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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

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

FOR THE FISCAL YEAR ENDED MARCH 31, 1997

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ______________ TO ___________.

COMMISSION FILE NUMBER 0-28660

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TRITEAL CORPORATION
(Exact name of Registrant as specified in its charter)
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DELAWARE 33-0548924
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

2011 PALOMAR AIRPORT ROAD
CARLSBAD, CA 92009-1431
(Address of principal executive offices)
(760) 827-5000
(Registrant's phone 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, $.001 par value per share
(Title of Class)

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 the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference into Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

As of June 19, 1997, the aggregate market value of voting stock held by
non-affiliates of the Registrant (based upon the closing sale price of such
shares on the Nasdaq National Market on June 19, 1997) was approximately
$67,624,993. Excludes shares of Common Stock held by each executive officer and
director and by each entity that owns 5% or more of the outstanding Common
Stock. Exclusion of shares held by any person should not be construed to
indicate that such person possesses the power, direct or indirect, to direct or
cause the direction of management or policies of the Registrant, or that such
person is controlled by or under common control with the Registrant.

As of June 19, 1997, there were 10,878,908 shares of the Registrant's Common
Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Registrant's Definitive Proxy Statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A in connection with the 1997
Annual Meeting of Stockholders to be held on August 27, 1997 is incorporated by
reference into Part III of this Report on Form 10-K to the extent stated herein.

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PART I

ITEM 1. BUSINESS

The following description of the Company's business contains forward-looking
statements which involve risks and uncertainties. The Company's actual results
could differ materially from those set forth in these forward-looking statements
as a result of a number of factors, including those set forth below under the
caption "Risk Factors" at the end of this Item 1 and elsewhere in this Report on
Form 10-K.

TriTeal Corporation develops, markets and supports open systems-based,
mission-critical desktop system software and integrated applications that enable
multi-platform deployment of client/server applications throughout an
enterprise. The Company's flagship product, the TriTeal Enterprise Desktop
("TED"), allows individual users, system administrators and developers to easily
access applications, data and network resources from a common, intuitive
operating environment across most leading platforms used in the enterprise
client/server market. TED's consistency and interoperability allow the
enterprise greater flexibility in deploying client/server hardware and in
integrating existing legacy applications, thereby enabling increased operating
efficiency and productivity. To further increase functionality in the operating
environment, TriTeal has developed follow-on products that are either sold
separately or bundled with the current release of TED. TriTeal recently
introduced its Java-based SoftNC technology, a thin-client, platform-independent
solution designed to allow simultaneous access to Java and legacy applications.
The Company provides customers with a broad range of services, including needs
assessment and analysis, application development, software integration and
training.

INDUSTRY BACKGROUND

In the mid-1980s, the development of powerful and cost-effective servers,
workstations and other client/server technologies increasingly led many large
enterprise organizations to adopt these technologies for deployment of new
mission-critical software applications. Client/server solutions were typically
developed and deployed on disparate, proprietary platforms (hardware, operating
system and desktop software) to solve specific business problems. For example, a
Hewlett-Packard proprietary vendor configuration might include PA/RISC as the
processor, HP/UX as the operating system and HP VUE as the desktop. In contrast,
a Sun Microsystems, Inc. proprietary configuration might include SPARC as the
processor, SunOS as the operating system and OpenLook as the desktop. As a
result, large enterprises typically deployed a variety of hardware platforms,
network architectures and applications that were not compatible or
interoperable. The problem of multiplicity of systems within the enterprise was
compounded as advanced new technologies became available that were not fully
compatible with existing systems. For example, the recent introduction of
Microsoft Windows NT and the increased adoption of Internet/intranet
technologies have added to the fragmentation within the enterprise. According to
Sentry Market Research, the average number of operating systems supported in the
client/server enterprise increased from four systems in 1991 to 12 systems in
1996 to a projected 13 systems by the end of 1997.

This fragmentation among computing technologies continues to present the
enterprise with a number of challenges. The cost of maintaining system
administration, training, development and support functions for each platform,
as well as the costs associated with the delivery of applications and data
across disparate platforms, can be substantial. Moreover, because the desktop
and the operating system are generally dependent on a particular hardware
platform, the end-user is typically restricted to that platform and cannot
easily access applications or data residing on other platforms in the
enterprise. In addition, with proprietary systems, the enterprise is often
restricted to a limited selection of compatible hardware components. Finally,
the desire to maintain both the substantial investments made by the enterprise
in legacy applications for specific platforms, along with the ability to perform
critical day-to-day work activities on those legacy applications, has continued
to compound the fragmentation problem.

Historically, enterprises have developed custom software solutions in order
to achieve interoperability among disparate platforms. These solutions, however,
are costly and labor intensive to develop and implement, and require substantial
technical resources to support each of the various platforms within the
enterprise. Adding a single new application to a custom solution can require
substantial engineering efforts. Moreover, accessing applications

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running on different platforms can be extremely complex, increasing the training
required for users and reducing user productivity.

The open systems vendor community has attempted to resolve some of these
fragmentation issues through a series of initiatives, which include CDE (Common
Desktop Environment), Motif and DCE (Distributed Computing Environment)
technologies and standards. While these and other initiatives are supported by
the hardware vendors, the Company believes that the technologies and standards
are typically implemented in a proprietary manner, which is inconsistent with
the fundamental purpose of these initiatives.

The increasing fragmentation of the enterprise client/server environment,
together with recent advances in computer networking and Internet/intranet
technologies, have fueled the need for a cost-effective, easy-to-use, unified
enterprise operating environment that enables effective deployment of
mission-critical client/server applications on the wide range of platforms and
operating systems commonly used throughout an enterprise. To address this need,
the Company believes that any solution should (i) interoperate among multiple
disparate platforms and operating systems; (ii) provide users with a consistent
look and feel to minimize training and enhance productivity; (iii) offer
sophisticated features and substantial functionality based on open systems
industry standards to facilitate integration with multiple platforms and
operating systems; (iv) provide systems administrators with effective management
tools; (v) provide developers with a single set of application programming
interfaces ("APIs") to create applications; and (vi) enable enterprise customers
to adopt advanced new technologies, including Internet/intranet technologies,
while protecting valuable legacy client/server software and systems.

THE TRITEAL SOLUTION

To address the problem of fragmentation within the enterprise, TriTeal
developed its desktop system software solution, TED, and its recently introduced
SoftNC technology, which provide the following benefits:

- Interoperability. TED provides interoperability among disparate platforms
by allowing applications from various client/server platforms to display and
operate on any client platforms on which TED is supported. For example, an
application that was developed for an IBM platform can, with TED, easily be
accessed by a user on a Sun system. Additionally, a Windows desktop user can
access UNIX applications without leaving the Windows environment. Similarly, the
Company is developing products based on its SoftNC technology that are being
designed to permit interoperability across any platform that includes a Java
Virtual Machine ("JVM").

- Consistency. TED looks, behaves and provides the same capabilities in the
same manner on every platform on which it operates. TED provides the enterprise
with a common set of systems, facilities, resources, commands, APIs and a
graphical user interface across disparate computing platforms. The products the
Company is developing based on its SoftNC technology are being designed to allow
the user and the enterprise to adopt similar look-and-feel capabilities for Java
applications.

- Enterprise Cost Efficiencies. TED's interoperability and consistency allow
the enterprise customer to reduce systems administration and training costs, to
achieve increased operating efficiency and productivity throughout the
enterprise and to leverage existing hardware and software investments. The
products being developed based on the Company's SoftNC technology are being
designed to provide similar cost efficiencies.

- Open Systems Environment. The Company implements open systems standards in
its products. These standards include, among others, CDE, Motif, X11, DCE, Java,
HTML (Hypertext Mark-up Language) and HTTP (Hypertext Transfer Protocol). By
adhering to these standards, TriTeal provides users with access to numerous
standards-based legacy applications.

- Robust Features and Functions. TED provides a number of features and
functions designed to enhance and simplify a multi-platform networked
environment. For example, TED's integrated desktop features include file, style
and help managers, electronic mail and a calendar function. In addition, TED
includes a graphical workspace manager, key binding support, an integrated Web
browser, a fax application and an optional security module. The

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products being developed based on the Company's SoftNC technology are being
designed to provide robust features and functions.

THE TRITEAL STRATEGY

TriTeal's objective is to establish its desktop system software as the de
facto standard operating environment in the enterprise client/server market. To
achieve this objective, the Company has adopted the following core strategies:

Continue to Evolve Client/Server and Internet/intranet-based Solutions.
TriTeal's strategy is to build products that address enterprise fragmentation
issues by providing a homogeneous environment for client/server, personal
productivity and network computer applications. The Company has an ongoing
development program to continue to enhance the TED product and to develop
follow-on products that can be sold into the TED installed base. To date,
TriTeal has developed several follow-on products, which are either sold or
bundled with the current release of TED, including NTED, WINTED, LOCALTED,
TEDSECURE, TEDVISION and TEDFAX. In addition, the Company is developing
Java-based products based on its recently introduced SoftNC technology,
including SoftNC desktops for network computers, PCs and workstations.

Commitment to Open Systems Technologies and Standards. The Company believes
that open systems are important to enterprise customers that have made
substantial investments in standards-based legacy systems applications. TriTeal
intends to continue to develop and deliver products that adhere to published
specifications and accepted industry standards and to create new products and
technologies that can then be branded as compliant with industry standards. The
Company also plans to continue its active membership with organizations that
determine industry standards, such as The Open Group (formerly the Open Software
Foundation) and World Wide Web Consortium.

Penetrate Global Markets Vertically. The Company's strategy is to penetrate
vertical markets with targeted sales teams that can respond to the particular
needs of these markets. These markets include, among others, financial services,
government, telecommunications and oil and gas. Where appropriate, the Company
develops specialized product features and functions to address special needs of
vertical markets. These features and functions can then be generalized by
incorporating them into other TriTeal products for sale in other market
segments.

Leveraged Business Model. The Company's strategy is to use indirect channel
organizations, such as original equipment manufacturers ("OEMs"), value-added
resellers ("VARs") and system integrators, when appropriate, to create demand
and deliver TriTeal products and services to its customers. The Company believes
that established channel organizations offer the benefits of an installed base
of customers and worldwide sales coverage. In addition, when appropriate, the
Company intends to continue to license from third parties component technologies
as the basis for new product development. TriTeal believes that this strategy
enables it to gain time to market, mitigate risk associated with new technology
development and lower research and development costs.

Deliver Enterprise-Level Service and Support. The Company's service and
support organization offers a single point of contact to facilitate resolution
of issues across all supported platforms and maintains an engineering and
technical support staff trained in cross-platform issues to provide enterprise
technology solutions and system integrity. The Company believes that this
approach to enterprise support is a key differentiating feature as compared to
other desktop vendors. TriTeal intends to continue its investment in
infrastructure, personnel and systems to provide support to enterprise
organizations worldwide. The Company utilizes knowledge obtained through its
support organization to evolve the Company's products in response to enterprise
needs.

The Company's strategies involve substantial risk. There can be no assurance
that the Company will be successful in implementing its strategies or that its
strategies, even if implemented, will lead to successful achievement of the
Company's objectives. If the Company is unable to implement its strategies
effectively, the Company's business, results of operations and financial
condition would be materially and adversely affected.

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PRODUCTS AND TECHNOLOGIES

TriTeal currently offers the TED family of products, providing open
systems-based, mission-critical desktop system software and integrated
applications that enable multi-platform deployment of client/server applications
throughout an enterprise. The Company recently introduced its Java-based SoftNC
technology, a thin-client, platform-independent solution designed to allow
simultaneous access to Java and legacy applications. The Company also has a
number of products in development, including enhancements to TED family of
products and products based on SoftNC technology.

TED Family of Products

TED provides a common intuitive environment across multiple hardware and
operating systems. To further increase functionality in the operating
environment, TriTeal has developed follow-on products that are either sold
separately or bundled with TED. The following table describes TriTeal's current
products:

PRODUCT (1) DESCRIPTION US LIST PRICE (2
----------- ----------- ----------------

TED
- Cross-platform CDE Consistent, easy-to-use interface for accessing - $425 per seat
- Integrated browser (TEDVISION) applications, data and network services. (including
- Netscape Navigator integration X/Open-designated CDE with value-added features documentation)
with desktop (TEDSCAPE) including key bindings, multi-screen support, graphical - $340 per seat
- Graphical Workspace workspace manager, automatic login and session save, for additional
Manager Netscape Navigator integration, featuring drag-and-drop right-to-use license
- Integrated fax capability, customizable options and navigational tool,
- Multi-screen support license keys, a version upgrade utility and support for
- Support for X Terminals, PCs alternative authentication mechanisms, including
and Macs DCE/Kerberos login. Also includes tight integration
- Pluggable Authentication with NTED product and complete integration with
Module (PAM) TEDSECURE for core desktop applications.
- Mailer Enhancements
- NTED support
- Integrated TEDSECURE option

NTED
- Easy access to Windows Provides remote access to Windows applications running in Pricing based on
applications from TED native mode on a multi-user Windows NT server from a TED configuration
- Run Windows applications in workstation.
native mode
- Single application and file
management
- Interoperability between UNIX
and Windows NT

WINTED Provides advanced desktop features, file-sharing and $199.99 per seat
integrated access to UNIX and remote Windows
applications and files.

TEDSECURE Provides data-level security and controlled access to $200 per seat
shared files on an open network with the TED desktop.

(1) Features listed are those included in the Company's most current
releases of the specified products, as follows: TED 4.2, NTED 2.0, WINTED 2.0
and TEDSECURE 1.0. Not all features are included in earlier releases.

(2) Based on the Company's most recent price list as of June 19, 1997.
Actual price depends on quantity purchased, among other factors.

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TriTeal Enterprise Desktop: TED. TED 4.0, introduced in August 1995, is a
fully integrated common user environment in which features and applications work
in concert. For example, drag-and-drop functionality is consistent throughout
the desktop, copy and paste works throughout each application, and window
management is consistent on all UNIX platforms. With its rich graphical display
of intuitive icons, customizable workspaces and other user-friendly features,
TED makes it easy for administrators to provide users with access to data,
applications and network services without having to use operating system
commands.

TED has been designated CDE-compliant by X/Open Co., Ltd. Standard CDE
features include a calendar manager, application manager, file manager, style
manager, mail tool, terminal emulator, print tool and help system, among others.
In addition to standard CDE features, TED includes (i) a graphical workspace
manager, which allows the user to easily control and navigate multiple
workspaces, (ii) multiple screen support, which expands the number of
applications and workspaces immediately available, and (iii) key bindings to
simplify routine operations.

TED 4.0 integrated applications include TEDFAX and TEDVISION. TEDFAX is a
powerful, easy-to-use, integrated fax software product that enables users to
compose, edit, send, receive and manage inbound and outgoing faxes directly from
their desktops. As with all TED features and applications, TEDFAX implements
drag-and-drop between the desktop, TEDFAX and other CDE clients. TEDVISION
allows the user to access the Web and other Internet/intranet services and
includes standard browser features, such as hot lists and pop-up menus.
Moreover, with TEDVISION, users can browse local and remote file systems, which
eliminates the need to access a separate application, such as a file or
application manager.

The Company has developed a version of TED 4.0 localized for the Japanese
market. In addition, the Company is developing German, French and Spanish
localizations.

TED 4.2, an upgraded version of TED, provides users with a number of
enhancements, including drag-and-drop integration between Netscape Navigator and
TED, DCE and Kerberos login authentication and support, enhancements to the
graphical workspace manager and mailer, along with additional key bindings,
license keys and a version upgrade utility.

NTED. NTED 1.0 provides TED users with easy access to Windows applications
directly from TED using familiar Windows icons. NTED delivers Windows
applications running natively on a Windows NT server to TED users, while
providing applications and file integration as well as interoperability between
the two environments. Users can then cut, copy and paste between Windows and
UNIX. In addition, applications and files from both environments can be
organized and accessed from a single application manager and file manager.

