Distribution Channels. The Company currently sells its First
Aid products primarily through distributors for resale to the retail channel and
through direct mail. Sales to such distributors and sales through direct mail
accounted for approximately 70% and 30%, respectively, of the Company's net
revenues in

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the year ended December 31 1996. Sales from direct mail have historically
operated at lower profitability levels than sales from distributors.
Accordingly, quarterly shifts in the mix of sales through distributors and
through direct mail could cause fluctuations in the Company's profitability.
There can be no assurance that the mix or relative profitability of such sales
will remain at current levels in the future. The Company is evaluating the use
of alternative distribution channels for its products and began distributing Oil
Change through the Internet in October 1996.

Sales to a limited number of distributors have constituted and are expected
to continue to constitute a substantial portion of the Company's net revenues.
Sales to the Company's top three distributors, Navarre Corporation ("Navarre"),
Ingram Micro, Inc. ("Ingram Micro") and Micro Central, Inc. ("Micro Central"),
accounted for approximately 25%, 25% and 9%, respectively, of the Company's net
revenues in the year ended December 31, 1996. The loss of, or reduction in,
orders from any of these distributors could have a material adverse effect on
the Company's business, results of operations and financial condition.
Historically, margins for distributors in the PC software industry have been
low, competition has been intense and distributors have relied on timely
payments from their customers. In September 1996, NeoStar Retail Group, Inc.
("NeoStar"), a major PC software retailer and a reseller of the Company's
products, filed for Chapter 11 bankruptcy protection. In the event that NeoStar
is unable to come to a satisfactory resolution with its creditors, it may cause
financial difficulties for one or more PC software distributors, including those
of the Company. Financial difficulties of any distributors could render the
Company's associated accounts receivable uncollectible, which could have a
material adverse effect on the Company's business, results of operations and
financial condition. In addition, any special distribution arrangements or
product pricing arrangements that the Company may implement for strategic
purposes in one or more of its distribution channels could materially adversely
affect its margins.

The distribution channels through which consumer software products are sold
have been characterized by rapid change, including consolidations and financial
difficulties of certain distributors and retailers and the emergence of new
retailers such as general mass merchandisers. In addition, due to an increase in
the number of software applications, there are an increasing number of companies
competing for access to these channels. Retailers of the Company's products
typically have a limited amount of shelf space and promotional resources, and
there is intense competition for high quality and adequate levels of shelf space
and promotional support from the retailers. The Company believes this
competition for shelf space will increase in the near term as competitors
introduce new automatic service and support software. There can be no assurance
that retailers will continue to purchase the Company's products or provide the
Company's products with adequate levels of shelf space and promotional support,
the lack of which would have a material adverse effect on the Company's
business, results of operations and financial condition. See
"Business -- Distribution and Marketing."

Risk of Product Returns. The Company's business includes a substantial
risk of product returns from distributors, retailers and end users, either
through the exercise of contractual return rights or as a result of the
Company's policy of assisting customers in balancing and updating inventories.
Individual end users may return products within 60 days of the date of purchase
for a full refund. Most retailers, distributors and end users also have the
ability to return products for a full refund. In addition, competitors'
promotional or other activities could cause returns to increase sharply at any
time. Further, the rate of product returns could increase if general mass
merchandisers become a larger percentage of the Company's business or other
changes in the Company's distribution channel occur. Large shipments in
anticipation of unrealized demand can lead to overstocking by the Company's
distributors or retailers and result in substantial product returns. In
addition, the inventory transition resulting from the introduction of product
upgrades, including First Aid 97 could result in an increased level of returns
for prior versions. Furthermore, the risk of product returns will increase if
demand for the Company's products declines.

Although the Company establishes reserves based on estimated future returns
of products, taking into account promotional activities, the timing of new
product introductions, distributor and retailer inventories of the Company's
products and other factors, there can be no assurance that actual levels of
returns will not significantly exceed amounts anticipated by the Company. In
addition, the Company provides price protection to its distributors in the event
the Company reduces its prices. While to date, the number of products returned
to the Company has been immaterial, there can be no assurance that the number of
returns will not

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significantly increase in the future. Any material increase in the level of
returns could materially adversely affect the Company's business, results of
operations and financial condition. See "Business -- Distribution and
Marketing."

Dependence on the Internet. The commercial viability of Oil Change and the
Company's ability to execute its strategy to leverage Oil Change as an
Internet-based platform for other products and services are dependent upon the
continued development and acceptance of the Internet as a delivery medium for
third-party software programs. In addition, the Company's future success may be
dependent upon continued growth in the use of the Internet in order to support
the distribution of products and future upgrades. The use of the Internet as a
distribution channel is new and unproven and represents a significant departure
from traditional distribution methods employed by software companies. Critical
issues concerning the commercial use of the Internet (including security,
reliability, cost, ease of use and access and speed) remain unresolved and may
affect the use of the Internet as a medium to distribute software.

There can be no assurance that the use of the Internet as a distribution
channel will be effective for either current or future products. The failure of
the Internet to be an effective distribution channel could have a material
adverse effect on the Company's business and prospects. The Company's future
success depends, in part, upon the future growth of the Internet for commercial
transactions. There can be no assurance that communication or commerce over the
Internet will become widespread and it is not known whether this market will
develop to the extent necessary for demand for the Company's products to emerge
and become sustainable. The Internet may not prove to be a viable commercial
marketplace for a number of reasons, including inadequate communications
bandwidth and a lack of secure payment mechanisms. To the extent that the
Internet continues to experience significant growth in the number of users and
level of use, there can be no assurance that the Internet infrastructure will
continue to be able to support the demands placed upon it. Moreover, the
Internet could lose its viability due to delays in the development or adoption
of new standards and protocols required to handle increased levels of Internet
activity or due to increased governmental regulation. Changes in or insufficient
availability of telecommunications services to support the Internet also could
result in slower response times which might adversely affect customers' ability
or willingness to access the Company's products or upgrades over the Internet.
In addition, the security and privacy concerns of existing and potential
customers, as well as concerns related to computer viruses, may inhibit the
growth of the Internet marketplace generally and the customer base for the
Company's Oil Change product in particular. The viability of Oil Change also
depends upon the continuation of the current practice of publishing new updates
and patches to commonly used software applications and device drivers on
vendors' Web sites.

If use of the Internet does not continue to grow, if the Internet
infrastructure does not effectively support customer demand or if hardware and
software vendors do not continue to post updates and patches on the Internet,
the Company's business, results of operations and financial condition could be
materially adversely affected. If users fail to accept Oil Change as a technical
support solution, the Company may have to expend significant resources to
educate users and create demand for Oil Change. See "Business -- Products," "--
Technology" and "-- Distribution and Marketing."