NTED 2.0, an upgraded version of NTED, makes use of the Windows NT registry
to make Windows applications transparently available to all remote users without
the need for action by a system administrator. NTED automatically makes any file
that is located in a proper share directory on the UNIX system available to
Windows applications on the Windows NT server. With the TEDFS option, NTED
allows sharing of PC and UNIX files stored on UNIX and printing of PC documents
and files on UNIX printers. NTED is sold separately as an optional module for
TED.

WINTED. WINTED 1.0 displays the TED front panel on Windows-based platforms
using a PC X server, providing full access to TED's features and
interoperability between TED and the Windows desktop.

WINTED 2.0, an upgraded version of WINTED, is a native advanced desktop
solution for Windows NT and Windows 95 PCs and provides expanded capabilities
over WINTED 1.0. WINTED 2.0 provides advanced desktop management capabilities
and file sharing, plus optional integrated access to remote UNIX and Windows
files and applications. WinTED 2.0 also provides advanced desktop features, such
as the TriTeal Front Panel and Graphical Workspace Management.

TEDSECURE. TEDSECURE 1.0 is a data level desktop security product. Developed
in conjunction with the National Security Agency ("NSA"), TEDSECURE provides
data protection and digital signature capability that has

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been approved by the NSA for federal agencies. TEDSECURE provides cryptographic
facilities and digital signatures, which allow users to send unclassified but
sensitive data across an open network. TEDSECURE, based on technology licensed
from SPYRUS, was implemented utilizing standard United States Government
security algorithms ("FORTEZZA"). TEDSECURE is sold separately as an optional
module and is fully integrated with TED.

Java-Based SoftNC Technology and Network-Centric Computing Architecture

The Company's SoftNC technology is a thin-client, platform-independent
solution designed to allow simultaneous access to Java and legacy applications.
Written entirely in Java, SoftNC technology is designed to operate on any
hardware device that includes a JVM. While most currently available Java-based
alternatives to graphical user interfaces rely on browsers, SoftNC technology
offers a graphical user interface that delivers Java applications directly from
the desktop without the need for a browser. As a result, users have access not
only to hyper-linked data, but also to a broad set of applications, including
legacy, mainframe, UNIX and PC applications. SoftNC's infrastructure is designed
to enable a user logging onto the network from any device through a URL to
access the user's customized desktop. The user can then access resources
throughout the network via a messaging backbone of communicating desktop servers
associated with each system. SoftNC's agents are designed to provide services
such as computation, personal productivity or system resource management,
accessible from anywhere on the network.

TriTeal recently introduced its Network-Centric Computing Architecture
("NCCA"), which combines existing distributed computing technologies and
powerful agent-based applications implemented in Java. NCCA is designed to
deliver advanced functionality to any device capable of running a JVM, allowing
computing resources to be administered consistently across virtually any system
that includes a JVM without regard to application or operating system
compatibility. NCCA provides the framework for the Company's Java-based SoftNC
technology

The Company is currently developing the following products based on its
SoftNC technology:

SoftNC Desktop for Network Computers. SoftNC Desktop for Network
Computers is being developed to operate on any hardware device that includes
a JVM. In addition, it is being designed to provide full-featured desktop
functionality, including overlapping windows, menus, drag-and-drop and full
desktop scalability, while offering the benefits associated with thin-client
architecture, including legacy application integration and centralized
administration. Developers will be able to write an application once and,
without re-porting, deploy that application across multiple platforms.

SoftNC Desktop for PCs and Workstations. TriTeal is developing SoftNC
Desktop for PCs and Workstations to provide enterprise users of PCs and
workstations with the same features and functionality as SoftNC for Network
Computers.

SoftNC Desktop Server. SoftNC Desktop Server is a standards-based
server-side framework and messaging system that delivers data, applications
and resources to the user, regardless of their underlying computer platform.

The statements made in this Report on Form 10-K regarding scheduled release
dates and anticipated features of the Company's products under development and
proposed enhancements are forward-looking statements, and the actual release
dates and features of such products or enhancements could differ materially from
those projected as a result of a variety of factors, including the ability of
the Company's engineers to solve technical problems and to test products, as
well as business priorities in light of the availability of development and
other resources and other factors, including factors that may be outside the
control of the Company and factors discussed under the caption "Risk Factors"
and elsewhere in this Report on Form 10-K. There can be no assurance that the
Company will not experience difficulties that could delay or prevent the
successful development, introduction and marketing of new products, or that new
products and product enhancements will satisfy the requirements of the
marketplace or achieve market acceptance.

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To date, substantially all of the Company's revenues have been attributable
to sales of licenses of the TED family of products and related services. The
Company has not introduced for commercial sale any products based on, or
recognized any revenues from licenses of, its SoftNC technology. The Company
currently expects the TED family of products and related services to account for
substantially all of its revenues for the foreseeable future. As a result,
factors adversely affecting the pricing of or demand for TED products, such as
competition or technological change, could have a material adverse effect on the
Company's business, results of operations and financial condition. The Company's
future financial performance will depend, in significant part, on the successful
development, introduction and customer acceptance of new and enhanced versions
of the TED family of products and related services and on the Company's ability
to develop and commercialize products based on its SoftNC technology. There can
be no assurance that the Company will continue to be successful in developing
and marketing the TED family of products and related services, or that the
Company will be successful in developing and marketing products based on the
Company's SoftNC technology.

CUSTOMERS AND MARKETS

The Company's target market consists of Global 1000 customers that use
multiple client/server platforms for mission-critical applications. TriTeal has
targeted specific vertical markets, including financial services, government,
telecommunications, oil and gas, manufacturing and other industries. The Company
has licensed in excess of 100,000 seats of the TED family of products (including
predecessor products) to date.

The Company has also licensed certain of its desktop and Internet
technologies through licensing agreements and joint development and marketing
agreements to a number of companies, including AT&T, Corel Corporation,
Hewlett-Packard, IBM, Network Computing Devices ("NCD"), Novell Inc. ("Novell"),
The Santa Cruz Operation ("SCO"), Siemens Nixdorf Informationssystemse AG
("SNI"), Tektronix, Inc. ("Tektronix") and Wyse Technology, Inc., among others.

A relatively small number of customers (primarily government resellers)
account for a significant percentage of the Company's revenues. In fiscal 1997,
two of the Company's government resellers, Sylvest Management and IBM, accounted
for 37% and 36% of revenues, respectively. In fiscal 1996, sales to Logicon and
AT&T accounted for 18% and 12% of revenues, respectively, and sales to the
Company's top four customers accounted for approximately 45% of revenues. In
fiscal 1995, sales to AT&T, IBM and British Columbia Telephone accounted for
29%, 12% and 11% of revenues, respectively. The Company expects that sales of
its products to a limited number of customers will continue to account for a
high percentage of revenue for the foreseeable future. More than 30% of the
Company's revenues during fiscal 1996 and more than 80% of its revenues during
fiscal 1997 were derived indirectly through distributors from sales to
departments and agencies of the U.S. Government. The Company believes that the
success and further development of the Company's business will continue to be
dependent, in significant part, upon its ability to continue such indirect
sales. A significant reduction in the federal funds available for agencies and
departments the Company is supplying, either through agency budget cuts by
Congress or the imposition of budgetary constraints, or a determination by the
Government that funding of such agencies and departments should be reduced or
discontinued, would have a material adverse effect on the Company's results of
operations. The future success of the Company will depend on its ability to
obtain orders from new customers and successfully market its products in diverse
industries. The loss of a major customer, failure to close a major order or any
reduction, cancellation or delay in orders by such customers, or the failure of
the Company to successfully market its products in existing targeted industry
segments or new industry segments, would have a material adverse effect on the
Company's business, results of operations and financial condition. For example,
during the fourth quarter of fiscal 1997, the Company's revenues fell
substantially short of anticipated levels due primarily to a failure to close an
order from a government reseller, and there can be no assurance that delays,
cancellations or failures to close orders will not occur in the future.
Similarly, changes in government procurement practices have resulted in the
past, and may result in the future, in losses or delays in orders. In addition,
orders from government resellers and agencies of the U.S. government may subject
the Company to other risks that are not typically present in commercial
contracts, such as retroactive price adjustments and potential penalties, as
well as the risk of termination at the convenience of the government. The
occurrence of any one of these factors could have a material adverse effect on
the Company's business, results of operations and financial condition.

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The Company generally does not offer payment terms beyond 60 days; however,
the Company's sales to government resellers and agencies of the U.S. government
typically have longer payment cycles. Because the Company derives a substantial
portion of its revenues from government resellers and agencies of the U.S.
Government, the Company's largest receivables tend to have lengthy collection
cycles. At March 31, 1997, approximately 87% of the Company's outstanding trade
receivables were from government resellers and agencies of the U.S. Government.
See Note 6 of Notes to Consolidated Financial Statements. To date, the impact of
such lengthy collection cycles has not been material to the Company's working
capital requirements; however, there can be no assurance that future delays in
payment will not adversely affect the Company's ability to meet its anticipated
liquidity needs.

All of the Company's business is in the desktop system, client/server and
Internet/intranet application software markets, which are still emerging markets
that are intensely competitive, highly fragmented and subject to rapid change.
The Company's future financial performance will depend in large part on
continued growth in the number of organizations adopting client/server computing
environments, the continued use by these organizations of a variety of
incompatible computing technologies and commercial acceptance of the Company's
products as a desktop system software solution to address these problems of
fragmentation. There can be no assurance that the desktop system software,
client/server or Internet/intranet markets will maintain their current level of
growth, or that they will continue to be heterogeneous or that the Company's
principal product, TED, will be widely adopted. If the desktop system software,
client/server or Internet/intranet markets fail to grow or grow more slowly or
if the enterprise becomes more homogeneous than the Company currently
anticipates, or if the Company's products are not widely adopted, the Company's
business, results of operations and financial condition would be materially and
adversely affected. The Company has spent, and intends to continue to spend,
significant resources educating potential customers about the benefits of its
products. However, there can be no assurance that such expenditures will enable
the Company's products to achieve any additional degree of market acceptance.

Certain of the Company's products and products in development are intended
for use with the Internet/intranet. The success of the Company's products and
products in development, if commercially released, may depend, in part, on their
compatibility with the Internet. The commercial market for products and services
designed for use with the Internet/intranet has only recently began to
experience rapid growth, and there can be no assurance that this growth pattern
will continue. To the extent that the Internet continues to experience rapid
growth in the level of use and the number of users, there can be no assurance
that the Internet infrastructure will be able to support the demands of such
growth or will not otherwise lose its utility due to delays in the development
and adoption of new standards and protocols required to handle increased levels
of activity or due to increased government regulation. There can be no assurance
that the Company will be able to successfully compete in the market for
Internet-related products and services without substantial modification or
customization of the Company's products or services or the introduction of new
products and services.

Because a large portion of the Company's revenues are currently derived from
enterprises that support UNIX operating systems, a significant decline in the
UNIX operating systems market would have a material adverse effect on the
Company's business, results of operations and financial condition. Similarly,
widespread adoption of other desktop system software and operating environments,
such as Windows NT, Web-based operating environments or other technologies,
could create a more homogeneous environment throughout an enterprise, which
would have a material adverse effect on the Company's business, results of
operations and financial condition.

MARKETING AND SALES

The Company markets and sells its products in the United States, Canada,
Europe and Pacific Rim countries through its direct sales force, OEMs, system
integrators and VARs. As of March 31, 1997, the Company employed 42 individuals
in its sales and marketing organization. The Company's direct sales staff is
based at the Company's corporate headquarters in Carlsbad, California, and at
field sales offices in the metropolitan areas of San Diego, Dallas, Boston, New
York, Chapel Hill, North Carolina, Washington, D.C. and London. To support its
sales force, the Company conducts comprehensive marketing programs, which
include seminars, trade shows, other industry

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events, direct mail, public relations and advertising.

The Company's direct sales force is responsible for creating demand for the
Company's products. Sales leads are generated through direct calls to known
prospects, direct mail, seminars, advertising, telemarketing and requests for
proposals from prospects. The Company's field sales force conducts presentations
and demonstrations of the Company's products to management and users at the
prospect site as part of the Company's direct sales effort. Fully functional
evaluation units are provided to prospects as requested. The Company's field
engineers assist prospects in technical matters pertaining to the evaluation
software. The Company plans to expand its direct sales force. There can be no
assurance that such internal expansion will be successfully completed, that the
cost of such expansion will not exceed the revenues generated or that the
Company's sales and marketing organization will be able to compete successfully
against the significantly more extensive and well-funded sales and marketing
operations of many of the Company's current or potential competitors. The
Company's inability to effectively manage the expansion of its direct sales
force could have a material adverse effect on the Company's business, results of
operations and financial condition.

The licensing of the Company's products by its customers typically involves
a significant technical evaluation and commitment of capital and other
resources, and is often subject to the delays frequently associated with
customers' internal procedures to approve large capital expenditures and to test
and accept new technologies that affect key operations, particularly with
respect to government sales. For these and other reasons, the sales cycle
associated with the licensing of the Company's products is typically lengthy and
subject to a number of significant risks that are beyond the Company's control.
There can be no assurance that the Company will not experience these and
additional future delays in sales of the Company's products because of the
lengthy sales cycle and the large size of many customers' orders. If revenues
forecasted from a specific customer for a particular quarter are not realized in
that quarter, the Company's operating results for that quarter could be
materially and adversely affected.

The Company's strategy is to leverage sales and marketing through its
indirect channel relationships, which include OEMs, VARs and system integrators,
that distribute or resell the Company's products in their respective markets.
The Company has entered into several OEM reseller agreements pursuant to which
the reseller provides either TED or a modified version of TED to its customers.
The Company has established OEM relationships with AT&T, Hummingbird, IBM, NCD,
SCO, Silicon Graphics, Inc., SNI and Tektronix in connection with the TED family
of products. These relationships have been established to help create and
fulfill demand and support end-user sites. The Company is currently pursuing
strategic OEM relationships in connection with its SoftNC technology. The
Company typically selects channel entities on the basis of their industry
expertise, supported customer base and system integration capabilities. The
Company has entered into agreements with VARs and system integrators in
connection with the TED family of products, including Logicon, Shell Services
Corporation, Stornet and Worldwide Technologies. Certain of these entities have
received advanced training and certification through the Company to ensure
appropriate skills and knowledge with respect to the Company's products. The
Company's sales representatives work with these channel entities in activities
such as educational and sales seminars, local or regional user conferences and
industry trade shows. The Company may, in the future, seek to establish
strategic VAR and system integrator relationships in connection with its SoftNC
technology.

There can be no assurance that the Company will be able to continue to
successfully manage its relationships with indirect channel entities or that any
OEM, VAR or system integrator will continue to market or to purchase the TED
family of products or that the Company will be successful in establishing
strategic relationships in connection with its SoftNC technology or products.
The failure by the Company to maintain these relationships or the failure to
establish new relationships in the future could have a material adverse effect
on the Company's business, results of operations and financial condition. There
can be no assurance that these events will not occur in the future. To the
extent that average selling prices through indirect channel relationships
decline relative to the Company's direct sales in the future, the Company's
average selling prices and gross margins may be materially and adversely
affected.

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and such agreements typically do not require any minimum purchase volumes;
therefore, there can be no assurance that these relationships will produce
significant revenues in the future. Consequently, the Company may be adversely
affected should any indirect channel entity fail to adequately penetrate its
market segment. Failure to recruit, manage or retain important indirect channel
entities, or to manage conflict within the channel, could materially and
adversely affect the business, results of operations and financial condition of
the Company.

Although, to date, the Company has not made a significant percentage of its
sales internationally, a significant portion of the Company's customer base are
large multinational companies. To meet the needs of such companies, both
domestically and internationally, the Company must directly or indirectly
provide worldwide sales and product support services. In April 1997, the Company
relocated the European headquarters of its European subsidiary, TriTeal B.V.,
from the Netherlands to the United Kingdom and closed the Netherlands facility.
The European operations are responsible for generating and fulfilling customer
demand and supporting indirect channel activities. In addition, the Company's
marketing department supports European activities from the Company's
headquarters in Carlsbad, California. The Company intends to enter additional
markets and to continue to expand its international operations and direct and
indirect sales and marketing activities worldwide, which will require
significant management and financial resources, and could adversely affect the
Company's business, results of operations and financial condition. The Company
has committed and intends to continue to commit significant time and financial
resources to developing international sales and support channels. Total export
sales for the years ended March 31, 1997, 1996 and 1995 were approximately
$510,000, $1.3 million, and $50,000, respectively. See Note 6 of Notes to
Consolidated Financial Statements. To the extent that the Company is unable to
expand its international sales organization in a timely manner, the Company's
growth, if any, in international sales will be limited, and the Company's
business, results of operations and financial condition could be materially and
adversely affected.

The Company has a Master Distribution Agreement with Ryoyo Electro
Corporation ("Ryoyo") under which Ryoyo distributes the localized version of TED
throughout Japan and functions as the Company's sole representative for Japan.
The Company has an agreement with Pacific Advantage, Ltd. under which Pacific
Advantage, Ltd. will serve as the Company's manufacturer's representative to
service the markets of the Pacific Rim outside of Japan.

There can be no assurance that the Company will be able to maintain or
increase international market demand for its products. Risks inherent in the
Company's international business activities generally include currency
fluctuations, unexpected changes in regulatory requirements, tariffs and other
trade barriers, costs of and the Company's limited experience in localizing
products for foreign countries, lack of acceptance of localized products in
foreign countries, longer accounts receivable payment cycles, difficulties in
managing international operations, potentially weaker protection for
intellectual property in certain foreign countries, potentially adverse tax
consequences including restrictions on the repatriation of earnings, and the
burdens of complying with a wide variety of foreign laws and practices. To date,
substantially all of the Company's international revenues have been denominated
in U.S. dollars. Although exposure to currency fluctuations to date has been
insignificant, there can be no assurance that fluctuations in future currency
exchange rates will not have a material adverse effect on revenues from
international sales and thus the Company's business, results of operations and
financial condition. There can be no assurance that such factors will not have a
material adverse effect on the Company's future international operations and,
consequently, the Company's business, results of operations and financial
condition.

SERVICES AND SUPPORT

The Company has established a services and support organization to provide
enterprise technology solutions and system integration. The Company assigns a
support representative to each of its customers as a point of contact for
resolving issues. TriTeal's professional services engineers and customer support
representatives are trained in cross-platform issues in order to diagnose and
solve technical problems related not only to the Company's products, but also to
the software and hardware technologies with which the Company's products
interact. The Company believes that its single contact system for enterprise
support is a key differentiating feature as compared to other vendors.

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TriTeal's support structure involves phone support and channel support
through the Company's engineering and field organizations. The Company's
services and support organization offers support both domestically and
internationally. This support is purchased separately from the product. The
Company tracks all support requests through a customer database that maintains
current status reports as well as historical logs of customer interactions. When
appropriate, these support representatives provide the customer with direct
access to the Company's development engineers. In addition, the Company
maintains a technical support area on its Web site which contains enhancements
and corrections to software defects that may be accessed through a file transfer
protocol, thereby enabling TED users to install that code on their platforms
automatically. In addition, the Company offers pre- and post-sales support from
its field systems engineers and professional services engineers, who are based
in all of the Company's sites worldwide. For those enterprise customers that
require custom features, the Company can deploy its professional services
engineering resources to assist the customer on its development efforts. The
Company also encourages application integration by assisting other software
companies or MIS organizations in the integration process.

The Company has created the UniTED Partners Program, which trains selected
resellers in providing enterprise support. UniTED Partners are awarded TriTeal
Certification after five days of support training for field engineers. The
Company recommends certified UniTED Partners to its enterprise customers to
address their training needs at three levels: end-user, developer and system
administration.

RESEARCH AND DEVELOPMENT

As of March 31, 1997, the Company employed 48 persons in its research and
development organization. The Company believes that its future success depends
in large part upon its ability to continue to enhance its existing products and
to develop new products that maintain cross-platform technological
competitiveness. The Company relies on extensive input concerning product
development from the Company's customers communicated through the Company's
sales and marketing organizations, as well as market research data. TriTeal's
research and development efforts are directed at increasing product
functionality, improving product performance, expanding the capabilities of its
products to interoperate with other acquired technologies and developing new
products.

The Company's research and development organization consists of three
groups: engineering, quality assurance and advanced research. These groups are
dedicated to maintaining the Company's core products, engineering corrections to
system defects, implementing performance enhancements and building complementary
desktop services and applications. The Company seeks to support open systems
standard software, while providing additional features and functionality that
complement and enhance standardized software.

Each of the client/server, desktop system software and Internet/intranet
markets is characterized by rapid technological advances, evolving industry
standards, changes in consumer expectations, and frequent new product
introductions and enhancements. The introduction of products embodying new
technologies and the emergence of new industry standards could render the
Company's existing products as well as products currently under development
obsolete and unmarketable. Accordingly, the life cycles of the Company's
products are difficult to estimate. The Company's future success will depend
upon its ability to enhance its current products and to develop and introduce
new products that keep pace with technological developments, respond to evolving
consumer requirements and achieve market acceptance. The Company's future
success will also depend in part upon its ability to maintain and enhance its
technology relationships in order to provide customers with integrated product
solutions. The Company's ability to develop and introduce new products and
enhancements on a timely basis may be adversely affected by a number of factors,
including the ability of the Company's engineers to solve technical problems and
to test products as well as business priorities in light of the availability of
development and other resources and other factors, including factors that may be
outside the control of the Company and factors discussed under the caption "Risk
Factors" and elsewhere in this Report on Form 10-K. If the Company is unable to
develop on a timely basis new software products or enhancements to existing
products, if such new products or enhancements do not achieve market acceptance,
or if the Company is unable to maintain its technology relationships, the
Company's business, results of operations and financial condition will be
materially and adversely affected.

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The Company's current products are designed to adhere to certain open
systems standards, and current and future sales of the Company's products will
be dependent, in part, on market acceptance of such standards. Emergence of new
industry standards could require the Company to modify its products to adhere to
such standards. There can be no assurance that the Company would be successful
in incorporating new standards effectively or on a timely basis or that any
resulting products would achieve commercial acceptance. Failure by the Company
to effectively incorporate into its products new industry standards that are
widely adopted in the markets served by the Company would have a material
adverse effect on the Company's business, results of operations and financial
condition.

COMPETITION

The market in which the Company competes is characterized by rapidly
changing technology and evolving standards. The Company's competitors and
potential competitors, which include Microsoft Corporation ("Microsoft"),
Netscape Communications Corporation ("Netscape") and the original CDE developers
(Hewlett-Packard Company ("Hewlett-Packard"), IBM, Novell and Sunsoft, a
subsidiary of Sun Microsystems, Inc.), have or may have a more established and
larger marketing and sales organization, significantly greater financial and
technical resources and a larger installed base of customers, as well as greater
name recognition than the Company. Accordingly, such competitors or potential
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements or devote greater resources to the
development, promotion and sales of their products than the Company or may be
better positioned to achieve market acceptance of new technology or products.
The Company also expects that competition will increase as a result of software
industry consolidation. In addition, current and potential competitors have
established or may establish cooperative relationships among themselves or with
third parties to increase the ability of their products to address the needs of
enterprise customers in the Company's markets. Accordingly, it is possible that
new competitors or alliances among competitors may emerge and rapidly acquire
significant market share. Increased competition may result in price reductions,
reduced gross margins and loss of market share, any of which could have a
material adverse effect on the Company's business, results of operations and
financial condition. There can be no assurance that the Company will be able to
compete successfully against current and future competitors, or that competitive
factors faced by the Company will not have a material adverse effect on the
Company's business, results of operations and financial condition.

The Company's products are based in part on a non-exclusive license of the
CDE industry standard. Each of the original CDE developers has developed or is
developing unique implementations of CDE specific to its own UNIX platforms.
Because CDE was developed as an open systems industry standard, any of the
original CDE developers, or their assignees, other competitors or third-party
licensees, may develop similar products or sell competing products in the
Company's markets. In addition, the Company has developed its TED product based
in part on a non-exclusive license of the CDE technology from Hewlett-Packard.
Under the terms of the Company's license agreement with Hewlett-Packard, all
modifications to the CDE developed by the Company are owned by the Company and
are licensed back to Hewlett-Packard on a non-exclusive basis. There can be no
assurance that one or more of these competitors and potential competitors will
not develop or market products that would directly compete with the Company's
products or license a third party to do so.

The Company believes that the principal competitive factors affecting its
market include adherence to open systems standards, product features and
functionality, ability to integrate with third-party products, ease of use,
quality, performance, price, customer service and support, effectiveness of
sales and marketing efforts and company reputation. Although the Company
believes that it currently competes favorably with respect to such factors,
there can be no assurance that the Company can maintain its competitive position
against current and potential customers, especially those with greater
financial, marketing, service, support, technical and other resources than the
Company.

LICENSE AGREEMENTS AND INTELLECTUAL PROPERTY

The Company relies on certain technology that it licenses from third
parties, including software which is integrated with internally developed
software and used in the Company's products to perform key functions. There

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can be no assurance that these third-party technology licenses will continue to
be available to the Company on commercially reasonable terms, if at all. The
loss of or inability to maintain any of these technology licenses could result
in delays or reductions in product shipments until equivalent technology, if
any, could be identified, licensed and integrated. Any such delays or reductions
in product shipments could materially and adversely affect the Company's
business, results of operations and financial condition.

The Company's principal product, TED, is based in part on X11, Motif and CDE
standards specified and administered by X/Open Company, Ltd. Certain of the
Company's third-party technology licensing agreements for implementation of
these standards are summarized below:

The Company has developed its TED product based in part on a non-exclusive
license of CDE technology from Hewlett-Packard. Under the terms of the license
agreement with Hewlett-Packard, all modifications to CDE developed by the
Company are owned by the Company, and the Company granted to Hewlett-Packard a
paid-up, non-exclusive, worldwide license to use, reproduce, distribute and
prepare derivative works of such modifications in both source code and object
code form. The Hewlett-Packard license agreement terminates in July 1997,
subject to unlimited one-year extensions at the Company's option. The
Hewlett-Packard license agreement is also terminable on breach, bankruptcy or
cessation of business by either party. In addition, if an infringement action is
brought against Hewlett-Packard relating to the CDE technology licensed by
Hewlett-Packard to TriTeal and Hewlett-Packard is not able to procure for
TriTeal the use of CDE, replace CDE with a non-infringing product or modify CDE
to be non-infringing, then Hewlett-Packard may terminate TriTeal's rights to its
CDE to the extent necessary to avoid infringement. In the event the
Hewlett-Packard license agreement is terminated, the Company believes that it
could successfully license comparable CDE technology from another source.

In May 1996, the Company entered into a software license agreement with SCO,
pursuant to which the Company granted to SCO a non-exclusive, royalty-free
license to certain TriTeal desktop technology in exchange for the grant to the
Company of a non-exclusive, royalty-free license to CDE, effective if SCO
obtains the right to sublicense CDE. The SCO license agreement terminates in May
1999, subject to one-year extensions upon mutual agreement of the parties.

Pursuant to a license agreement with The Open Group, the Company has
licensed Motif applications from The Open Group on a non-exclusive basis. The
license agreement is terminable by OSF in the event of default by the Company in
its payment obligations or upon the Company's bankruptcy.

In May 1995, TriTeal entered into a software license agreement with SPYRUS,
pursuant to which SPYRUS granted to the Company a worldwide, non-exclusive,
royalty-bearing license for SPYRUS' network security technology, which is the
basis for the Company's TEDSECURE product. The SPYRUS license agreement
terminates in May 2000, but may be extended for one-year terms at the Company's
option, subject to the written consent of SPYRUS.

Pursuant to an OEM source license agreement between the Company and
Spyglass, Inc. ("Spyglass"), the Company licensed certain Internet/intranet
component technologies from Spyglass, on a non-exclusive, royalty-bearing basis.
The Spyglass license agreement terminates in September 1998, subject to one-year
extensions at the Company's option. The Company has incorporated this technology
from Spyglass into its TEDVISION product.

While it may be necessary or desirable in the future to obtain other
licenses relating to one or more of the Company's products or to current or
future technologies, there can be no assurance that the Company will be able to
do so on commercially reasonable terms, if at all.

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that any patents will issue from such applications or that others will not
develop technologies that are similar or superior to the Company's technology.
The Company believes the source code for the Company's proprietary software is
protected both as a trade secret and copyright work. However, effective
trademark, copyright and trade secret protection may not be available in every
foreign country in which the Company's products are distributed. The Company's
policy is to enter into confidentiality agreements with its employees,
consultants and vendors, and the Company generally controls access to, and
distribution of, its software, documentation and other proprietary information.
Despite these precautions, it may be possible for a third party to copy or
otherwise obtain and use the Company's products or technology without
authorization. There can be no assurance that the steps taken by the Company to
protect its proprietary technology will be adequate to prevent misappropriation
of its technology by third parties, or that third parties will not be able to
develop similar technology independently.

The Company may receive notices from third parties claiming that the
Company's products infringe third-party proprietary or intellectual property
rights. The Company expects that, as the number of software products in the
industry increases and the functionality of these products or their
implementation further overlaps, software products will increasingly be subject
to such claims. Any such claim, with or without merit, could result in costly
litigation and require the Company to enter into royalty or licensing
arrangements. Such royalty or licensing arrangements, if required, may not be
available on terms acceptable to the Company, if at all. Consequently, any such
litigation could have a material adverse effect on the Company's business,
results of operations and financial condition.

EMPLOYEES

As of March 31, 1997, the Company had no part-time employees and 130
full-time employees, including 42 in sales and marketing, 61 in product
development and support services and 27 in finance and administration. The
Company's employees are not represented by any collective bargaining
organization, and the Company has never experienced a work stoppage. The Company
believes that its relations with its employees are good. The loss of certain key
employees or the Company's inability to attract and retain other qualified
employees could have a material adverse effect on the Company's business and
operations.

EXECUTIVE OFFICERS

The executive officers of TriTeal Corporation and their ages as of June 27,
1997 are as follows:

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

Jeffrey D. Witous................... 36 President, Chief Executive Officer
and Chairman of the Board
Arthur S. Budman.................... 35 Chief Financial Officer and Director
Ronald B. Hegli..................... 36 Vice President, Engineering
Robert D. Ruhe...................... 39 Executive Vice President, Worldwide Field Operations
Rand R. Schulman.................... 44 Executive Vice President
Garrett M. Thomas................... 52 Vice President, Corporate General Counsel
Oran M. Thomas...................... 34 Chief Technology Officer
Gregory J. White.................... 39 Chief Operating Officer and Secretary

JEFFREY D. WITOUS co-founded the Company and has served as Chief Executive
Officer since April 1995, Chairman of the Board since March 1994 and President
since June 1996. From March 1994 to April 1995, Mr. Witous served as Executive
Vice President of Business Development. Prior to joining the Company, Mr. Witous
served as National Business Development Manager for Sun Microsystems Computer
Corporation ("SMCC"), a subsidiary of Sun Microsystems, Inc. ("Sun"), a computer
hardware, software and services company, from April 1991 to January 1994.

ARTHUR S. BUDMAN joined the Company in November 1994, was appointed Chief
Financial Officer in February 1995 and was elected to the Board of Directors in
January 1996. From January 1985 to November 1994, he was employed by Ernst &
Young LLP, a public accounting firm, serving most recently as Senior Manager.
Mr.

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Budman is co-founder of the San Diego Software Industry Council, a trade
association for software companies. Mr. Budman is a certified public accountant.