Limited Protection of Proprietary Rights. The Company's success is heavily
dependent upon its proprietary software. The Company relies primarily on a
combination of copyright, trademark and trade secret laws, employee
confidentiality and nondisclosure agreements and third-party nondisclosure
agreements and other methods of protection common in the consumer software
industry to protect its proprietary rights. The Company licenses its products
primarily under "shrink wrap" license agreements that are not signed by
licensees and therefore may be unenforceable under the laws of certain
jurisdictions. In addition, the Company has two United States patent
applications pending and intends to seek international and further United States
patents on its technology. There can be no assurance that patents will issue
from the Company's pending applications or that any claims allowed from the
pending patent applications or those hereafter filed will be of sufficient scope
or strength, or be issued in all countries where the Company's products can be
sold, to provide meaningful protection or any commercial advantage to the
Company or that any patents which may be issued to the Company will not be
challenged and invalidated. In addition, existing copyright laws provide only
limited protection. Despite the Company's efforts to protect its proprietary
rights, unauthorized parties may attempt to copy or otherwise obtain and use the
Company's products or technology that the Company

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considers proprietary, and third parties may develop similar technology
independently. Policing unauthorized use of the Company's products is difficult,
and while the Company is unable to determine the extent to which piracy of its
software products exists, software piracy can be expected to be a persistent
problem. There can be no assurance that the Company's means of protecting its
proprietary rights will be adequate. In addition, there can be no assurance that
the Company's competitors will not independently develop technologies and
products that are substantially equivalent or superior to those of the Company
without violating the Company's proprietary rights.

While the Company's international sales were insignificant prior to 1996,
international sales increased in 1996 and the Company continues to devote
substantial resources in an effort to expand the international distribution of
its products. The laws of some foreign countries either do not protect the
Company's proprietary rights or offer only limited protection for those rights.
The Company has not registered its copyrights in any foreign countries. While in
most foreign countries registration is not required in order to receive
copyright protection, the ability to bring an enforcement action and obtain
certain remedies depends on compliance with that country's copyright laws.
Consequently, the Company's failure to register its copyrights abroad may make
enforcement of these rights more difficult or reduce the available remedies in
any enforcement action. In addition, the Company has not to date pursued foreign
registration of its trademarks due to the significant costs involved and, as a
result, the Company may not be able to prevent a third party from using its
trademarks in many foreign jurisdictions. See "Business -- Proprietary Rights."

System Interruption and Security Risks. The Company's ability to provide
product functionality through the Internet is dependent on its ability to
protect its system from interruption, whether by damage from fire, earthquake,
power loss, telecommunications failure, unauthorized entry or other events
beyond the Company's control. Most of the Company's computer equipment,
including its processing equipment, is currently located at a single site. While
the Company believes that its existing and planned precautions of redundant
systems, regular data backups and other procedures are adequate to prevent any
significant system outage or data loss, there can be no assurance that
unanticipated problems will not cause such a failure or loss. Despite the
implementation of security measures, the Company's infrastructure may also be
vulnerable to computer viruses, hackers or similar disruptive problems caused by
its customers, employees or other Internet users. Any damage or failure that
causes interruptions in the Company's operations could have a material adverse
effect on the Company's business, results of operations and financial condition.
Computer break-ins and other disruptions could jeopardize the security of
information stored in and transmitted through the computer systems of the
individuals and businesses utilizing the Company's products, which could result
in significant liability to the Company and also may deter customers and
potential customers from using the Company's services. Persistent problems
continue to affect public and private data networks. For example, in a number of
networks, hackers have bypassed network security and misappropriated
confidential information.

Product Liability. Although the Company attempts to incorporate support
for most software conflicts and configuration errors in the Windows environment,
there can be no assurance that the Company's products will resolve any specific
problems encountered by a PC user. Furthermore, as a result of their complexity,
the Company's software products may contain undetected errors or failures, when
they are first introduced and as new versions are released. There can be no
assurance that, despite testing by the Company and testing and use by current
and potential customers, errors will not be found in new products after
commencement of commercial shipments or thereafter. The occurrence of any such
errors could result in the loss of, or a delay in, market acceptance of the
Company's products, which would have a material adverse effect on the Company's
business, results of operations and financial condition. The Company's license
agreements with its customers

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typically contain provisions designed to limit the Company's exposure to
potential claims for damages. It is possible, however, that the limitation of
liability provisions contained in the Company's license agreement may not be
effective under the laws of certain jurisdictions. Although the Company has not
experienced any such claims to date, the sale and support of the Company's
products may entail the risk of such claims. While the Company has obtained
insurance against product liability risks, there can be no assurance that such
insurance will provide adequate coverage. The Company does not currently carry
errors and omissions coverage which may protect against allegations that the
Company's products have failed to perform adequately. Any such claims for
damages brought against the Company could have a material adverse effect on the
Company's business, results of operations and financial condition.

Risks Associated With Global Operations. Prior to 1996, the Company has
derived less than 5% of its total net revenues in each year from sales to
customers outside of the United States. During 1996, approximately 10% of total
net revenues were from sales to customers outside of the United States. The
Company is expanding its sales operations outside of the United States which
will require significant management attention and financial resources. The
Company's ability to expand its product sales internationally is dependent on
the successful development of localized versions of the Company's products,
acceptance of such products and the acceptance of the Internet internationally.
The Company expects to commit significant resources to customizing its products
for selected international markets and to developing international sales and
support channels. The Company's First Aid products rely on a knowledge base that
contains detailed information based on specific English language versions of
third-party hardware and software applications. This knowledge base must be
recreated for each foreign language version that is developed to support foreign
releases of such products, many of which have been modified from their United
States releases. There can be no assurance that this task can be completed in a
timely or cost-effective manner or that enough products can be supported to
ensure customer acceptance. The Company believes that successful execution of a
global strategy is critical to maintaining its current market position and
competitive advantage. Failure to successfully expand its products to
international markets could cause the Company to lose business to global
competitors or prevent the development of strategic relationships with global
hardware and software vendors. See "Business -- Distribution and Marketing."

International operations are subject to a number of risks, including costs
of customizing products for foreign countries, dependence on independent
resellers, multiple and conflicting regulations regarding communications, use of
data and control of Internet access, longer payment cycles, unexpected changes
in regulatory requirements, import and export restrictions and tariffs,
difficulties in staffing and managing foreign operations, greater difficulty or
delay in accounts receivable collection, potentially adverse tax consequences,
the burdens of complying with a variety of foreign laws, the impact of possible
recessionary environments in economies outside the United States and political
and economic instability. Furthermore, the Company's export sales are currently
denominated predominantly in United States dollars. An increase in the value of
the United States dollar relative to foreign currencies could make the Company's
products more expensive and, therefore, potentially less competitive in foreign
markets. If the Company increases its international sales, its net revenues may
also be affected to a greater extent by seasonal fluctuations resulting from
lower sales that typically occur during the summer months in Europe and other
parts of the world. See "Business -- Distribution and Marketing."

Reliance on Outside Resources. The Company relies upon independent
contractors to perform a number of tasks, including product duplication and
packaging, reproduction of manuals and brochures and order fulfillment. The
Company depends on these outside parties to perform such functions to the
Company's specifications and quality standards. The Company currently does not
have long-term agreements with any of these outside parties. The Company also
employs software engineers in India on a work-for-hire basis to assist in its
product development efforts. Although the Company believes that alternative
resources exist or can be obtained, a disruption of the Company's relationship
with any of these outside parties or the failure of these outside parties to
continue to provide quality supplies and services on a timely basis could
materially adversely affect the Company's business, results of operations and
financial condition. See "Business -- Product Development" and "-- Operations."