RONALD B. HEGLI has served as Vice President of Engineering since December
1996. From March 1994 to December 1996, Mr. Hegli held various engineering
positions, including Manager of Development and Director of Engineering. From
May 1988 to March 1994, Mr. Hegli was a Senior Engineer at Digital Equipment
Corporation, where he was lead engineer for desktop environments, including the
initial port of the CDE to the Alpha platform. From August 1983 to May 1988, Mr.
Hegli was a senior engineer at General Electric Company, developing computer
systems for nuclear power plant monitoring.

ROBERT D. RUHE has served as Executive Vice President, Worldwide Field
Operations, since September 1996. Mr. Ruhe served as Vice President of Federal
Business from May 1995 to September 1996. From July 1992 to May 1995, he served
as Manager of National Civilian Federal Sales for Sun Microsystems Federal Inc.
From February 1981 to July 1992, he was employed by Digital Equipment
Corporation, a computer manufacturer, where he served most recently as Strategic
Federal Account Manager.

RAND R. SCHULMAN has served as Executive Vice President since February 1996.
From July 1994 to February 1996, he was Vice President of Marketing for the
Company. From January 1992 to June 1994, Mr. Schulman served as Vice President
of Sales and Marketing at Pages Software, a computer software company. Mr.
Schulman was employed in various capacities from December 1983 to January 1992
by Island Graphics/Dainippon Screen Mfg. Co., a computer software company,
serving most recently as General Manager and Senior Vice President.

GARRETT L. THOMAS joined the Company in January 1997 as Vice President,
Corporate General Counsel. For the past 13 years, he has held various legal
positions with Sun, most recently as General Counsel of Sun's government
operations. Prior to joining Sun, Mr. Thomas held various legal positions at
software and telecommunications companies.

ORAN M. THOMAS co-founded the Company and has served as Chief Technical
Officer since April 1995. From January 1993 to November 1993, Mr. Thomas served
as President and Secretary of the Company. From January 1993 to February 1995,
he served as the Company's Chief Financial Officer. Mr. Thomas served as a
director of the Company from January 1993 to January 1996. From January 1988 to
September 1993, he served as Senior Software Engineer at Science Applications
International Corporation, a software company, where he managed the
multi-platform, commercial systems software development group.

GREGORY J. WHITE co-founded the Company, has served as Chief Operating
Officer since April 1995 and as Secretary since November 1993. From November
1993 to March 1994 and from April 1995 to June 1996, he served as President of
the Company. From March 1994 to January 1995, Mr. White served as Chief
Executive Officer for the Company. From July 1990 to September 1993, he held the
position of Sales Executive for SMCC.

Each officer serves at the discretion of the Board of Directors. The
Company's By-laws permit the Board of Directors to establish by resolution the
authorized number of directors, and the Company currently has four directors
authorized. There are no family relationships among any of the directors or
officers of the Company.

RISK FACTORS

Limited Operating History

The Company was founded in January 1993 and commenced shipment of its
initial software products in May 1993 and its current flagship product, TED, in
August 1995. Accordingly, the Company has only a limited operating history upon
which an evaluation of the Company and its prospects can be based, making
prediction of future operating results difficult, if not impossible. The
Company's prospects must be considered in light of the risks and uncertainties
frequently encountered by companies in their early stages of development,
particularly those companies in new and rapidly evolving markets. To address
these risks, the Company must, among other things,

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respond to competitive developments, continue to attract, retain and motivate
qualified persons and continue to upgrade its software products and services.
There can be no assurance that the Company will be successful in addressing such
risks. Although the Company has experienced revenue growth in recent periods,
such growth rates should not be relied upon as indicative of future operating
results, and there can be no assurance that the Company will be able to sustain
revenue growth. See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

History of Operating Losses; Uncertainty of Future Operating Results

Since its inception, the Company has incurred substantial costs to research,
develop and enhance its technology and products, to recruit and train a
marketing and sales group and to establish an administrative organization. As a
result, the Company incurred net losses in its fiscal years ended March 31, 1997
and 1996. Through March 31, 1997 the Company had an accumulated deficit of $6.6
million. The Company anticipates that its operating expenses will increase
substantially in the foreseeable future as it increases its sales and marketing
activities, expands its operations and management and continues the development
of its products and technologies. Accordingly, there can be no assurance that
the Company will achieve or sustain profitability. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

Fluctuations in Quarterly Results

The Company has experienced significant fluctuations in its revenues and
operating results from quarter to quarter and anticipates that it will continue
to experience such quarterly fluctuations. The Company's revenues and operating
results have generally been higher in the fourth fiscal quarter than in any
preceding quarter of each fiscal year, due largely, the Company believes, to the
positive effect of the Company's incentive sales compensation plans. In
addition, as a result of the Company's incentive sales compensation plans, first
fiscal quarter revenues in any year are typically lower than revenues in the
immediately preceding fourth fiscal quarter. In fiscal 1997, however, revenues
for the fourth quarter were approximately equal to third quarter revenues, and
there can be no assurance that the historical patterns of operating results will
be repeated in the future. In addition, the Company's sales are made
predominantly in the third month of each fiscal quarter and tend to be
concentrated in the latter half of that third month. Accordingly, the Company's
quarterly results of operations are difficult to predict, and delays in product
delivery or in closings of sales near the end of a quarter could cause quarterly
revenues to fall substantially short of anticipated levels and, to a greater
degree, adversely affect profitability. Factors that may contribute to such
fluctuations, in addition to incentive compensation, include seasonal factors,
such as the fiscal year ends of the government and other customers and reduction
in European business during summer months; the number of new orders and product
shipments; the size and timing of individual orders; the timing of introduction
of products or product enhancements by the Company, the Company's competitors or
other providers of hardware, software and components for the Company's market;
competition and pricing in the software industry; market acceptance of new
products; new product introductions by competitors; product quality problems;
customer order deferrals in anticipation of new products; changes in customer
budgets or procurement practices; changes in operating expenses; changes in
Company or customer strategies; personnel changes; changes in foreign currency
exchange rates; changes in mix of products sold; and changes in general economic
conditions.

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variations in operating results from quarter to quarter and could result in
losses substantially in excess of anticipated amounts. To the extent such
expenses precede, or are not subsequently followed by, increased revenues, the
Company's operating results would be materially and adversely affected. In
addition, the achievement of anticipated revenues is substantially dependent on
the ability of the Company to attract, on a timely basis, and retain skilled
personnel, especially sales and support personnel. As a result of the foregoing
factors, among others, revenues for any quarter are subject to significant
variation, and the Company believes that period-to-period comparisons of its
results of operations are not necessarily meaningful and should not be relied
upon as indications of future performance. Fluctuations in operating results may
also result in volatility in the price of the Company's Common Stock in the
public market. Due to all of the foregoing factors, among others, it is likely
that, from time to time in the future, the Company's results of operations would
be below the expectations of public market analysts and investors. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

Customer and Market Concentration

The Company generally does not offer payment terms beyond 60 days; however,
the Company's sales to government resellers and agencies of the U.S. government
typically have longer payment cycles. Because the Company derives a substantial
portion of its revenues from government resellers and agencies of the U.S.
Government, the Company's largest receivables tend to have lengthy collection
cycles. At March 31, 1997, approximately 87% of the Company's outstanding trade
receivables were from government resellers and agencies of the U.S. Government.
See Note 6 of Notes to Consolidated Financial Statements. To date, the impact of
such lengthy collection cycles has not been material to the Company's working
capital requirements; however, there can be no assurance that future delays in
payment will not adversely affect the Company's ability to meet its anticipated
liquidity needs.

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19
Because a large portion of the Company's revenues are currently derived from
enterprises that support UNIX operating systems, a significant decline in the
UNIX operating systems market would have a material adverse effect on the
Company's business, results of operations and financial condition. Similarly,
widespread adoption of other desktop system software and operating environments,
such as Windows NT, Java-based operating environments or other technologies,
could create a more homogeneous environment throughout an enterprise, which
would have a material adverse effect on the Company's business, results of
operations and financial condition.
See " - Customers and Markets."

Dependence on Growth of Desktop System and Client/Server Market

All of the Company's business is in the desktop system and client/server
application software markets, which are still emerging markets that are
intensely competitive, highly fragmented and subject to rapid change. The
Company's future financial performance will depend in large part on continued
growth in the number of organizations adopting client/server computing
environments, the continued use by these organizations of a variety of
incompatible computing technologies and commercial acceptance of the Company's
products as a desktop systems software solution to address these problems of
fragmentation. There can be no assurance that the desktop system and
client/server application software markets will maintain their current level of
growth or that they will continue to be heterogeneous or that the Company's
principal product, TED, will be widely adopted. If the desktop system and
client/server application software markets fail to grow or grow more slowly or
if the enterprise environment becomes more homogeneous than the Company
currently anticipates, or if the Company's products are not widely adopted, the
Company's business, results of operations and financial condition would be
materially adversely affected. The Company has spent, and intends to continue to
spend, significant resources educating potential customers about the benefits of
its products. However, there can be no assurance that such expenditures will
enable the Company's products to achieve any additional degree of market
acceptance. See " Customers and Markets."

Certain of the Company's products and products in development are intended
for use with the Internet/intranet. The success of the Company's products and
products in development, if commercially released, may depend, in part, on their
compatibility with the Internet. The commercial market for products and services
designed for use with the Internet/intranet has only recently began to
experience rapid growth, and there can be no assurance that this growth pattern
will continue. To the extent that the Internet continues to experience rapid
growth in the level of use and the number of users, there can be no assurance
that the Internet infrastructure will be able to support the demands of such
growth or will not otherwise lose its utility due to delays in the development
and adoption of new standards and protocols required to handle increased levels
of activity or due to increased government regulation. It is difficult to
predict with any assurance whether the demand for Internet-related products and
services will increase or decrease in the future. There can be no assurance that
the Company will be able to successfully compete in the market for
Internet-related products and services without substantial modification or
customization of the Company's products or services or the introduction of new
products and services.

Reliance on Certain Relationships

In connection with the Company's TED family of products, the Company has
established strategic relationships with a number of organizations that it
believes are important to its ability to enhance its worldwide sales, marketing
and support activities as well as to develop and market enhancements and new
applications for its products. The Company's indirect channel relationships
provide marketing and sales opportunities for the Company's direct sales force
and expand distribution of its products. These relationships also assist the
Company in keeping pace with technological and marketing developments and the
needs of major customers and vendors. There can be no assurance that the Company
will be able to continue to successfully manage its strategic relationships or
that any customer, system integrator or distributor will continue to market or
to purchase the TED family of products or that the Company will be successful in
establishing strategic relationships in connection with its SoftNC technology or
products. The failure by the Company to maintain these relationships or the
failure to establish new relationships in the future could have a material
adverse effect on the Company's business, results of operations and financial
condition. There can be no assurance that these events will not occur in the
future. See " - Marketing and Sales."

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20
The Company licenses technology from OEMs and other third parties to enable
the Company to develop new applications for its products. Such licenses are
terminable on the occurrence of certain events. This software is then integrated
with internally developed software and used in the Company's products to perform
key functions. There can be no assurance that these third-party technology
licenses will continue to be available to the Company on commercially reasonable
terms, if at all. The loss of or inability to maintain any of these technology
licenses could result in delays or reductions in product shipments until
equivalent technology, if any, could be identified, licensed and integrated. Any
such delays or reductions in product shipments could materially and adversely
affect the Company's business, results of operations and financial condition.

Industry Conditions, New Product Development and Technological Change

The client/server and desktop system software market is characterized by
rapid technological advancements, evolving industry standards, changes in
consumer expectations and frequent new product introductions and enhancements.
The introduction of products embodying new technologies and the emergence of new
industry standards could render the Company's existing products and products
currently under development obsolete and unmarketable. Accordingly, the life
cycles of the Company's products are difficult to estimate. The Company's future
success will depend upon its ability to enhance its current products and to
develop and introduce new products that keep pace with technological
developments, respond to evolving consumer requirements and achieve market
acceptance. The Company's future success will also depend in part upon its
ability to maintain and enhance its technology relationships in order to provide
customers with integrated product solutions. The Company's ability to develop
and introduce new products and enhancements on a timely basis may be adversely
affected by a number of factors, including the ability of the Company's
engineers to solve technical problems and to test products, as well as business
priorities in light of the availability of development and other resources and
other factors, including factors that may be outside the control of the Company.
If the Company is unable to develop on a timely basis new software products or
enhancements to existing products, if such new products or enhancements do not
achieve market acceptance, or if the Company is unable to maintain its
technology relationships, the Company's business, results of operations and
financial condition will be materially and adversely affected. See " - Products
and Technologies" and " - Research and Development."

The Company's current products are designed to adhere to certain open
systems standards, and current and future sales of the Company's products will
be dependent, in part, on market acceptance of such standards. Emergence of new
industry standards could require the Company to modify its products to adhere to
such standards. There can be no assurance that the Company would be successful
in incorporating new standards effectively or on a timely basis or that any
resulting products would achieve commercial acceptance. Failure by the Company
to effectively incorporate into its products new industry standards that are
widely adopted in the markets served by the Company would have a material
adverse effect on the Company's business, results of operations and financial
condition.

Product Concentration

To date, substantially all of the Company's revenues have been attributable
to sales of licenses of the TED family of products and related services. The
Company has not introduced for commercial sale any products based on, or
recognized any revenues from licenses of, its SoftNC technology. The Company
currently expects the TED family of products and related services to account for
substantially all of its revenues for the foreseeable future. As a result,
factors adversely affecting the pricing of or demand for the TED products, such
as competition or technological change, could have a material adverse effect on
the Company's business, results of operations and financial condition. The
Company's future financial performance will depend, in significant part, on the
successful development, introduction and customer acceptance of new and enhanced
versions of the TED family of products and related services and on the Company's
ability to develop and commercialize products based on the Company's SoftNC
technology. There can be no assurance that the Company will continue to be
successful in developing and marketing the TED family of products and related
services, or that the Company will be successful in developing and marketing
products based on the Company's SoftNC technology. See " - Products and
Technologies."

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21
Competition

The market in which the Company competes is characterized by rapidly
changing technology and evolving standards. The Company's competitors and
potential competitors, which include Microsoft, Netscape, and the original CDE
developers (Hewlett-Packard, IBM, Novell, and Sunsoft, a subsidiary of Sun),
have or may have more established and larger marketing and sales organizations,
significantly greater financial and technical resources and a larger installed
base of customers, as well as greater name recognition than the Company.
Accordingly, such competitors or potential competitors may be able to respond
more quickly to new or emerging technologies and changes in customer
requirements or devote greater resources to the development, promotion and sales
of their products than the Company or may be better positioned to achieve market
acceptance of new technology or products. The Company also expects that
competition will increase as a result of software industry consolidation. In
addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase the
ability of their products to address the needs of the enterprise customers in
the Company's markets. Accordingly, it is possible that new competitors or
alliances among competitors may emerge and rapidly acquire significant market
share. Increased competition may result in price reductions, reduced gross
margins and loss of market share, any of which could have a material adverse
effect on the Company's business, results of operations and financial condition.
There can be no assurance that the Company will be able to compete successfully
against current and future competitors, or that competitive factors faced by the
Company will not have a material adverse effect on the Company's business,
results of operations and financial condition. See " - Competition."

The Company's products are based in part on a non-exclusive license of the
CDE industry standard. Each of the original CDE developers has developed or is
developing unique implementations of CDE specific to its own UNIX platforms.
Because CDE was developed as an open systems industry standard, any of the
original CDE developers or their assignees, other competitors or third-party
licensees, may develop similar products or sell competing products in the
Company's markets. In addition, the Company has developed its TED product based
in part on a non-exclusive license of the CDE technology from Hewlett-Packard.
Under the terms of the Company's license agreement with Hewlett-Packard, all
modifications to the CDE developed by the Company are owned by the Company and
are licensed back to Hewlett-Packard on a non-exclusive basis. There can be no
assurance that one or more of these competitors and potential competitors will
not develop or market products that would directly compete with the Company's
products or license a third party to do so.