26
28

Volatility of Stock Price. The trading price of the Company's Common Stock
has been subject to wide fluctuations in response to a variety of factors since
the Company's initial public offering in October 1996, including quarterly
variations in operating results, announcements of technological innovations or
new products by the Company or its competitors, developments in patents or other
intellectual property rights, general conditions in the software industry,
revised earning estimates, comments or recommendations issued by analysts who
follow the Company, its competitors or the software industry and general
economic and market conditions. Additionally, the stock market in general, and
the market for technology stocks in particular, have experienced extreme price
volatility in recent years. Volatility in price and volume has had a substantial
effect on the market prices of many technology companies for reasons unrelated
or disproportionate to the operating performance of such companies. These broad
market fluctuations could have a significant impact on the market price of the
Common Stock. See Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters-Market Information for Common Equity.

27
29

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEPENDENT AUDITORS' REPORT

The Board of Directors

CyberMedia, Inc.:

We have audited the accompanying balance sheets of CyberMedia, Inc. as of
December 31, 1996 and 1995 and the related statements of operations,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CyberMedia, Inc. as of
December 31, 1996 and 1995 and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1996 in
conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP

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

Long Beach, California
February 21, 1997

28
30

CYBERMEDIA, INC

BALANCE SHEETS

DECEMBER 31,
-------------------------
1995 1996
----------- -----------

ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................... $ 2,050,000 $39,322,000
Trade accounts receivable, net...................................... 1,182,000 12,318,000
Inventory........................................................... 412,000 2,365,000
Prepaid expenses.................................................... 111,000 1,270,000
Other current assets................................................ 10,000 185,000
----------- -----------
Total current assets........................................... 3,765,000 55,460,000
Furniture, fixtures and equipment, net.............................. 90,000 990,000
----------- -----------
$ 3,855,000 $56,450,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY

DECEMBER 31,
1995 1996
----------- -----------

CURRENT LIABILITIES:
Current installments of capital lease obligations................... $ 8,000 $ 45,000
Accounts payable.................................................... 1,620,000 7,004,000
Accrued expenses.................................................... 419,000 1,247,000
Unearned revenues................................................... 677,000 4,024,000
Grant payable....................................................... 607,000 413,000
----------- -----------
Total current liabilities...................................... 3,331,000 12,733,000
Note payable, non-current........................................... 500,000 --
Capital lease obligation, less current installments................. 17,000 49,000
----------- -----------
Total liabilities.............................................. 3,848,000 12,782,000
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Undesignated Preferred Stock, $0.01 par value. Authorized 2,000,000
shares; no shares issued and outstanding in 1995 and 1996......... -- --
Series A Preferred Stock, $0.01 par value. Authorized 4,726,129
shares; issued and outstanding 2,959,658 shares in 1995........... 30,000 --
Series B Preferred Stock, $0.01 par value. Authorized 6,442,858
shares; issued and outstanding 6,371,429 shares in 1995........... 64,000 --
Common Stock, $0.01 par value. Authorized 50,000,000 shares; issued
and outstanding 1,222,500 shares in 1995 and 11,825,354 shares in
1996.............................................................. 13,000 119,000
Additional paid-in capital.......................................... 5,451,000 52,583,000
Accumulated deficit................................................. (5,551,000) (9,034,000)
----------- -----------
Total stockholders' equity..................................... 7,000 43,668,000
----------- -----------
$ 3,855,000 $56,450,000
=========== ===========

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

29
31

CYBERMEDIA, INC.

STATEMENTS OF OPERATIONS

YEAR ENDED DECEMBER 31,
-------------------------------------------
1994 1995 1996
----------- ----------- -----------

Net revenues........................................ $ 241,000 $ 4,797,000 $38,524,000
Cost of revenues.................................... 106,000 2,103,000 11,991,000
----------- ----------- -----------
Gross profit................................... 135,000 2,694,000 26,533,000
----------- ----------- -----------

Research and development............................ 544,000 964,000 3,300,000
Sales and marketing................................. 439,000 4,036,000 24,125,000
General and administrative.......................... 247,000 987,000 2,941,000
----------- ----------- -----------
1,230,000 5,987,000 30,366,000

Loss from operations........................... (1,095,000) (3,293,000) (3,833,000)
Interest income..................................... -- 22,000 420,000
Interest expense.................................... (19,000) (80,000) (69,000)
----------- ----------- -----------
Loss before income taxes....................... $(1,114,000) $(3,351,000) $(3,482,000)
Income tax expense.................................. 1,000 1,000 1,000
----------- ----------- -----------
Net loss....................................... $(1,115,000) $(3,352,000) $(3,483,000)
=========== =========== ===========

Net loss per share............................. $ (.14) $ (.43) $ (.42)
=========== =========== ===========
Weighted average common stock and common stock
equivalents outstanding........................... 7,839,000 7,855,000 8,231,000
=========== =========== ===========

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

30
32

CYBERMEDIA, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY

SERIES A PREFERRED SERIES B PREFERRED SERIES C PREFERRED
STOCK STOCK STOCK COMMON STOCK
-------------------- -------------------- -------------------- --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ------- ---------- ------- ---------- ------- ---------- -------

Balance at December 31, 1993......... 1,192,232 12,000 -- -- -- -- 1,172,500 12,000
Conversion of notes payable into
Series A Preferred Stock........... 781,428 8,000 -- -- -- -- -- --
Issuance of Series A Preferred Stock
in exchange for cash............... 843,141 8,000 -- -- -- -- -- --
Net loss............................. -- -- -- -- -- -- -- --
---------- ------- ---------- ------- ---------- ------- ---------- -------
Balance at December 31, 1994......... 2,816,801 28,000 -- -- -- -- 1,172,500 12,000
Issuance of Series A Preferred Stock
in exchange for cash............... 142,857 2,000 -- -- -- -- -- --
Issuance of Common Stock upon
exercise of stock options.......... -- -- -- -- -- -- 50,000 1,000
Conversion of notes payable into
Series B Preferred Stock........... -- -- 635,714 6,000 -- -- -- --
Issuance of Series B Preferred Stock
in exchange for cash............... -- -- 5,735,715 58,000 -- -- -- --
Net loss............................. -- -- -- -- -- -- -- --
---------- ------- ---------- ------- ---------- ------- ---------- -------
Balance at December 31, 1995......... 2,959,658 30,000 6,371,429 64,000 -- -- 1,222,500 13,000
Issuance of Series C Preferred Stock
in exchange for cash............... -- -- -- -- 1,666,667 17,000 -- --
Issuance of Common Stock upon
exercise of stock options and
warrants........................... -- -- -- -- -- -- 2,228,977 22,000
Issuance of Common Stock upon
Conversion of Series A, B and C
Preferred Stock.................... (2,959,658) (30,000) (6,371,429) (64,000) (1,666,667) (17,000) 5,498,877 55,000
Issuance of Common Stock upon initial
public offering, net of
underwriting discounts and offering
costs of $4,444,000................ -- -- -- -- -- -- 2,875,000 29,000
Net loss............................. -- -- -- -- -- -- -- --
---------- ------- ---------- ------- ---------- ------- ---------- -------
Balance at December 31, 1996......... -- -- -- -- -- -- 11,825,354 119,000
========== ======= ========== ======= ========== ======= ========== =======