Management of Growth

The Company has recently experienced a period of significant growth in total
revenues that has placed and is expected to continue to place a significant
strain upon its managerial, financial and operational resources. To manage its
expansion, the Company must improve these resources on a timely basis and
continue to expand, train and manage its employee base. In addition, the Company
will be required to manage multiple relationships with various customers,
distribution channels, technology licensors and licensees and other third
parties. There can be no assurance that the Company's systems, procedures or
controls will be adequate to support the Company's operations or that the
Company's management will be able to achieve the rapid execution necessary to
fully exploit any future market opportunity for the Company's products and
services or successfully manage relationships with its customers, distribution
channels, technology licensors and licensees or other third parties. The
Company's future operating results will also depend on its ability to expand its
sales and marketing organizations, implement and manage new distribution
channels to penetrate different and broader markets and expand its support
organization. If the Company is unable to manage expansion effectively, the
Company's business, results of operations and financial condition will be
materially and adversely affected. There can be no assurance, however, that such
expansion or growth will occur. See Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

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22
Lengthy Sales and Implementation Cycle

The licensing of the Company's products by its customers typically involves
a significant technical evaluation and commitment of capital and other
resources, with delays frequently associated with customers' internal procedures
to approve large capital expenditures and to test and accept new technologies
that affect key operations, particularly with respect to government sales. For
these and other reasons, the sales cycle associated with the licensing of the
Company's products is typically lengthy and subject to a number of significant
risks. For example, during the fourth quarter of fiscal 1997, the Company's
revenues fell substantially short of anticipated levels due primarily to a
failure to close an order from a government reseller. There can be no assurance
that the Company will not experience these and additional cancellations, delays
or failures to close orders in the future. Because of the lengthy sales cycle
and the large size of many customers' orders, if revenues forecasted from a
specific customer for a particular quarter are not realized in that quarter, the
Company's operating results for that quarter could be materially and adversely
affected.

Evolving Distribution Channels

The Company's strategy is to leverage its sales and marketing through its
indirect channel relationships, which include OEMs, VARs and system integrators,
that distribute or resell the Company's products in their respective markets. To
the extent that average selling prices through indirect channel relationships
decline relative to the Company's direct sales in the future, the Company's
average selling prices and gross margins may be materially and adversely
affected.

In addition, the Company's agreements with indirect channel entities
typically do not restrict such entities from distributing competing products
and, in many cases, may be terminated by either party without cause.
Furthermore, in some cases the Company has granted exclusive distribution rights
that are limited by territory and in duration, and such agreements typically do
not require any minimum purchase volumes; therefore, there can be no assurance
that these relationships will produce significant revenues in the future.
Consequently, the Company may be adversely affected should any indirect channel
entity fail to adequately penetrate its market segment. Failure to recruit,
manage or retain important indirect channel entities, or to manage conflict
within the channel, could materially and adversely affect the business, results
of operations and financial condition of the Company.

The Company plans to expand its direct sales force. There can be no
assurance that such internal expansion will be successfully completed, that the
cost of such expansion will not exceed the revenues generated or that the
Company's sales and marketing organization will be able to compete successfully
against the significantly more extensive and well-funded sales and marketing
operations of many of the Company's current or potential competitors. The
Company's inability to effectively manage the expansion of its direct sales
force could have a material adverse effect on the Company's business, results of
operations and financial condition. See " Marketing and Sales."

Dependence on Key Personnel

The Company's performance and prospects are substantially dependent on the
continued service of its executive officers and key technical and sales and
marketing personnel, most of whom have worked together for only a short period
of time. Given the Company's early stage of development, the Company is
dependent on its ability to retain and motivate highly qualified personnel,
especially its management and technical and sales personnel. The Company has
"key person" life insurance policies on certain of its executive officers. Even
so, the loss of the services of any of its executive officers or other key
employees could have a material adverse effect on the business, results of
operations and financial condition of the Company.

The Company's future success also depends on its continuing ability to
identify, hire, train and retain other highly qualified technical and managerial
personnel. Competition for such personnel is intense, and there can be no
assurance that the Company will be able to identify, attract, assimilate or
retain other highly qualified technical and managerial personnel in the future.
The inability to identify, attract and retain the necessary technical and
managerial personnel could have a material adverse effect upon the Company's
business, results of operations and

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23
financial condition.

Dependence on Proprietary Technology; Risks of Infringement

The Company's success and ability to compete is dependent in part upon its
proprietary technology. While the Company relies on trademark, trade secret,
copyright law, confidentiality procedures and contractual provisions to protect
its technology, the Company believes that factors such as the technological and
creative skills of its personnel, new product developments, frequent product
enhancements, name recognition and reliable product maintenance are more
essential to establishing and maintaining a technology leadership position. To
date, the Company has had no patents issued; however, it has three patent
applications pending. There can be no assurance that any patents will be issued
from such applications or that others will not develop technologies that are
similar or superior to the Company's technology. The Company believes the source
code for the Company's proprietary software is protected both as a trade secret
and copyright work. However, effective trademark, copyright and trade secret
protection may not be available in every foreign country in which the Company's
products are distributed. The Company's policy is to enter into confidentiality
agreements with its employees, consultants and vendors, and the Company
generally controls access to and distribution of its software, documentation and
other proprietary information. Despite these precautions, it may be possible for
a third party to copy or otherwise obtain and use the Company's products or
technology without authorization. There can be no assurance that the steps taken
by the Company to protect its proprietary technology will be adequate to prevent
misappropriation of its technology by third parties or that third parties will
not be able to develop similar technology independently.

The Company may receive notices from third parties claiming that the
Company's products infringe third-party proprietary or intellectual property
rights. The Company expects that, as the number of software products in the
industry increases and the functionality of these products or their
implementation further overlaps, software products will increasingly be subject
to such claims. Any such claim, with or without merit, could result in costly
litigation and may require the Company to enter into royalty or licensing
arrangements. However, such royalty or licensing arrangements, if required, may
not be available on terms acceptable to the Company, if at all. Consequently,
any such litigation could have a material adverse effect on the Company's
business, results of operations and financial condition. See " - License
Agreements and Intellectual Property."

International Operations

Although, to date, the Company has not made a significant percentage of its
sales internationally, a significant portion of the Company's customer base are
large multinational companies. To meet the needs of such companies, both
domestically and internationally, the Company must directly or indirectly
provide worldwide sales and product support services. In April 1997, the Company
relocated the European headquarters of its European subsidiary, TriTeal B.V.,
from the Netherlands to the United Kingdom and closed the Netherlands facility.
The European operations are responsible for generating and fulfilling customer
demand and supporting indirect channel activities. In addition, the Company's
marketing department supports European activities from the Company's
headquarters in Carlsbad, California. The Company intends to enter additional
international markets and to continue to expand its international operations and
direct and indirect sales and marketing activities worldwide, which will require
significant management and financial resources and could adversely affect the
Company's business, results of operations and financial condition. The Company
has committed and intends to continue to commit significant time and financial
resources to developing international sales and support channels. To the extent
that the Company is unable to expand its international sales organization in a
timely manner, the Company's growth, if any, in international sales will be
limited, and the Company's business, results of operations and financial
condition could be materially and adversely affected.

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24
consequences including restrictions on the repatriation of earnings, and the
burdens of complying with a wide variety of foreign laws and practices. To date,
substantially all of the Company's international revenues have been denominated
in U.S. dollars. Although exposure to currency fluctuations to date has been
insignificant, there can be no assurance that fluctuations in future currency
exchange rates will not have a material adverse effect on revenues from
international sales and thus the Company's business, results of operations and
financial condition. There can be no assurance that any of such factors will not
have a material adverse effect on the Company's future international operations
and, consequently, the Company's business, results of operations and financial
condition. See " - Marketing and Sales" and Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

Risk of Product Defects

Software products as complex as those offered by the Company frequently
contain errors or may fail, especially when first introduced or when new
versions are released. Although the Company conducts extensive product testing,
the Company may discover software errors in its new products or enhancements
after their release, possibly resulting in a loss or delay of recognition of
revenues. The Company's products are typically intended for use in applications
that may be critical to a customer's business. As a result, the Company expects
that its customers and potential customers have a greater sensitivity to product
defects than the market for software products generally. Although the Company's
business has not been adversely affected by any such errors to date, there can
be no assurance that, despite testing by the Company and by current and
potential customers, errors will not be found in products or releases after
commencement of commercial shipments, resulting in loss of revenue or delay in
market acceptance, diversion of development resources, damage to the Company's
reputation or increased service and warranty costs, any of which could have a
material adverse effect upon the Company's business, results of operations and
financial condition. See " - Research and Development."

Product Liability

The Company's license agreements with its customers typically contain provisions
designed to limit the Company's exposure to potential product liability claims.
However, it is possible that the limitation of liability provisions contained in
the Company's license agreements may not be effective under the laws of certain
jurisdictions. Although the Company has not experienced any product liability
claims to date, the sale and support of products by the Company may entail the
risk of such claims, and there can be no assurance that the Company will not be
subject to such claims in the future. A successful product liability claim
brought against the Company could have a material adverse effect upon the
Company's business, results of operations and financial condition.

Potential Volatility of Stock Price

The market price of the Company's Common Stock has been, and may continue to
be, highly volatile and could be subject to wide fluctuations in response to
quarterly variations in operating results, announcements of technological
innovations or new software or services by the Company or its competitors,
changes in or failure of the Company to meet financial estimates by securities
analysts, general market conditions or other events or factors, many of which
are beyond the Company's control. In addition, the stock market has experienced
significant price and volume fluctuations that have particularly affected the
market prices of equity securities of many high technology companies and that
often have been unrelated to the operating performance of such companies. These
broad market fluctuations may adversely affect the market price of the Company's
Common Stock. In the past, following periods of volatility in the market price
for a company's securities, securities class action litigation has often been
initiated. Such litigation could result in substantial costs and a diversion of
management attention and resources, which could have a material adverse effect
on the Company's business, results of operations and financial condition.

Future Capital Needs; Uncertainty of Additional Financing

The Company's operations to date have required substantial amounts of
capital. The Company expects to spend substantial funds to support the growth of
its products, to develop new products, to add enhancements and

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25
additional applications to its products and to expand internationally. The
Company anticipates that its existing capital resources and credit facilities
should enable it to maintain its current and planned operations for at least the
next 12 months.

The Company's capital requirements will depend on numerous factors,
including the progress of the Company's research and development programs, the
commercial acceptance of its products, the resources the Company devotes to
advanced technologies and the demand for its products. To the extent that funds
generated from operations and available credit facilities are insufficient, the
Company will have to raise additional funds to meet its capital requirements. If
additional funds are raised through the issuance of equity securities, the
percentage ownership of the stockholders of the Company will be reduced,
stockholders may experience additional dilution, and such equity securities may
have rights, preferences or privileges senior to those of the holders of the
Company's Common Stock. No assurance can be given that additional financing will
be available on acceptable terms, if at all. If adequate funds are not
available, the Company may have to, among other things, reduce substantially or
eliminate expenditures for the development and marketing of its products. See
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations."

Antitakeover Provisions

Certain provisions of the Company's Certificate of Incorporation and
By-laws, as well as provisions of Delaware law, could discourage potential
acquisition proposals and delay or prevent a change in control of the Company.
For example, the Company's Certificate of Incorporation authorizes the Board of
Directors to issue up to 5,000,000 shares of Preferred Stock and to determine
the designations, price, rights, powers, preferences, privileges and
limitations, including voting rights, of those shares without any further vote
or action by the stockholders. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the Rights of the holders of any
Preferred Stock that may be issued in the future. The Certificate of
Incorporation and By-laws, among other things, provide for a classified Board of
Directors, require that stockholder actions occur at duly called meetings of the
stockholders, provide that special meetings of stockholders may be called only
by the Chairman of the Board of Directors, the Chief Executive Officer or a
majority of the Board of Directors, do not permit cumulative voting in the
election of directors and require advance notice of stockholder proposals and
director nominations. These provisions, as well as certain applicable provisions
of Delaware law, could serve to depress the Company's stock price or discourage
a hostile bid in which stockholders could receive a premium for their shares. In
addition, these provisions could have the effect of making it more difficult for
a third party to acquire a majority of the outstanding voting stock of the
Company, or delay, prevent or deter a merger, acquisition or tender offer in
which the Company's stockholders could receive a premium for their shares, or a
proxy contest for control of the Company or other change in the Company's
management.

ITEM 2. PROPERTIES

At March 31, 1997, the Company leased approximately 32,000 square feet of
office space for its corporate headquarters in Carlsbad, California, under
operating leases expiring at various dates through 1999. At the same date, the
Company also occupied approximately 8,500 square feet of office space under
lease and rental agreements in various locations across the United States in
support of its regional activities and approximately 3,000 square feet of office
space in the Netherlands and the United Kingdom.

In April 1997, the Company signed a 10-year lease agreement for
approximately 51,000 square feet of office space intended for use as the new
corporate headquarters in Carlsbad, California. Under the terms of the lease,
which is scheduled to commence in April 1998, the Company is committed to future
lease payments aggregating approximately $11.2 million through fiscal 2008.

In April 1997, the Company elected to close its 2,600 square-foot facility
in the Netherlands and relocate its European headquarters to the United Kingdom.
In May 1997, the Company terminated its current lease for a 400-square foot
office building in the United Kingdom and signed a new lease in the United
Kingdom for a 1,400 square- foot facility. Under the terms of the lease, the
Company is committed to future lease payments aggregating approximately $116,000
through fiscal 2001.

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ITEM 3. LEGAL PROCEEDINGS

Not applicable.

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

Not applicable.

PART II

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

PRICE RANGE OF COMMON STOCK

The Company's Common Stock commenced trading on the Nasdaq National Market
on August 7, 1996 under the symbol "TEAL." The following table sets forth, for
the periods indicated, the high and low sale prices per share of the Common
Stock, as reported by the Nasdaq National Market.

YEAR ENDED MARCH 31, 1997 HIGH LOW
-------------------------------------------------------------- ------------- -------------

Second Quarter (commencing August 7, 1996) ................... $ 15.75 $ 8.00
Third Quarter ................................................ 21.75 12.25
Fourth Quarter................................................ 23.25 5.50

The last reported sale price of the Common Stock on the Nasdaq National
Market on June 19, 1997 was $9.62 per share. As of June 19, 1997, there were
approximately 178 holders of record of the Company's Common Stock.

DIVIDEND POLICY

The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain any future earnings to finance
growth and development of its business and therefore does not anticipate paying
any cash dividends in the foreseeable future. In addition, the Company's line of
credit agreement currently prohibits the payment of cash dividends on its
capital stock without the consent of the lender.

RECENT SALES AND ISSUANCES OF UNREGISTERED SECURITIES

From April 1, 1996 to March 31, 1997, the Registrant has sold and issued
(without payment of any selling commission to any person) the following
unregistered securities:

1. During the period, the Registrant granted incentive stock options to
employees, officers and, directors of the Company under its 1995 Stock Option
Plan (the "1995 Plan") covering an aggregate of 513,797 shares of the Company's
Common Stock. Certain of these options vest over a period of time following
their respective dates of grant.

2. During the period, 21,696 unregistered shares of Common Stock were issued
upon exercise of stock options by employees for an aggregate exercise price of
$5,424.

3. In February 1997, 32,277 shares of Common Stock were issued to Imperial
Bank upon exercise of a warrant for an aggregate exercise price of $68,750.

4. In June 1996, pursuant to the terms of an equity financing of the
Company, the Registrant issued 566,164 shares of the Company's Series C
Preferred stock to a group of investors, including a director of the Company,
for $3,963,148 in cash.

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The sales and issuances of securities in the transactions described in
paragraphs (1) and (2) above were deemed to be exempt from registration under
the Securities Act by virtue of Rule 701 promulgated thereunder in that they
were offered and sold either pursuant to written compensatory benefit plans or
pursuant to a written contract relating to compensation, as provided by Rule
701.

With respect to the grant of stock options described in paragraph (1) above,
exemption from registration under the Securities Act was unnecessary in that
none of such transactions involved a "sale" of securities as such term is used
in Section 2(3) of the Securities Act.

The sales and issuances of securities in the transactions described in
paragraphs (3) and (4) above were deemed to be exempt from registration under
the Securities Act by virtue of Section 4(2) and/or Regulation D promulgated
thereunder.

The recipients represented their intention to acquire the securities for
investment purposes only and not with a view to the distribution thereof.
Appropriate legends are affixed to the stock certificates issued in such
transactions. All recipients either received adequate information about the
Registrant or had access, through employment or other relationships, to such
information.

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ITEM 6. SELECTED FINANCIAL DATA

The following selected consolidated financial data are derived from the
audited Consolidated Financial Statements of the Company and should be read in
conjunction with Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the Consolidated Financial Statements of
the Company and related notes thereto included elsewhere in this Report on Form
10-K.

YEARS ENDED MARCH 31,
--------------------------------------------
1997 1996 1995 1994
-------- -------- -------- --------
(In thousands, except per share data)

Revenues:
License fees ...................... $ 13,704 $ 6,750 $ 2,575 $ 148
Maintenance and services .......... 2,121 1,471 1,535 285
-------- -------- -------- --------
Total revenues ............ 15,825 8,221 4,110 433
Costs of revenues:
Cost of license fees .............. 2,719 1,751 785 3
Cost of maintenance and services .. 676 421 384 192
-------- -------- -------- --------
Total costs of revenues ... 3,395 2,172 1,169 195
-------- -------- -------- --------
Gross profit .............. 12,430 6,049 2,941 238
Operating expenses:
Research and development .......... 2,499 2,391 485 8
Selling, general and administrative 12,742 8,569 2,290 99
-------- -------- -------- --------
Total operating expenses .. 15,241 10,960 2,775 107
-------- -------- -------- --------
Operating income (loss) ............. (2,811) (4,911) 166 131
Interest income (expense), net ...... 901 (26) (2) --
-------- -------- -------- --------
Income (loss) before provision for
(benefit from) income taxes ....... (1,910) (4,937) 164 131
Provision for (benefit from)
income taxes ...................... -- (95) 48 56
-------- -------- -------- --------
Net income (loss) ................... $ (1,910) $ (4,842) $ 116 $ 75
======== ======== ======== ========
Net income (loss) per share (2) ..... $ (0.23) $ (0.72) $ 0.02 $ 0.01
======== ======== ======== ========
Shares used in computing net income
(loss) per share (2) ............. 8,428 6,712 6,503 6,463
======== ======== ======== ========

MARCH 31,
--------------------------------------------
1997 1996 1995 1994
-------- -------- -------- --------
(In thousands)

Cash, cash equivalents and short-term
investments ...................... $ 42,864 $ 301 $ 1,225 $ 22
Working capital ..................... 46,223 428 1,541 95
Total assets ........................ 55,701 6,636 3,155 238
Long-term debt, less current portion -- 243 120 79
Total stockholders' equity .......... 48,116 1,269 1,740 85

(1) The Company was incorporated on January 14, 1993, but did not commence
operations until after March 31, 1993. Accordingly, there were no results of
operations for the period from January 14, 1993 (inception) through March 31,
1993, and no balance sheet data at March 31, 1993.

(2) See Note 1 of Notes to Consolidated Financial Statements.

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

The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that involve risks
and uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements as a result of certain
factors, including those set forth below and as well as those discussed under
the caption "Risk Factors" in Item 1 of this Report on Form 10-K. The following
discussion should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto included elsewhere in this Report on Form 10-K.

OVERVIEW

TriTeal develops, markets and supports open systems-based, mission-critical
desktop system software and integrated applications that enable multi-platform
deployment of client/server applications throughout an enterprise. The Company
was founded in January 1993, commenced operations in April 1993 and released its
first product in May 1993. In August 1995, the Company introduced its current
flagship product, TED. The Company's current products are based, in part, on
certain technologies licensed from Hewlett-Packard, Spyglass, SPYRUS and other
technology vendors. The Company's revenues historically have been derived from
two principal sources: (i) license fees for the use of the Company's software
products, and (ii) maintenance agreements and software development contract
revenues. To date, substantially all of the Company's revenues have been
attributable to sales of licenses of the TED family of products and related
services. The Company does not anticipate receiving a significant amount of
revenues from software development contracts in the future. TriTeal recently
introduced its Java-based SoftNC technology, a thin-client, platform-independent
solution designed to allow simultaneous access to Java and legacy applications.
The Company has not introduced for commercial sale any products based on, or
recognized any revenues from licenses of, its SoftNC technology. Revenues from
software licenses are generally recognized upon shipment of software. Revenues
from maintenance agreements are recognized over the contract terms, which
generally is one year. Software development contract revenues are recognized
using the percentage-of-completion method. See Note 1 of Notes to Consolidated
Financial Statements.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, the percentage of
net revenues represented by each item reflected on the Company's Statements of
Operations.

YEARS ENDED MARCH 31,
--------------------------
1997 1996 1995
---- ---- ----

Revenues:
License fees ...................... 87% 82% 63%
Maintenance and services .......... 13 18 37
---- ---- ----
Total revenues ............ 100 100 100
Costs of revenues:
Cost of license fees .............. 17 21 19
Cost of maintenance and services .. 4 5 9
---- ---- ----
Total cost of revenues .... 21 26 28
---- ---- ----
Gross profit .............. 79 74 72
Operating expenses:
Research and development .......... 16 29 12
Selling, general and administrative 81 104 56
---- ---- ----
Total operating expenses .. 97 133 68
---- ---- ----
Operating income (loss) ... (18) (59) 4
Interest income, net ................ 6 -- --
---- ---- ----
Income (loss) before provision for
income taxes ..................... (12) (59) 4
Provision for income taxes ......... -- -- 1
---- ---- ----
Net income (loss) ................... (12)% (59)% 3%
==== ==== ====

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YEARS ENDED MARCH 31, 1997, 1996 AND 1995

Revenues

The Company's total revenues increased to $15.8 million in fiscal 1997 from
$8.2 million in fiscal 1996 and $4.1 million in fiscal 1995. During fiscal 1997,
two of the Company's government resellers, Sylvest Management and IBM, accounted
for 37% and 36% of revenues, respectively. License fees increased to $13.7
million in fiscal 1997 from $6.8 million in fiscal 1996 and $2.6 million in
fiscal 1995. During the years ended March 31, 1997, 1996 and 1995, license fees
aggregated 87%, 82% and 63% of total revenues, respectively. These increases in
license fees were due primarily to increased market acceptance of the Company's
existing products, introduction of enhanced and new products and expansion of
the Company's direct sales force. Maintenance and services revenues, which also
include revenues derived from software development contracts, increased to $2.1
million in fiscal 1997 from $1.5 million in each of fiscal 1996 and fiscal 1995.
Maintenance, which consists primarily of technical support, increased to $1.7
million in fiscal 1997 from $752,000 in fiscal 1996 and $267,000 in fiscal 1995.
The increase in maintenance revenues was due primarily to additional maintenance
agreements associated with a larger installed base of customers. The Company
does not anticipate receiving a significant amount of revenues from software
development contracts in the future; however, it may enter into such contracts
in special situations where such software development may be necessary or where
the technology may allow the Company to introduce new products, penetrate new
markets or establish strategic relationships.

Cost of Revenues

The Company's total cost of revenues increased to $3.4 million in fiscal
1997 from $2.2 million in fiscal 1996 and $1.2 million in fiscal 1995. As a
percentage of revenues, gross margin increased to 79% in fiscal 1997 from 74% in
fiscal 1996 and 72% in fiscal 1995. The annual increases in gross margin were a
result of the shift in revenue mix to software license revenues, which typically
have higher gross margins, as well as lower average third-party royalty rates.
There can be no assurance that gross margins will remain at this level in the
future. The cost of license fees, which consists primarily of third-party
royalties for licensed technology, related maintenance charges, and media and
documentation, increased to $2.7 million in fiscal 1997 from $1.8 million in
fiscal 1996 and $785,000 in fiscal 1995. These increases in the cost of license
fees were due principally to a higher volume of sales of licenses. The cost of
maintenance and services, which consists primarily of labor and services,
increased to $676,000 in fiscal 1997 from $421,000 in fiscal 1996 and $384,000
in fiscal 1995. These increases in the cost of maintenance and services were due
primarily to an increase in the number of customer support and development
personnel and related overhead costs necessary to support a larger installed
customer base, product upgrades and development activities.

Research and Development

Research and development expenses include expenses associated with the
development of new products, enhancements of existing products and quality
assurance activities. These expenses consist primarily of personnel costs,
overhead costs relating to occupancy, equipment depreciation and supplies. In
accordance with Statement of Financial Accounting Standards No. 86, development
costs incurred in the research and development of new software products and
enhancements to existing software products are expensed as incurred until
technological feasibility has been established. To date, the Company's software
development has been completed concurrent with the establishment of
technological feasibility and, accordingly, no costs have been capitalized.
Research and development expenses increased to $2.5 million in fiscal 1997 from
$2.4 million in fiscal 1996 and $485,000 in fiscal 1995. The increases in
research and development expenses were attributable primarily to the development
of the Company's research and development organization and reflect the increased
costs associated with both additional headcount as well as expanded research and
development efforts. The increase from fiscal 1996 to fiscal 1997 was offset in
large part by an $800,000 non-recurring charge in fiscal 1996 related to license
fees for certain Internet/intranet technologies. Research and development
expenses represented 16%, 29% and 12% of total revenues in fiscal 1997, 1996 and
1995, respectively. The Company believes that a significant level of investment

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31
for product development is required and, accordingly, the Company anticipates
that, for the foreseeable future, these expenses will continue to increase in
absolute dollars.

Selling, General and Administrative

Selling, general and administrative expenses consist primarily of salaries,
commissions and bonuses, promotional expenses and occupancy costs. Selling,
general and administrative expenses increased to $12.7 million in fiscal 1997
from $8.6 million in fiscal 1996 and $2.3 million in fiscal 1995. The increases
in selling, general and administrative expenses were due primarily to the hiring
of additional sales and marketing personnel, sales commissions and bonuses
associated with increased sales volume, increased travel associated with
additional headcount and increased sales volumes, additional promotional
activities and, to a lesser degree, increased administrative personnel and
occupancy costs. The Company believes that selling, general and administrative
expenses will increase in absolute dollars as the Company expands its sales and
administrative staff, adds infrastructure and incurs additional costs related to
being a publicly-held company.

Interest Income (Expense), Net

Interest income (expense), net represents interest earned on the Company's
cash, cash equivalents and short-term investments, offset in part by interest
expense on the Company's borrowings, principally its equipment loan and line of
credit. Net interest income was $901,000 during fiscal 1997 compared to net
interest expense of $26,000 and $2,000 during fiscal 1996 and 1995,
respectively. This increase was attributable to earnings on the proceeds from
the Company's initial public offering in August 1996 and follow-on public
offering in February 1997, which together generated approximately $44.7 million
in cash proceeds.

Income Taxes

At March 31, 1997, the Company had net operating loss carryforwards for
federal and state tax reporting purposes of approximately $6.7 million and $3.7
million, respectively. The Company also had research and development credit
carryforwards for federal and state tax reporting purposes of approximately
$229,000 and $127,000, respectively. Utilization of the carryforwards may be
subject to annual limitations due to changes in the Company's ownership
resulting from the Company's initial public offering and follow-on public
offering. See Note 8 of Notes to Consolidated Financial Statements. The net
operating loss carryforwards expire, if not utilized, at various dates through
2010 and 2000 for federal and state tax reporting purposes, respectively. A
valuation allowance has been recorded for the entire net deferred tax asset as a
result of uncertainties regarding the realization of the asset due to the
limited operating history of the Company. See Note 8 of Notes to Consolidated
Financial Statements.

The Company had an effective tax rate of approximately 29% in fiscal 1995.
This rate differs from the federal statutory rate primarily due to state income
taxes and permanent differences.

FACTORS AFFECTING OPERATING RESULTS

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fluctuations, in addition to incentive compensation, include seasonal factors,
such as the fiscal year ends of the government and other customers and reduction
in European business during summer months; the number of new orders and product
shipments; the size and timing of individual orders; the timing of introduction
of products or product enhancements by the Company, the Company's competitors or
other providers of hardware, software and components for the Company's market;
competition and pricing in the software industry; market acceptance of new
products; reduction in demand for existing products and shortening of product
life cycles as a result of new product introductions by competitors; product
quality problems; customer order deferrals in anticipation of new products;
changes in customer budgets or procurement procedures; changes in operating
expenses; changes in Company or customer strategy; personnel changes; changes in
foreign currency exchange rates; changes in mix of products sold; and changes in
general economic conditions.

The Company's sales generally comprise a small number of orders with a large
dollar amount per order. The loss or delay in receipt of individual orders,
therefore, could have a more significant impact on the revenues and quarterly
results of the Company than on those of companies with higher sales volumes or
lower revenues per order. For example, during the fourth quarter of fiscal 1997,
the Company's revenues fell substantially short of anticipated levels due
primarily to a failure to close an order from a government reseller, and there
can be no assurance that delays, cancellations or failures to close orders will
not occur in the future. The Company's software products generally are shipped
as orders are received, and revenues are recognized upon delivery of the
products, provided no significant vendor obligations exist and collection of the
related receivable is deemed probable. As a result, software license revenues in
any quarter are substantially dependent on orders booked and shipped in that
quarter. The timing of license fee revenue is difficult to predict because of
the length of the Company's sales cycle, which is typically three to nine months
from the initial contact. Because the Company's operating expenses are based on
anticipated revenue trends and because a high percentage of the Company's
expenses are relatively fixed, a delay in the recognition of revenue from a
limited number of license transactions could cause significant variations in
operating results from quarter to quarter and could result in losses
substantially in excess of anticipated amounts. To the extent such expenses
precede, or are not subsequently followed by, increased revenues, the Company's
operating results would be materially and adversely affected. In addition, the
achievement of anticipated revenues is substantially dependent on the ability of
the Company to attract, on a timely basis, and retain skilled personnel,
especially sales and support personnel. As a result of the foregoing factors,
among others, revenues for any quarter are subject to significant variation, and
the Company believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as
indications of future performance. Fluctuations in operating results may also
result in volatility in the price of the Company's Common Stock in the public
market. Due to all of the foregoing factors, among others, it is likely that,
from time to time in the future, the Company's results of operations would be
below the expectations of public market analysts and investors.

The Company has recently experienced a period of significant growth in total
revenues that has placed and is expected to continue to place a significant
strain upon its managerial, financial and operational resources. To manage its
expansion, the Company must improve these resources on a timely basis and
continue to expand, train and manage its employee base. In addition, the Company
will be required to manage multiple relationships with various customers,
distribution channels, technology licensors and licensees and other third
parties. There can be no assurance that the Company's systems, procedures or
controls will be adequate to support the Company's operations or that the
Company's management will be able to achieve the rapid execution necessary to
fully exploit any future market opportunity for the Company's software products
and services or successfully manage relationships with its customers,
distribution channels, technology licensors and licensees or other third
parties. The Company's future operating results will also depend on its ability
to expand its sales and marketing organizations, implement and manage new
distribution channels to penetrate different and broader markets and expand its
support organization. If the Company is unable to manage expansion effectively,
the Company's business, results of operations and financial condition will be
materially and adversely affected. There can be no assurance, however, that such
expansion or growth will occur.

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33
LIQUIDITY AND CAPITAL RESOURCES

Since inception, the Company has financed its operations and met its capital
expenditure requirements primarily from proceeds of the Company's initial and
follow-on public offerings of Common Stock and private sales of Preferred Stock,
sales of its software products and services, as well as borrowings under its
bank credit facility.

In August 1996, the Company completed the initial public offering of
2,875,000 shares of its Common Stock (including exercise of the underwriters'
over-allotment option), generating net proceeds of approximately $20.4 million.
In February 1997, the Company completed a follow-on public offering of its
Common Stock, generating net proceeds of approximately $24.3 million.