ADDITIONAL STOCKHOLDERS'
PAID-IN ACCUMULATED EQUITY
CAPITAL DEFICIT (DEFICIENCY)
---------- ----------- -------------

Balance at December 31, 1993......... 450,000 (1,084,000) (610,000)
Conversion of notes payable into
Series A Preferred Stock........... 267,000 -- 275,000
Issuance of Series A Preferred Stock
in exchange for cash............... 287,000 -- 295,000
Net loss............................. -- (1,115,000) (1,115,000)
---------- ---------- ----------
Balance at December 31, 1994......... 1,004,000 (2,199,000) (1,155,000)
Issuance of Series A Preferred Stock
in exchange for cash............... 48,000 -- 50,000
Issuance of Common Stock upon
exercise of stock options.......... 2,000 -- 3,000
Conversion of notes payable into
Series B Preferred Stock........... 439,000 -- 445,000
Issuance of Series B Preferred Stock
in exchange for cash............... 3,958,000 -- 4,016,000
Net loss............................. -- (3,352,000) (3,352,000)
---------- ---------- ----------
Balance at December 31, 1995......... 5,451,000 (5,551,000) 7,000
Issuance of Series C Preferred Stock
in exchange for cash............... 4,983,000 -- 5,000,000
Issuance of Common Stock upon
exercise of stock options and
warrants........................... 566,000 -- 588,000
Issuance of Common Stock upon
Conversion of Series A, B and C
Preferred Stock.................... 56,000 -- --
Issuance of Common Stock upon initial
public offering, net of
underwriting discounts and offering
costs of $4,444,000................ 41,527,000 -- 41,556,000
Net loss............................. -- (3,483,000) (3,483,000)
---------- ---------- ----------
Balance at December 31, 1996......... 52,583,000 (9,034,000) 43,668,000
========== ========== ==========

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

31
33

CYBERMEDIA, INC.

STATEMENTS OF CASH FLOWS

YEAR ENDED DECEMBER 31,
--------------------------------------------
1994 1995 1996
----------- ----------- ------------

Cash flow from operating activities:
Net loss................................................... $(1,115,000) $(3,352,000) $ (3,483,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation............................................... 9,000 19,000 237,000
Royalty expense (adjustment)............................... 13,000 276,000 (194,000)
Changes in assets and liabilities:
Trade accounts receivable, net............................. (39,000) (1,143,000) (11,136,000)
Inventory.................................................. (5,000) (407,000) (1,953,000)
Prepaid expenses........................................... (27,000) (84,000) (1,159,000)
Other current assets....................................... -- (10,000) (175,000)
Accounts payable........................................... 258,000 1,362,000 5,384,000
Accrued expenses........................................... 111,000 189,000 828,000
Unearned revenues.......................................... -- 677,000 3,347,000
Other liabilities............................................ -- (25,000) --
----------- ----------- ------------
Net cash used in operating activities............... (795,000) (2,498,000) (8,304,000)
Cash flows used in investing activities -- purchase of
furniture, fixtures and equipment.......................... (13,000) (67,000) (1,043,000)
Cash flows from financing activities:
Proceeds from the issuance of Series A Preferred Stock..... 295,000 50,000 --
Proceeds from the issuance of Series B Preferred Stock..... -- 4,016,000 --
Proceeds from the issuance of Series C Preferred Stock..... -- -- 5,000,000
Proceeds from notes to shareholders........................ 71,000 -- --
Payments of capital lease obligations...................... -- (1,000) (25,000)
Proceeds from the issuance of Common Stock upon exercise of
stock options and warrants............................... -- 3,000 588,000
Proceeds from (repayments of) note payable................. 500,000 445,000 (500,000)
Proceeds from the issuance of Common Stock upon initial
public offering.......................................... -- -- 41,556,000
Proceeds from the receipt of grant......................... 30,000 -- --
----------- ----------- ------------
Net cash provided by financing activities........... 896,000 4,513,000 46,619,000
----------- ----------- ------------
Net increase in cash and cash equivalents........... 88,000 1,948,000 37,272,000
Cash and cash equivalents at beginning of year............... 14,000 102,000 2,050,000
----------- ----------- ------------
Cash and cash equivalents at end of year..................... $ 102,000 $ 2,050,000 $ 39,322,000
----------- ----------- ------------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest................................................. $ -- $ 80,000 $ 69,000
Income taxes............................................. $ 1,000 $ 1,000 $ 440,000
Supplemental disclosure of noncash investing and financing
activities.................................................
Conversion of notes payable to stockholders into Series A
Preferred Stock.......................................... $ 275,000 $ -- $ --
Conversions of notes payable into Series B Preferred
Stock.................................................... $ -- $ 445,000 $ --
Acquisition of equipment through capital lease
agreements............................................... $ -- $ 26,000 $ 94,000

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

32
34

CYBERMEDIA, INC.

NOTES TO FINANCIAL STATEMENTS

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

CyberMedia, Inc. (the "Company"), a Delaware corporation, develops and
markets software products that provide automatic service and support to PC users
in the Windows environment. Products are principally sold to distributors and
directly to consumers. In addition, the Company's products are sold directly to
catalog companies throughout the United States and Canada. The Company also
markets its products internationally through distribution and licensing
agreements, and during 1996, approximately 10% of the Company's net revenues
were from international sales. Prior to 1996, international sales were less than
5% of net revenues.

Cash Equivalents

The Company considers all highly liquid investments having original
maturities of three months or less to be cash equivalents.

Inventory

Inventory, consisting of software product and related packaging materials,
is stated at the lower of cost (first-in, first-out method) or market. Inventory
is shown net of valuation allowances of $430,000 at December 31, 1996.

Unearned Revenues

The Company offers customers update rights for certain products at no
additional cost. As a result, ratable revenue recognition is appropriate for a
portion of the license fees for such products. Accordingly, unearned revenues on
the accompanying balance sheets represent Internet and other product updates and
other unspecified future support commitments which will be recognized ratably
over the estimated update periods.

Revenue Recognition

Revenues are generated from sales of software to distributors, resellers
and end-users and are recognized upon shipment of products, net of provisions
for estimated future returns and price protection, provided that no significant
vendor obligations remain and collection of accounts receivable is deemed to be
probable. On sales of products having remaining vendor obligations, a portion of
related revenue is deferred based upon the relative retail value of future
obligations and recognized ratably over the estimated period for which
obligations exist, generally one year from the date of sale.

The Company provides routine telephone customer support as an accommodation
to purchasers of its products for a limited time. Costs associated with such
post-sale customer support were immaterial.

Revenue Related Allowances

Allowances for sales returns and doubtful accounts are established based
upon historical experience and management's estimates as shipments are made. The
allowance for sales returns and doubtful accounts aggregated $767,000 and
$1,523,000 at December 31, 1995 and 1996, respectively, and is shown as a
reduction of accounts receivable on the accompanying balance sheets. The
allowance for sales returns includes the Company's estimation of costs related
to its price protection policy. Such costs have historically been immaterial.

33
35

CYBERMEDIA, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Research and Development

Costs relating to designing, developing and testing new software products
are expensed as research and development as incurred. Although costs incurred
subsequent to establishing technological feasibility of software products are
permitted capitalization pursuant to Statement of Financial Accounting Standards
("SFAS") No. 86 (Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed), the Company has not capitalized any software
development costs since the impact to the financial statements for all periods
presented has been immaterial.

Depreciation and Amortization

Furniture, fixtures and equipment are stated at cost. Depreciation of
furniture, fixtures and equipment is calculated on the straight-line
depreciation method over the estimated useful lives as follows:

Computer equipment and purchased software... 3 years
Office furniture and equipment..............
4 years
Assets under capital lease..................
Shorter of lease term or the
estimated useful life of the asset

Income Taxes

The Company accounts for income taxes using SFAS No. 109 "Accounting for
Income Taxes." Under the asset and liability method of SFAS No. 109, deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes the
enactment date.