Net cash used for operating activities was $4.2 million, $4.6 million and
$23,000 in fiscal 1997, fiscal 1996 and fiscal 1995, respectively. The net cash
used during fiscal 1997 and fiscal 1996 reflects primarily net losses incurred
and increases in accounts receivable and prepaid expenses and other current
assets, which were partially offset by increases in accrued compensation and
related benefits and deferred revenues. Net cash used during fiscal 1995
reflects primarily an increase in accounts receivable, which was partially
offset by net income generated as well as an increase in accrued compensation
and related benefits and deferred revenue. The Company generally does not offer
payment terms beyond 60 days; however, the Company's sales to government
resellers and agencies of the U.S. government typically have longer payment
cycles. Because the Company derives a substantial portion of its revenues from
government resellers and agencies of the U.S. Government, the Company's largest
receivables tend to have lengthy collection cycles. At March 31,1997,
approximately 87% of the Company's outstanding trade receivables were from
government resellers and agencies of the U.S. Government. See Note 6 of Notes to
Consolidated Financial Statements. To date, the impact of such lengthy
collection cycles has not been material to the Company's working capital
requirements; however, there can be no assurance that future delays in payment
will not adversely affect the Company's ability to meet its anticipated
liquidity needs.

Investing activities used net cash of $32.7 million in fiscal 1997, and
consisted primarily of the purchase of short-term investments and, to a lesser
extent, the purchase of property and equipment. Investing activities used $1.0
million and $407,000 in fiscal 1996 and 1995, respectively, and consisted
primarily of the purchase of property and equipment. Capital expenditures have
generally consisted of computer workstations, networking equipment, office
furniture and equipment and leasehold improvements. The Company had no material
firm commitments for capital expenditures at March 31, 1997, but expects to
purchase additional computer equipment and to enhance its management information
systems throughout fiscal 1998.

Financing activities generated $48.2 million during fiscal 1997 from the
issuance of Preferred Stock and Common Stock, offset in part by repayments of
long-term debt. Since inception, the Company had raised $9.4 million from the
sale of Preferred Stock and $44.7 million from the sale of Common Stock in the
Company's initial and follow-on offerings. Financing activities generated cash
of $4.7 million and $1.6 million in fiscal 1996 and 1995, respectively, from the
issuance of Preferred Stock and from the net proceeds of long-term debt. At
March 31, 1997, the Company had $42.9 million in cash, cash equivalents and
short-term investments and $46.2 million of working capital. The Company has a
$3.0 million revolving bank credit facility which expires on October 30, 1997.
Borrowings are secured by substantially all Company assets. At March 31, 1997,
there were no amounts outstanding under the facility.

As of March 31, 1997, the Company's principal commitments consisted of
obligations under operating leases, aggregating $1.4 million. In April 1997, the
Company signed a 10-year lease agreement for approximately 51,000 square feet of
office space intended for use as a new corporate headquarters in Carlsbad,
California. Under the terms of the lease, which is scheduled to commence in
April 1998, the Company is committed to future minimum lease payments
aggregating approximately $11.2 million through fiscal 2008.

The Company's operations to date have required substantial amounts of
capital. The Company expects to spend substantial funds to support the growth of
its products, to add enhancements and additional applications to its products
and to expand internationally. The Company believes that its current cash, cash
equivalents and short-term investments, along with its available credit
facility, will be sufficient to meet its anticipated cash needs for working

33
34
capital, capital expenditures and business expansion for at least the next 12
months. The estimate of the period for which the Company expects its available
cash balances and credit facilities to be sufficient to meet its capital
requirements is a forward-looking statement that involves risks and
uncertainties as set forth herein and in Item 1 under the caption "Business -
Risk Factors" and elsewhere in this Report on Form 10-K. The Company's capital
requirements will depend on numerous factors, including the progress of the
Company's research and development programs, the commercial acceptance of its
products, the resources the Company devotes to advanced technologies and the
demand for its products. To the extent that funds generated from operations are
insufficient, the Company will have to raise additional funds to meet its
capital requirements. If additional funds are raised through the issuance of
equity securities, the percentage ownership of the stockholders of the Company
will be reduced, stockholders may experience additional dilution, and such
equity securities may have rights, preferences or privileges senior to those of
the holders of the Company's Common Stock. No assurance can be given that
additional financing will be available on acceptable terms, if at all. If
adequate funds are not available, the Company may have to, among other things,
reduce substantially or eliminate expenditures for the development and marketing
of its products.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Company's Consolidated Financial Statements and Notes thereto, together
with the independent auditor's report thereon, appear at pages F-1 through F-14
of this Report on Form 10-K and are incorporated herein by reference.

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

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

IDENTIFICATION OF DIRECTORS

The information required by this item is incorporated by reference to the
information set forth in the section captioned "Election of Directors -
Nominees" contained in the Company's definitive Proxy Statement for the 1997
Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission within 120 days after the end of the Company's fiscal year ended
March 31, 1997 (the "Proxy Statement").

IDENTIFICATION OF EXECUTIVE OFFICERS

The information required by this item is incorporated by reference to the
information set forth in the section captioned "Executive Officers" at the end
of Part I, Item 1 of this Report on Form 10-K.

COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

The information required by this item is incorporated by reference to the
information set forth in the section captioned "Compliance with the Reporting
Requirements of Section 16(a) of the Securities Exchange Act of 1934" contained
in the Proxy Statement.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference to the
information set forth in the section captioned "Executive Compensation"
contained in the Proxy Statement.

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35
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is incorporated by reference to the
information set forth in the section captioned "Security Ownership of Certain
Beneficial Owners and Management" contained in the Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated by reference to the
information set forth in the section captioned "Certain Transactions" contained
in the Proxy Statement.

PART IV

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

(a)1. CONSOLIDATED FINANCIAL STATEMENTS

The consolidated financial statements required by this item are submitted in
a separate section beginning on page F-1 of this Report on Form 10-K.

Consolidated Financial Statements of TriTeal Corporation
--------------------------------------------------------

Report of Ernst & Young LLP, Independent Auditors.....................................................F-1
Consolidated Balance Sheets as of March 31, 1997 and 1996.............................................F-2
Consolidated Statements of Operations for the years ended March 31, 1997, 1996 and 1995...............F-3
Consolidated Statements of Stockholders' Equity for the years ended March 31, 1997, 1996 and 1995.....F-4
Consolidated Statements of Cash Flows for the years ended March 31, 1997, 1996 and 1995...............F-5
Notes to Consolidated Financial Statements............................................................F-6

2. FINANCIAL STATEMENT SCHEDULES

All schedules have been omitted because they are not required, are not
applicable, or the information is included in the Consolidated
Financial Statements or notes thereto.

3. INDEX TO EXHIBITS

EXHIBIT
REFERENCE EXHIBIT DESCRIPTION
--------- -------------------------------------------------------------------------------------------

3.1 Registrant's Certificate of Incorporation (2)
3.2 Registrant's By-laws (3)
4.1 Reference is made to Exhibits 3.1 and 3.2
4.2 Specimen stock certificate (1)
*10.1 Form of Indemnity Agreement entered into between the Registrant and its directors and
officers. (1)
*10.2 1995 Stock Option Plan (1)
*10.3 Form of Incentive Stock Option Agreement under the 1995 Stock Option Plan (1)
*10.4 Form of Nonstatutory Stock Option Agreement under the 1995 Stock Option Plan (1)
*10.5 Form of Nonstatutory Stock Option Agreement outside the 1995 Option Plan (1)
*10.6 Form of NonQualified Stock Option Agreement outside the 1995 Stock Option Plan (1)
*10.7 1996 Employee Stock Purchase Plan (1)
*10.8 Form of Employee Stock Purchase Plan Offering (1)
*10.9 Form of Restricted Stock Purchase Agreement (1)
10.10 Series A Preferred Stock Purchase Agreement, dated January 10, 1995, between the
Registrant and certain investors (1)
10.11 Series B Preferred Stock Purchase Agreement, dated September 30, 1995, between the
Registrant and certain investors (1)
10.12 Series C Preferred Stock Purchase Agreement, dated June 7, 1996, between the Registrant

35
36

and certain investors (1)
10.13 Investors' Rights Agreement, dated June 7, 1996, between the Registrant and certain
investors (1)
10.14 Imperial Bank Credit Terms and Conditions, dated April 4, 1995 as amended (1)
10.15 Warrant to Purchase Common Stock, dated May 5, 1995, between the Registrant and PT
Carlsbad Associates (1)
10.16 Full Service Office Lease, dated January 19, 1995, between the Registrant and PT
Carlsbad Associates (1)
10.17 Full Service Office Lease, dated August 19, 1994, between the Registrant and PT Carlsbad
Associates (1)
10.18 CDE and TED Core Software License Agreement, dated May 20, 1996, between the
Registrant and The Santa Cruz Operation, Inc (1)
10.19 Common Desktop Environment Software License Agreement, dated April 19, 1996,
between the Registrant and Hewlett-Packard Company, as amended (1)
10.20 OEM Source License Agreement, dated January 24, 1996, between the Registrant and
Spyglass, Inc (1)
10.21 Independent Software License Agreement, dated May 18, 1995, between the Registrant and
SPYRUS (1)
10.22 OEM Source License Agreement, dated April 26, 1995, between the Registrant and Spyglass,
Inc (1)
10.23 Master Software License and Support Agreement, dated October 31, 1994, between the
Registrant and Spyglass, Inc (1)
10.24 Master Software License and Support Agreement, dated October 31, 1994, between the
Registrant and Open Software Foundation, Inc (1)
10.25 Sublease, dated June 7, 1995, between Scripps Memorial Hospitals and the Registrant (1)
10.26 Imperial Bank Revolving Line of Credit, dated November 18, 1996 (4)
10.27 Office Lease, dated April 17, 1997, between the Registrant and Marco Plaza Enterprises
10.28 Underwriting Agreement between the Registrant and PaineWebber Incorporated and Piper
Jaffray, Inc., as representatives of the underwriters, dated August 6, 1996 (2)
10.29 Underwriting Agreement between the Registrant and PaineWebber Incorporated, Hambrecht
and Quist and Piper Jaffray, Inc., as representatives of the underwriters, dated
February 19, 1997
*10.30 Description of Fiscal Year 1997 Executive Bonus Arrangement (3)
*10.31 Form of Fiscal Year 1998 Performance Incentive Plan
11.1 Statement regarding the calculation of net income (loss) per share
21.1 Subsidiaries of Registrant (1)
23.1 Consent of Ernst & Young LLP, independent auditors
24.1 Power of Attorney. Reference is made to the signature page of this Report on Form 10-K
27.1 Financial Data Schedule

- ----------

* Indicates management compensatory plan, contract or arrangement

(1) Filed as an exhibit to the Registrant's Statement on Form
SB-2 (No. 333-5052-LA) or amendments thereto and
incorporated by reference.
(2) Filed as an exhibit to the Registrant's Form 10-Q for the
six months ended September 30, 1996 and incorporated by
reference.
(3) Filed as an exhibit to the Registrant's Statement on Form
S-1 (No. 333-20579) or amendments thereto and incorporated
by reference.
(4) Filed as Exhibit 10.1 to the Registrant's Form 10-Q for the
nine months ended December 31, 1996 and incorporated by
reference.

(b) REPORTS ON FORM 8-K

No reports on Form 8-K were filed by the Company during the fiscal quarter ended
March 31, 1997.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized in the
city of San Diego, County of San Diego, State of California on the 27th day of
June, 1997.

TRITEAL CORPORATION

By: /s/ Jeffrey D. Witous
----------------------------------------
JEFFREY D. WITOUS
President, Chief Executive Officer,
and Chairman of the Board of Directors

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Jeffrey D. Witous and Arthur S. Budman and each
of them, jointly and severally, as his true and lawful attorneys-in-fact and
agents, each with full power of substitution, for him in any and all capacities,
to sign any and all amendments to this Report on Form 10-K, and to file the
same, with exhibits thereto and other documents in connections therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and attorney to do and perform each and
every act and thing requisite and necessary to be done therewith, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that each of said attorneys-in-fact and agents or his substitute
or substitutes, may lawfully do so or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report on Form 10-K has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated:

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

/S/ JEFFREY D. WITOUS President, Chief Executive Officer,
- ------------------------------ and Chairman of the Board of Directors
Jeffrey D. Witous (principal executive officer) June 27, 1997

/S/ ARTHUR S. BUDMAN Chief Financial Officer and Director
- ------------------------------ (principal financial and accounting
Arthur S. Budman officer) June 27, 1997

/S/ TERRY A. STRAETER Director June 27, 1997
- ------------------------------
Dr. Terry A. Straeter

/S/ GARY A. WETSEL Director June 27, 1997
- ------------------------------
Gary A. Wetsel

37
38
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
TriTeal Corporation

We have audited the accompanying consolidated balance sheets of TriTeal
Corporation as of March 31, 1997 and 1996 and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended March 31, 1997. These consolidated 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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of TriTeal Corporation at March
31, 1997 and 1996, and the results of its operations and its cash flows for each
of the three years in the period ended March 31, 1997 in conformity with
generally accepted accounting principles.

/s/ ERNST & YOUNG LLP

San Diego, California
April 30, 1997

F-1

TRITEAL CORPORATION

CONSOLIDATED BALANCE SHEETS

ASSETS

MARCH 31,
--------------------------------
1997 1996
------------- -------------

Current assets:
Cash and cash equivalents ........................... $ 11,614,707 $ 301,251
Short-term investments .............................. 31,248,987 --
Accounts receivable, net of allowance for doubtful
accounts of $300,000 at March 31, 1997 and $80,000
at March 31, 1996 ................................ 8,748,817 4,872,054
Prepaid expenses and other current assets ........... 2,196,112 378,485
------------- -------------
Total current assets ........................ 53,808,623 5,551,790
Property and equipment, net ........................... 1,561,609 1,024,040
Other assets, net ..................................... 330,622 60,140
------------- -------------
Total assets ................................ $ 55,700,854 $ 6,635,970
============= =============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Line of credit ...................................... $ -- $ 113,542
Accounts payable .................................... 1,507,250 784,575
Accrued liabilities ................................. 5,064,570 3,181,761
Deferred revenues ................................... 1,013,414 922,732
Current portion of long-term debt ................... -- 121,388
------------- -------------
Total current liabilities ................... 7,585,234 5,123,998
Long-term debt ........................................ -- 242,776
Stockholders' equity:
Preferred Stock, $.001 par value
Authorized shares -- 5,000,000
Issued and outstanding shares -- no shares and
1,527,247 shares at March 31,1997 and 1996, .... -- 1,527
respectively
Common Stock, $.001 par value
Authorized shares -- 30,000,000
Issued and outstanding shares --10,768,493 shares
and 4,186,902 shares at March 31,1997 and 1996,
respectively ..................................... 10,768 4,187
Additional paid-in capital .......................... 54,861,984 5,869,825
Preferred stock subscriptions ....................... -- 363,129
Notes receivable from stockholders .................. (96,667) (167,250)
Deferred compensation ............................... (100,300) (151,900)
Retained earnings (deficit) ......................... (6,560,165) (4,650,322)
------------- -------------
Total stockholders' equity .................. 48,115,620 1,269,196
------------- -------------
Total liabilities and stockholders' equity .. $ 55,700,854 $ 6,635,970
============= =============

See accompanying notes.