Computation of Net Loss per Share

Net loss per share of Common Stock and Common Stock equivalents has been
computed using the weighted average number of shares of Common Stock and Common
Stock equivalents outstanding using the treasury stock method and is summarized
as follows:

YEAR ENDED DECEMBER 31,
-------------------------------------
1994 1995 1996
--------- --------- ---------

Weighted average shares of Common Stock outstanding....... 2,445,000 2,461,000 4,274,000
Weighted average shares of Common Stock equivalents....... 5,394,000 5,394,000 3,957,000
--------- --------- ---------
Shares used in net loss per share calculation............. 7,839,000 7,855,000 8,231,000
========= ========= =========

Pursuant to the requirements of the Securities and Exchange Commission,
Common Stock, stock options, warrants and Convertible Preferred Stock issued by
the Company during the twelve months immediately preceding the initial public
offering date have been included in the calculation of the weighted average
shares outstanding for all periods presented using the treasury stock method
based on the initial public offering price for stock options and warrants and
using the if converted method for Convertible Preferred Stock. Accordingly,
weighted average Common Stock outstanding includes 1,272,000 shares of Common
Stock issued during 1996 shown as outstanding for all periods presented. In
addition, weighted average Common Stock equivalents outstanding includes
1,375,000 Common Stock equivalents for Common Stock options and warrants issued
during 1995 and 1996 and 4,019,000 shares assumed to be issued upon the

34
36

CYBERMEDIA, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

conversion of the Series B and Series C Preferred Stock into Common Stock, shown
as outstanding for all periods presented, except for the 1996 year where such
equivalents are only outstanding through the initial public offering date.

Financial Instruments

The Financial Accounting Standards Board's SFAS No. 107 (Disclosures about
Fair Value of Financial Instruments) defines fair value of a financial
instrument as the amount at which the instrument could be exchanged in a current
transaction between willing parties. The Company's carrying value of cash
equivalents, accounts receivable, accounts payable, accrued expenses, grant
payable, capital lease obligations and notes payable approximates fair value
because the instrument has a short-term maturity or because the applicable
interest rates are comparable to current borrowing rates.

Long-Lived Assets

The Company adopted the provisions SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," on
January 1, 1996. This Statement requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed the fair value of
the assets. Adoption of this Statement did not have a material impact on the
Company's financial position, results of operations or liquidity.

Accounting for Stock Options

Prior to January 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted SFAS No. 123. Accounting for Stock-Based
Compensation, which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.

Use of Estimates

Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.

35
37

CYBERMEDIA, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(2) FURNITURE, FIXTURES AND EQUIPMENT

Furniture, fixtures and equipment, stated at cost, are summarized as
follows:

DECEMBER 31,
------------------------------------
1994 1995 1996
-------- -------- ----------

Office furniture and equipment............ $ 4,000 $ 3,000 $ 348,000
Computer equipment and purchased
software................................ 37,000 131,000 923,000
-------- -------- ----------
41,000 134,000 1,271,000
Less accumulated depreciation............. (25,000) (44,000) (281,000)
-------- -------- ----------
$ 16,000 $ 90,000 $ 990,000
======== ======== ==========

Assets acquired under capitalized leases, which are principally included in
computer equipment above, at December 31, 1995 and 1996 aggregated $26,000 and
$168,000, respectively. Accumulated depreciation related to these assets
aggregated $1,000 and $57,000 at December 31, 1995 and 1996, respectively.

(3) ACCRUED EXPENSES

Accrued expenses consist of the following:

DECEMBER 31,
------------------------------------
1994 1995 1996
-------- -------- ----------

Accrued compensation and related
expenses................................ $213,000 $268,000 $ 563,000
Accrued IPO related expenses.............. -- -- $ 419,000
Other..................................... 17,000 151,000 265,000
-------- -------- ----------
$230,000 $419,000 $1,247,000
======== ======== ==========

(4) GRANT PAYABLE

In August 1992, the Company received a grant under the Program for the
Advancement of Commercial Technology Provided by the United States Agency for
International Development and administered by the Industrial Credit and
Investment Corporation of India Limited ("ICICI"). As of December 31, 1994, the
Company had received $318,000 which had been allocated to the Company,
concurrent with the development of its products. Under the terms of the
agreement, the Company repays the grant at a rate of 250% of the amount of grant
received, or $795,000, through royalties based on 5% of product sales, as
defined. The agreement provides that in the event expected future revenue
generated from the exploitation of certain technology specified in the agreement
does not meet such expectation, the Company will repay the grant at an amount
less than $795,000. The Company accrued royalty expense related to this grant of
$276,000 during the year ended December 31, 1995. During the year ended December
31, 1996, the Company has reduced the royalty amount accrued to $95,000,
representing the total royalty amount the Company expects to pay in addition to
the original grant amount of $318,000.

(5) NOTE PAYABLE

At December 31, 1995, the Company had a note payable to ICICI, bearing
interest at the U.S. prime rate plus 2.25%, with principal payable in equal
quarterly installments of $50,000 plus interest from January 1997 through April
1999. To secure the loan, certain directors and founders of the Company provided
personal guarantees for the total loan amount. In consideration for the personal
guarantees, the guarantors received warrants to purchase up to an aggregate of
900,000 shares of the Company's Series A Preferred Stock at an

36
38

CYBERMEDIA, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

exercise price of $0.35 per share. As of December 31, 1996, the Company repaid
the total obligation of $500,000 in full.

(6) NOTES PAYABLE TO BANK

The Company has a revolving line of credit of $3,000,000 based on eligible
accounts receivable. The line of credit bears interest at the prime rate (8.25%
per annum at December 31, 1996) plus 1% and expires in April 1997. As of
December 31, 1996, the Company had no outstanding borrowings on the revolving
line of credit. The line of credit is collateralized by all assets of the
Company. The Company is restricted under the revolving line of credit from
declaring or paying a dividend on any of its capital stock without bank consent.

(7) INCOME TAXES

The provision for income taxes, all current, for the years ended December
31, 1994, 1995 and 1996 consists solely of the annual minimum California
franchise tax of approximately $1,000.

The provision for income taxes differs from the expected tax benefit
computed by applying the federal corporate tax rate of 34% to loss before income
taxes principally due to the effect of net operating loss carryforwards.

The tax effects of temporary differences that give rise to significant
portions of deferred tax assets are summarized as follows:

DECEMBER 31,
---------------------------
1995 1996
----------- -----------

Deferred tax assets:
Allowances...................................... $ 307,000 $ 474,000
Accrued expenses................................ 32,000 140,000
Unearned revenues............................... 243,000 1,333,000
Grant payable................................... 127,000 (127,000)
Net operating losses............................ 1,506,000 1,124,000
Other........................................... -- 47,000
----------- -----------
Total gross deferred tax assets.............. 2,215,000 2,991,000
Less valuation allowance..................... (2,215,000) (2,991,000)
----------- -----------
Net deferred tax assets......................... $ -- $ --
=========== ===========

The net change in the valuation allowance for the years ended December 31,
1994, 1995 and 1996 was an increase of $446,000, $1,359,000 and $776,000,
respectively. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers projected future taxable income and tax planning strategies in making
this assessment. Based on the level of historical taxable income and projections
for future taxable income over the periods in which the level of deferred tax
assets are deductible, management believes that it is not more likely than not
that the Company will realize the benefits of these deductible differences at
December 31, 1995 and December 31, 1996. Accordingly, a valuation allowance has
been provided for the total gross deferred tax assets.

37
39

CYBERMEDIA, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The Company had available at December 31, 1996 approximately $3,070,000 of
net operating losses to offset future Federal taxable income that expire
beginning in the year 2006. Use of these net operating losses will be limited
under rules governing changes in ownership of the Company. These rules restrict
the amount of the net operating loss carryforwards which may be used in a
particular year. The maximum amount of net operating loss carryforwards which
are available on an annual basis for use subsequent to the year ended December
31, 1996 is approximately $214,000.

(8) STOCKHOLDERS' EQUITY

Preferred Stock

During 1994, the Company issued 843,141 shares of Series A Preferred Stock
for cash consideration and issued 781,428 shares of Series A Preferred Stock
upon conversion of certain notes payable.

During 1995, the Company issued 5,735,715 shares of Series B Preferred
Stock for cash consideration and issued 635,714 shares of Series B Preferred
Stock upon conversion of certain notes payable. The Company also issued 142,857
shares of Series A Preferred Stock for cash consideration in 1995.

During July 1996, the Company issued 1,666,667 shares of Series C Preferred
Stock at a price of $3.00 per share, convertible into approximately 833,334
shares of Common Stock.

During October 1996, upon the closing of the initial public offering, all
of the shares of Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock were converted to 1,479,829, 3,185,714 and 833,334 shares of
Common Stock, respectively.

No dividends were declared during the years ended December 31, 1994, 1995
and 1996. Furthermore, the Company is restricted under the revolving line of
credit from declaring or paying any dividend on any of its capital stock without
bank consent.

Upon the closing of the initial public offering, the Company was authorized
to issue 2,000,000 shares of Undesignated Preferred Stock.

Common Stock

During the year ended December 31, 1995, an option holder exercised stock
options to purchase 50,000 shares of Common Stock at an exercise price of $0.05
per share.

During the year ended December 31, 1996, certain option and warrant holders
exercised stock options and warrants to purchase 2,228,977 shares of Common
Stock at exercise prices ranging from $0.08 to $1.20 per share.

During October 1996, upon the closing of the initial public offering, all
of the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred
Stock were converted to 1,479,829, 3,185,714 and 833,334 shares of Common Stock,
respectively.

During July 1996, the Board of Directors approved a one-for-two reverse
stock split of the Company's Common Stock. Accordingly, all references to the
number of shares authorized, issued and outstanding and per share information
for all periods presented have been adjusted to give effect to the
aforementioned reverse stock split. The reverse stock split became effective
during August 1996.

During October 1996, the Board of Directors approved the increase in the
authorized number of shares of Common Stock from 10,833,334 to 50,000,000.

During October 1996, the Company completed an initial public offering of
its Common Stock whereby 2,500,000 shares were issued at $16 per share resulting
in net proceeds of approximately $37,200,000, after underwriting discounts and
commissions and before other expenses of the offering of $1,224,000.
Additionally,

38
40

CYBERMEDIA, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

375,000 shares for the underwriter's overallotment were issued at $16 per share
resulting in net proceeds of approximately $5,580,000, after underwriter
discounts and commissions.

Stock Warrants

During the years ended December 31, 1994 and 1995, the Company issued
warrants for the purchase of a total of 1,766,471 shares of Series A Preferred
Stock at exercise prices ranging from $0.35 to $0.70 per share. No value was
ascribed to the warrants because management was of the opinion that the impact
of any such value is negligible to the accompanying financial statements. These
warrants were exercised and converted into 866,152 shares of Common Stock during
the year ended December 31, 1996.

The Company issued warrants for the purchase of 49,644 shares of Common
Stock at $1.40 per share during the year ended December 31, 1995 and issued
warrants for the purchase of 70,667 shares of Common Stock at an exercise price
of $4.50 per share during the year ended December 31, 1996. No value was
ascribed to the warrants because management was of the opinion that the impact
of any such value is negligible to the accompanying financial statements.
Warrants for the purchase of 50,643 shares of Common Stock were exercised during
the year ended December 31, 1996, resulting in the issuance of 46,933 shares of
Common Stock. As a result, warrants for the purchase of 69,668 shares of Common
Stock were outstanding at December 31, 1996.

(9) STOCK OPTIONS

The Company has a 1992 Stock Plan and an Amended 1993 Stock Plan in which
various options have been issued which allow the option holder to purchase
shares of the Company's Common Stock at fair market value. Options granted vest
immediately or over periods as determined by the Company's Board of Directors,
generally four years. During August 1996, the Company's Board of Directors
approved the increase in the number of shares of Common Stock reserved under the
Amended 1993 Stock Plan to 3,902,000. Stock option activity under the plans is
summarized as follows:

YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1994 1995 1996
---------------------- ---------------------- -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- --------- ---------- --------- ----------- ---------

Balance at beginning of period: 95,000 $0.06 821,500 $0.08 1,846,025 $0.10
Granted...................... 726,500 0.08 1,074,525 0.11 1,401,420 3.64
Exercised.................... -- -- (50,000) 0.05 (1,315,892) 0.09
Canceled..................... -- -- -- -- (131,598) 0.47
----------- -----------
---
Balance at end of period....... 821,500 $0.08 1,846,025 $0.10 1,799,955 $2.83
============== ===========
Exercisable stock options...... 821,500 $0.08 1,213,692 $0.08 341,181 $2.73
Price range of options......... $0.05-0.08 $0.05-0.14 $0.05-23.50
============== ===========

The weighted average contractual life of stock options outstanding as of
December 31, 1996 was 9.2 years.

The Company applies APB Opinion No. 25 in accounting for its Plans and,
accordingly, no compensation cost was recognized to the extent the exercise
price of the stock options equaled the fair value. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under

39
41

CYBERMEDIA, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

SFAS No. 123, the Company's net loss and loss per share would have been
increased to the pro forma amounts indicated below:

YEAR ENDED DECEMBER 31,
---------------------------
1995 1996
----------- -----------

Net loss
As Reported..................................... $(3,352,000) $(3,483,000)
Pro forma....................................... $(3,383,000) $(4,026,000)
=========== ===========
Net loss per share
As Reported..................................... $ (.43) $ (.42)
Pro forma....................................... $ (.43) $ (.49)
=========== ===========

The weighted-average fair value of options granted during the year ended
December 31, 1995 and 1996 was $.08 and $.47, respectively, using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: 1996 and 1995 -- expected volatility of 70.4%, risk-free interest
rate of 6.4%, no expected dividends and an expected life of 4 years.

Pro forma net loss reflects only options granted in 1995 and 1996.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net loss amounts presented
above because compensation cost is reflected over the option vesting periods of
up to four years and compensation cost for options granted prior to January 1,
1995 is not considered.

During the year ended December 31, 1996, the Company issued Common Stock to
certain directors who exercised unvested options to purchase 206,250 shares of
Common Stock, subject to the terms of their respective stock option agreements.
As defined more fully in the stock option agreements, the Company retains the
right to purchase such stock at the original exercise price.

In June 1996, the Company's Board of Directors approved the 1996 Director
Option Plan. The Plan provides for the automatic and nondiscretionary grant of
nonstatutory stock options to nonemployee directors of the Company who are first
elected to the Board after the adoption of the Director Option Plan ("outside
directors"). A total of 50,000 shares of Common Stock have been reserved for
issuance under the Director Option Plan. Each outside director elected after the
adoption of the Plan will automatically be granted an option to purchase 5,000
shares on the date on which such person first becomes an outside director
("First Option") at the fair market value of the Company's Common Stock at the
date of grant. Each First Option granted vests ratably over specified periods,
approximately four years, subject to continued service as an outside director.
Thereafter, each outside director will be automatically granted an option to
purchase 5,000 shares on December 1 of each year beginning in 1997, provided he
or she shall have served on the Board for at least six months ("subsequent
option"). Each subsequent option shall have an exercise price equal to the fair
value of the Company's Common Stock as of the date of grant and shall be
exercisable ratably over four years, beginning three years and one month from
the date of grant, subject to continued service as an outside director. To date,
no options have been granted under the 1996 Director Option Plan.

40
42

CYBERMEDIA, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(10) SIGNIFICANT CUSTOMERS, CONCENTRATION OF CREDIT RISK AND OTHER
CONCENTRATIONS

Significant Customers

Sales to certain customers represented 10% or more of the Company's net
revenues for the years ended December 31, 1994, 1995 and 1996. Sales to these
customers were as follows:

FOR THE YEAR ENDED DECEMBER
31,
------------------------------
1994 1995 1996
---- ---- ----

Company A...................................... 16% 19% 25%
Company B...................................... -- 16% --
Company C...................................... -- -- 25%
Company D...................................... 13% -- --

Concentration of Credit Risk

Certain financial instruments potentially subject the Company to credit
risk. These financial instruments consist primarily of trade receivables. The
Company sells to distributors, resellers and directly to end-users. The Company
performs ongoing credit evaluations of its customers and maintains allowances
for doubtful accounts and estimates of potential future product returns. The
Company's three major customers in 1995 represented 41%, 26% and 21%,
respectively, of trade accounts receivable, net at December 31, 1995. The
Company's three major customers in 1996 represented 36%, 21% and 12%,
respectively, of trade accounts receivable, net at December 31, 1996.

Other Concentrations

One product line constitutes over 90% of the Company's net revenues for the
years ended December 31, 1994, 1995 and 1996. Any technical difficulties or
other factors affecting sales of this product line could adversely affect
operating results.

As of December 31, 1996, the Company received 100% of its fulfillment
services from two fulfillment firms. A delay in product shipments from these
fulfillment companies could result in a possible loss of sales, which could
adversely affect operating results.

(11) EMPLOYEE BENEFIT PLANS

During May 1996, the Company adopted a 401(k) Plan (the "Plan"). All
full-time employees who have reached age 18 and who have been employed for at
least 30 days are eligible to participate in the Plan. The Company may make
discretionary contributions to the Plan. For the year ended December 31, 1996,
the Company did not make any contributions to the Plan.

During June 1996, the Company's Board of Directors and stockholders
approved the 1996 Employee Stock Purchase Plan, which is intended to qualify
under Section 423 of the Internal Revenue Code. A total of 100,000 shares of
Common Stock have been reserved for issuance under the Employee Stock Purchase
Plan. Employees are entitled to participate if they satisfy certain criteria, as
defined, in the Employee Stock Purchase Plan agreement. As of December 31, 1996,
no shares of Common Stock have been issued from the Employee Stock Purchase
Plan.

(12) RELATED PARTY TRANSACTIONS

In connection with the sale of the Series B Preferred Stock, the Company's
founders and the holders of the Series A Preferred Stock and the Series B
Preferred Stock entered into a Key Employees' Right of First

41
43

CYBERMEDIA, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Refusal, Co-Sale and Voting Agreement ("Voting Agreement"). Pursuant to the
Voting Agreement, the Company is obligated to designate certain directors.

In October 1995, three of the Company's directors each received options to
purchase 75,000 shares of the Company's Common Stock. The options have an
exercise price equal to the fair market value of the stock at the date of grant
and vest over four years from the date of grant, subject to providing continued
consulting services to the Company. During the year ended December 31, 1996,
each of the directors exercised such options, including the unvested options,
and such shares are subject to repurchase on the same four-year vesting
schedule. See Note 9.

In September 1995, a director of the Company advanced a series of loans to
the Company to meet then-existing financial requirements. The loans were
converted into Series B Preferred Stock in consideration for the loans to the
Company. The director received warrants to purchase 17,857 shares of the
Company's Common Stock at an exercise price of $1.40 which expire on the earlier
of five years from the date of issue or the closing of an initial public
offering. During the year ended December 31, 1996, the director exercised such
warrants.

(13) COMMITMENTS AND CONTINGENCIES

The Company leases office facilities under operating leases which expire on
July 9, 2000. Rent expense aggregated $39,000, $79,000 and $469,000 for the
years ended December 31, 1994, 1995 and 1996, respectively. The Company also
leases equipment under operating and capital leases which expire within the next
four years. Future minimum lease payments under noncancelable operating leases
and present value of future minimum capital lease payments as of December 31,
1996 are as follows:

CAPITAL OPERATING
-------- ----------

YEAR ENDING DECEMBER 31:
1997............................................................... $ 52,000 $ 542,000
1998............................................................... 48,000 559,000
1999............................................................... 3,000 548,000
2000............................................................... 249,000
-------- ----------
Total minimum lease payments....................................... 103,000 $1,898,000
==========
Less amount representing interest.................................... 9,000
--------
Present value of net minimum capital lease payments.................. 94,000
--------
Less current installments of obligations under capital leases........ 45,000
--------
Long-term obligation under capital leases............................ $ 49,000
========

The Company has entered into employment agreements with Company founders
which include terms whereby the founders are to receive full payment of salary
and benefits for specified periods, as set forth more fully in the employment
agreements, in the event of early termination.

42
44

CYBERMEDIA, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(14) SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS

BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT END
DESCRIPTION PERIOD EXPENSES DELETIONS OF PERIOD
- --------------------------------------------- ------------ ---------- ----------- --------------

Allowance for doubtful accounts:
Year ended
December 31, 1994....................... $ -- $ 3,000 $ -- $ 3,000
December 31, 1995....................... $ 3,000 $ 97,000 $ -- $ 100,000
December 31, 1996....................... $100,000 $ 101,000 $ (21,000) $ 180,000
Reserve for sales returns:
Year ended
December 31, 1994....................... $ -- $ 9,000 $ -- $ 9,000
December 31, 1995....................... $ 9,000 $ 921,000 $ (263,000) $ 667,000
December 31, 1996....................... $667,000 $3,234,000 $(2,558,000) $1,343,000
Allowance for obsolete inventory:
Year ended
December 31, 1994....................... $ -- $ -- $ -- $ --
December 31, 1995....................... $ -- $ -- $ -- $ --
December 31, 1996....................... $ -- $ 430,000 $ -- $ 430,000

43
45

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information regarding directors of the Company is incorporated by reference
to "ELECTION OF DIRECTORS -Nominees" in the Company's Proxy Statement for the
Company's 1997 Annual Meeting of Stockholders. The information concerning
current executive officers of the Registrant found under the caption "Executive
Officers of the Registrant" in Part I hereof is also incorporated by reference
into this Item 10.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item is incorporated by reference to
"EXECUTIVE COMPENSATION" in the Company's Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item is incorporated by reference to
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" in the
Company's Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item is incorporated by reference to
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" in the Company's Proxy
Statement.

PART IV

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

PAGE IN
FORM 10-K
REPORT
---------

(a) The following documents are filed in Part II of this Annual Report on
Form 10-K.
1. FINANCIAL STATEMENTS
Report of Independent Auditors........................................... 28
Balance Sheets as of December 31, 1996 and 1995.......................... 29
Statements of Operations for the years ended December 31, 1996, 1995 and
1994................................................................... 30
Statements of Stockholders' Equity for the years ended December 31, 1996,
1995 and 1994.......................................................... 31
Statements of Cash Flows for the years ended December 31, 1996, 1995 and
1994................................................................... 32
Notes to Financial Statements............................................ 33

Other schedules have been omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.

44
46

3. EXHIBITS
Refer to (c) below.
(b) Reports on 8-K. No reports on 8-K were filed during the fourth quarter of 1996.

(c) Exhibits
--------
3.1(1) Amended and Restated Certificate of Incorporation of Registrant.
3.3(1) Bylaws of Registrant, as amended and restated.
10.1(1) Form of Indemnification Agreement with directors and officers.
10.2(1) Amended 1993 Stock Plan and form of agreements thereunder.
10.3(1) 1996 Employee Stock Purchase Plan and form of agreement thereunder.
10.4(1) 1996 Director Option Plan and form of agreements thereunder.
10.5(1) Sublease Agreement dated December 1995 between Century Southwest Cable
Television, Inc. and the Registrant.
10.6(1) Business Loan Agreement dated April 30, 1996 between Imperial Bank and the
Registrant.
10.7(1) Distribution Agreement dated February 28, 1996 between the Registrant and
Ingram Micro Inc.
10.8*(1) Distribution Agreement dated March 1, 1996 between the Registrant and
Navarre Corporation.
10.9*(1) Distributor Contract dated March 20, 1996 between the Registration and Micro
Central, Inc.
10.10(1) Form of Employment Agreements dated March 12, 1995 between the Registrant
and the Founders.
10.11(1) Loan Agreement dated June 22, 1994 between ICICI and the Registrant.
10.12(1) Form of Agreement dated August 26, 1996 between the Registrant and certain
executive officers.
10.13* Agreement dated September 8, 1996, between the Registrant and Phoenix
Technologies, Ltd.
10.14(1) Form of Severance agreement between the Registrant and Brad Kingsbury.
10.15(1) Form of Severance agreement between the Registrant and Charles M. Valentine.
10.16(1) Form of Key Employees' Right of First Refusal, Co-Sale and Voting Agreement
dated June 26, 1996 by and among the Registrant and certain individuals and
entities.
11.1 Statement Regarding Computing of Per Share Earnings.
21.1 Subsidiaries.
23.1 Consent of Independent Auditors.
24.1 Power of Attorney (See page 46).
27.1 Financial Data Schedule.

- ---------------
* Confidential treatment has been granted with respect to certain portions
of this exhibit.

(1) Incorporated by reference to the exhibits filed with the Registration
Statement on Form S-1 (No. 333-11063) which was declared effective on
October 22, 1996.

45
47

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Santa Clara, State
of California, on the 28th day of March, 1997.

CYBERMEDIA, INC.

By: /s/ UNNI S. WARRIER
------------------------------------
Unni S. Warrier
President, Chief Executive Officer,
and Chairman of the Board

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Unni S. Warrier and Jeffrey W. Beaumont,
jointly and severally, their attorney-in-fact, each with full power of
substitution, for him in any and all capacities, to sign on behalf of the
undersigned any amendments to this Report on Form 10-K, and to file the same,
with exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, and each of the undersigned does hereby
ratifying and confirming all that each of said attorneys-in-fact, of his
substitutes, may do or cause to be done by virtue hereof.

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

SIGNATURES TITLE DATE
- --------------------------------------------- ---------------------------- -----------------

/s/ UNNI S. WARRIER President, Chief Executive March 28, 1997
- --------------------------------------------- Officer, and Director
(Unni S. Warrier) (Principal Executive
Officer)

/s/ JEFFREY W. BEAUMONT Chief Financial Officer March 28, 1997
- --------------------------------------------- (Principal Financial and
(Jeffrey W. Beaumont) Accounting Officer)

/s/ PAUL DALI Director March 28, 1997
- ---------------------------------------------
(Paul Dali)

/s/ SUHAS PATIL Director March 28, 1997
- ---------------------------------------------
(Suhas Patil)

/s/ RONALD S. POSNER Director March 28, 1997
- ---------------------------------------------
(Ronald S. Posner)

/s/ KANWAL REKHI Director March 28, 1997
- ---------------------------------------------
(Kanwal Rekhi)

/s/ PETER MORRIS Director March 28, 1997
- ---------------------------------------------
(Peter Morris)

/s/ JAMES R. TOLONEN Director March 28, 1997
- ---------------------------------------------
(James R. Tolonen)

46
48
EXHIBIT INDEX

Exhibit
Number Description
------- -----------

3.1(1) Amended and Restated Certificate of Incorporation of Registrant.
3.3(1) Bylaws of Registrant, as amended and restated.
10.1(1) Form of Indemnification Agreement with directors and officers.
10.2(1) Amended 1993 Stock Plan and form of agreements thereunder.
10.3(1) 1996 Employee Stock Purchase Plan and form of agreement thereunder.
10.4(1) 1996 Director Option Plan and form of agreements thereunder.
10.5(1) Sublease Agreement dated December 1995 between Century Southwest Cable
Television, Inc. and the Registrant.
10.6(1) Business Loan Agreement dated April 30, 1996 between Imperial Bank and the
Registrant.
10.7(1) Distribution Agreement dated February 28, 1996 between the Registrant and
Ingram Micro Inc.
10.8*(1) Distribution Agreement dated March 1, 1996 between the Registrant and
Navarre Corporation.
10.9*(1) Distributor Contract dated March 20, 1996 between the Registration and Micro
Central, Inc.
10.10(1) Form of Employment Agreements dated March 12, 1995 between the Registrant
and the Founders.
10.11(1) Loan Agreement dated June 22, 1994 between ICICI and the Registrant.
10.12(1) Form of Agreement dated August 26, 1996 between the Registrant and certain
executive officers.
10.13* Agreement dated September 8, 1996, between the Registrant and Phoenix
Technologies, Ltd.
10.14(1) Form of Severance agreement between the Registrant and Brad Kingsbury.
10.15(1) Form of Severance agreement between the Registrant and Charles M. Valentine.
10.16(1) Form of Key Employees' Right of First Refusal, Co-Sale and Voting Agreement
dated June 26, 1996 by and among the Registrant and certain individuals and
entities.
11.1 Statement Regarding Computing of Per Share Earnings.
21.1 Subsidiaries.
23.1 Consent of Independent Auditors.
24.1 Power of Attorney (See page) .
27.1 Financial Data Schedule.

- ---------------
* Confidential treatment has been granted with respect to certain portions
of this exhibit.

(1) Incorporated by reference to the exhibits filed with the Registration
Statement on Form S-1 (No. 333-11063) which was declared effective on
October 22, 1996.