F-2
40

TRITEAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED MARCH 31,
------------------------------------------------
1997 1996 1995
------------ ------------ ------------

Revenues:
License fees ............................ $ 13,704,577 $ 6,750,281 $ 2,575,294
Maintenance and services ................ 2,121,148 1,470,883 1,534,572
------------ ------------ ------------
Total revenues .................. 15,825,725 8,221,164 4,109,866
Costs of revenues:
Cost of license fees .................... 2,719,452 1,751,442 785,550
Cost of maintenance and services ........ 675,871 420,969 383,754
------------ ------------ ------------
Total costs of revenues ......... 3,395,323 2,172,411 1,169,304
------------ ------------ ------------
Gross profit .................... 12,430,402 6,048,753 2,940,562
Operating expenses:
Research and development ................ 2,498,873 2,390,627 484,499
Selling, general and administrative ..... 12,742,656 8,569,275 2,290,064
------------ ------------ ------------
Total operating expenses ........ 15,241,529 10,959,902 2,774,563
------------ ------------ ------------
Operating income (loss) ................... (2,811,127) (4,911,149) 165,999
Interest income (expense), net ............ 901,284 (25,943) (2,317)
------------ ------------ ------------
Income (loss) before provision for
(benefit from) income taxes ............. (1,909,843) (4,937,092) 163,682
Provision for (benefit from)
income taxes ............................ -- (95,500) 47,800
------------ ------------ ------------
Net income (loss) ......................... $ (1,909,843) $ (4,841,592) $ 115,882
============ ============ ============
Net income (loss) per share ............... $ (0.23) $ (0.72) $ 0.02
============ ============ ============
Shares used in computing net income
(loss) per share ....................... 8,428,152 6,712,321 6,503,134
============ ============ ============

See accompanying notes.

F-3
41

TRITEAL CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

CONVERTIBLE PREFERRED
STOCK COMMON STOCK
------------------------------ -----------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------

Balance at March 31, 1994 ............. -- $ -- 3,492,902 $ 3,493
Issuance of Series A
convertible preferred
stock, net ........................ 727,247 727 -- --
Net income ........................... -- -- -- --
------------ ------------ ------------ ------------
Balance at March 31, 1995 ............. 727,247 727 3,492,902 3,493
Issuance of Series B convertible
preferred stock, net ............... 800,000 800 -- --
Preferred stock subscriptions .......... -- -- -- --
Issuance of common stock in
exchange for notes
receivable and service
rendered.......................... -- -- 694,000 694

Deferred compensation ................ -- -- -- --
Amortization of deferred
compensation........................ -- -- -- --
Net loss ............................. -- -- -- --
------------ ------------ ------------ ------------
Balance at March 31, 1996 ............. 1,527,247 1,527 4,186,902 4,187
Issuance of Series C convertible
preferred stock, net ............... 566,164 566 -- --
Conversion of preferred stock
into common stock upon initial
public offering, net ............... (2,093,411) (2,093) 2,093,411 2,093
Issuance of common stock upon
initial public offering, net........ -- -- 2,875,000 2,875
Issuance of common stock upon
follow-on public offering, net....... -- -- 1,365,000 1,365
Issuance of common stock upon
exercise of options and
warrants ........................... -- -- 211,552 212
Issuance of common stock under
Employee Stock Purchase Plan ....... -- -- 36,628 36
Repayments of notes receivable
from stockholders .................. -- -- -- --
Amortization of
deferred compensation ............ -- -- -- --
Net loss ............................. -- -- -- --
------------ ------------ ------------ ------------
Balance at March 31, 1997 ............. -- $ -- 10,768,493 $ 10,768
============ ============ ============ ============

NOTES
ADDITIONAL PREFERRED RECEIVABLE RETAINED
PAID-IN STOCK FROM DEFERRED EARNINGS
CAPITAL SUBSCRIPTIONS STOCKHOLDERS COMPENSATION (DEFICIT) TOTAL
------------ ------------- ------------- ------------- ------------ ------------

Balance at March 31, 1994 ............. $ 6,507 $ -- $ -- $ -- $ 75,388 $ 85,388
Issuance of Series A
convertible preferred
stock, net ........................ 1,538,312 -- -- -- -- 1,539,039
Net income ........................... -- -- -- -- 115,882 115,882
------------ ------------- ------------- ------------- ------------ ------------
Balance at March 31, 1995 ............. 1,544,819 -- -- -- 191,270 1,740,309
Issuance of Series B convertible
preferred stock, net................ 3,964,200 -- -- -- -- 3,965,000
Preferred stock subscriptions .......... -- 363,129 -- -- -- 363,129
Issuance of common stock in
exchange for notes
receivable and service
rendered ........................... 172,806 -- (167,250) -- -- 6,250
Deferred compensation ................ 188,000 -- -- (188,000) -- --
Amortization of deferred
compensation ....................... -- -- -- 36,100 -- 36,100
Net loss ............................. -- -- -- -- (4,841,592) (4,841,592)
------------ ------------- ------------- ------------- ------------ ------------
Balance at March 31, 1996 ............. 5,869,825 363,129 (167,250) (151,900) (4,650,322) 1,269,196
Issuance of Series C convertible
preferred stock, net ............... 3,928,727 (363,129) -- -- -- 3,566,164
Conversion of preferred stock
into common stock upon initial
public offering, net ............... -- -- -- -- -- --
Issuance of common stock upon
initial public offering, net ....... 20,379,119 -- -- -- -- 20,381,994
Issuance of common stock upon
follow-on public offering, net ..... 24,317,477 -- -- -- -- 24,318,842
Issuance of common stock upon ......... --
exercise of options and
warrants ........................... 117,801 -- -- -- -- 118,013
Issuance of common stock under
Employee Stock Purchase Plan ....... 249,035 -- -- -- -- 249,071
Repayments of notes receivable
from stockholders .................. -- -- 70,583 -- -- 70,583
Amortization of
deferred compensation ............ -- -- -- 51,600 -- 51,600
Net loss ............................. -- -- -- -- (1,909,843) (1,909,843)
------------ ------------- ------------- ------------- ------------ ------------
Balance at March 31, 1997 ............. $ 54,861,984 $ -- $(96,667)) $ (100,300) $ (6,560,165) $ 48,115,620
============ ============= ============= ============= ============ ============

See accompanying notes.

F-4
42

TRITEAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED MARCH 31,
----------------------------------------------
1997 1996 1995
------------ ------------ ------------

Cash flows from operating activities:
Net income (loss) .......................................... $ (1,909,843) $ (4,841,592) $ 115,882
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization .......................... 625,885 332,445 60,863
Provision for doubtful accounts ........................ 220,000 20,000 60,000
Amortization of deferred compensation .................. 51,600 36,100 --
Issuance of common stock for services .................. -- 6,250 --
Deferred income taxes .................................. -- (95,500) 44,947
Changes in operating assets and liabilities:
Accounts receivable .................................. (4,096,763) (3,412,783) (1,392,464)
Prepaid expenses and other current assets ............ (1,817,627) (342,408) (36,077)
Accounts payable ..................................... 722,675 601,564 163,011
Accrued liabilities .................................. 1,882,809 2,560,000 606,737
Deferred revenue ..................................... 90,682 549,377 353,955
------------ ------------ ------------
Net cash used in operating activities ...................... (4,230,582) (4,586,547) (23,146)
Cash flows from investing activities:
Purchases of short-term investments ...................... (80,415,565) -- --
Sales and maturities of short-term investments ........... 49,166,578 -- --
Purchases of property and equipment ...................... (1,163,454) (964,341) (396,655)
Other assets ............................................. (270,482) (36,807) (10,352)
------------ ------------ ------------
Net cash used in investing activities ...................... (32,682,923) (1,001,148) (407,007)
Cash flows from financing activities:
Net proceeds from (repayments of) line of
credit ................................................ (113,542) 113,542 --
Proceeds from long-term debt ............................. -- 364,164 125,123
Repayments of long-term debt ............................. (364,164) (141,525) (31,730)
Proceeds from repayments of notes receivable
from stockholders ...................................... 70,583 -- --
Proceeds from issuance of common stock, net .............. 45,067,920 -- --
Proceeds from stock subscriptions, net ................... -- 363,129 --
Proceeds from issuance of preferred stock, net ........... 3,566,164 3,965,000 1,539,039
------------ ------------ ------------
Net cash provided by financing activities .................. 48,226,961 4,664,310 1,632,432
------------ ------------ ------------
Increase (decrease) in cash and cash
equivalents .............................................. 11,313,456 (923,385) 1,202,279
Cash and cash equivalents at beginning of
year ..................................................... 301,251 1,224,636 22,357
============ ============ ============
Cash and cash equivalents at end of year ................... $ 11,614,707 $ 301,251 $ 1,224,636
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ................................................. $ 28,418 $ 42,243 $ 7,904
============ ============ ============
Income taxes ............................................. $ -- $ -- $ 7,407
============ ============ ============
Supplemental disclosure of noncash financing activities:
Issuance of common stock in exchange for notes
receivable ............................................... $ -- $ 167,250 $ --
============ ============ ============

See accompanying notes.

F-5
43
TRITEAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business

TriTeal Corporation (the "Company"), develops, markets and supports open
systems-based, mission-critical desktop system software and integrated
applications that enable multi-platform deployment of client/server applications
throughout an enterprise. The Company recently introduced its Java-based SoftNC
technology, a thin-client, platform-independent solution designed to allow
simultaneous access to Java and legacy applications.

Reincorporation

In August 1996, the Company reincorporated in the State of Delaware,
providing for 30,000,000 authorized shares of Common Stock with a $.001 par
value per share and for 5,000,000 authorized shares of Preferred Stock with a
$.001 par value per share. Pursuant to the reincorporation, each share of Common
Stock and each share of Preferred Stock of the predecessor California
corporation was exchanged for one share of Common Stock and one share of
Preferred Stock, respectively, of the Delaware corporation. The accompanying
financial statements have been retroactively restated to give effect to the
reincorporation.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary in The Netherlands. To date, substantially all
of the Company's international operations have been denominated in U.S. dollars.
Foreign currency transaction gains and losses were insignificant for the years
ended March 31, 1997, 1996 and 1995. All intercompany accounts and transactions
have been eliminated in consolidation.

Property and Equipment

Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets
(principally three to five years). Leasehold improvements are amortized over the
lesser of the estimated economic life of the asset or the remaining term of the
lease.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash and highly liquid investments with
maturities of three months or less when purchased. Short-term investments are
recorded at amortized cost plus accrued interest which approximates market
value. The Company generally invests its excess cash in certificates of deposit,
commercial paper, corporate debt instruments and U.S. government securities. The
Company has established guidelines relative to diversification and maturities
that are periodically reviewed and modified to take advantage of trends in
yields and interest rates. The Company has not experienced any losses on its
cash equivalents or short-term investments.

The Company applies Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities," to
value its investments. Under the statement, the Company classifies its
short-term investments as "Available-for-Sale" and records such assets at
estimated fair value in the balance sheet. As of March 31, 1997 and 1996, the
fair market value of cash equivalents and short-term investments approximated
cost.

F-6
44
TRITEAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Concentration of Credit Risk

Credit is extended based on an evaluation of the customer's financial
condition and collateral is generally not required. Credit losses have been
minimal and such losses have been within management's expectations.

Revenue Recognition

Revenue from sales of software licenses is recognized upon product shipment
provided that no significant vendor obligations remain and collection of the
resulting receivable is deemed probable. Maintenance revenue is recognized
ratably over the term of the maintenance agreement, which in most cases is one
year. Revenue from software development contracts is recognized under the
percentage-of-completion method.

Capitalized Software

In accordance with SFAS No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed," development costs incurred
in the research and development of new software products and enhancements to
existing software products are expensed as incurred until technological
feasibility in the form of a working model has been established. To date, the
Company's software development has been completed concurrent with the
establishment of technological feasibility and, accordingly, no costs have been
capitalized.

Income Taxes

The Company accounts for income taxes following the provisions of SFAS
No.109, "Accounting for Income Taxes." SFAS No. 109 is an asset and liability
approach that requires the recognition of deferred tax assets and liabilities
for expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns.

Computation of Net Income (Loss) Per Share

Net income (loss) per share is computed using the weighted average number of
common shares and common stock equivalents outstanding. Common equivalent shares
from stock options and warrants are excluded from the computation when their
effect is antidilutive except that, pursuant to the Securities and Exchange
Commission Staff Accounting Bulletins, common shares and common equivalent
shares issued during the 12 months prior to the Company's August 1996 initial
public offering (the "IPO") have been included in the calculation as outstanding
for all periods prior to the IPO (using the treasury stock method). The
calculation also gives effect to the conversion of all convertible preferred
shares (using the if-converted method), which automatically converted into
common shares upon completion of the IPO.

Use of Estimates

The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and disclosures made in the accompanying notes to the consolidated
financial statements. Actual results could differ from those estimates.

Accounting Standard on Impairment of Long-Lived Assets

Effective April 1, 1996, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of."
The adoption had no effect on the consolidated financial statements.

F-7
45

TRITEAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Accounting Standard on Earnings per Share

In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share," which will be effective for the Company's fiscal 1998
financial statements. The Company will be required to change the method
currently used to compute earnings per share and to restate all prior periods.
The new requirements for calculating primary earnings per share exclude the
dilutive effect of stock options and warrants. The adoption of this statement is
not expected to have a material impact, since the Company is currently in a net
loss position and the impact of stock options and warrants is not included in
the net loss per share calculations as their effect is antidilutive.

Stock Options

In fiscal 1997, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." As permitted by the Statement, the Company has
elected to continue accounting for its stock-based compensation in accordance
with the provisions of APB No. 25. As such, the new provisions of SFAS No. 123
had no impact on the financial position or results of operations of the Company.

2. BALANCE SHEET COMPONENTS

Short-term Investments

The Company has classified all of its marketable securities as available-for-
sale securities. The fair market value of these investments approximates
cost. The following table summarizes available-for-sale securities at March 31,
1997:

Certificates of deposit.................. $ 6,000,693
Commercial paper.......................... 15,186,401
Corporate debt securities................. 7,065,565
U.S. government agency obligations........ 2,996,328
--------------
$ 31,248,987
==============

At March 31, 1997, all short-term investments are due within one year of the
date of purchase.

Property and Equipment

Property and equipment consists of the following:

MARCH 31,
----------------------------------
1997 1996
--------------- ---------------

Computer equipment..................$ 1,948,477 $ 988,356
Furniture and fixtures.............. 537,077 384,416
Leasehold improvements.............. 109,335 58,663
--------------- ---------------
2,594,889 1,431,435
Less accumulated depreciation
and amortization................ (1,033,280) (407,395)
--------------- ---------------
$ 1,561,609 $ 1,024,040
=============== ===============

F-8
46

TRITEAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Accrued Liabilities

Accrued liabilities consist of the following:

MARCH 31,
--------------- -------------
1997 1996
--------------- -------------

Royalties payable.................. $ 1,593,280 $ 1,534,014
Accrued compensation
and related benefits............ 1,452,661 877,222
Allowance for sales returns ....... 1,061,706 511,332
Other accrued liabilities.......... 956,923 259,193
--------------- -------------
$ 5,064,570 $ 3,181,761
=============== =============

3. LINE OF CREDIT FACILITY AND LONG-TERM DEBT

Effective March 31, 1995, the Company entered into a revolving bank credit
facility (the "Facility"). Borrowings are secured by substantially all Company
assets and are limited to the lesser of $1.1 million or 80% of eligible accounts
receivable At March 31, 1996, $113,542 was outstanding under the Facility. A
portion of the proceeds from the Company's IPO during fiscal 1997 was used to
repay the amount due under the Facility.

On August 4, 1996, the Facility expired. On November 18, 1996, the Company
entered into a $3 million revolving bank credit facility (the "revolving
Facility") which expires on October 30, 1997. Borrowings are secured by
substantially all Company assets and bear interest at the bank's prime rate
(8.50% at March 31, 1997). At March 31, 1997, no amounts were outstanding under
the revolving Facility.

4. LONG-TERM DEBT

During fiscal 1996, the Company refinanced and converted $364,164 due under
the Facility into a three-year term loan. This note was repaid in full during
fiscal 1997.

5. LEASE COMMITMENTS

The Company leases its offices under operating lease agreements which expire
at various dates through February 2002. In April 1997, the Company signed a
10-year lease agreement commencing in fiscal 1998 for approximately 51,000
square feet of office space intended for use as a new corporate headquarters in
Carlsbad, California. Future annual minimum lease payments under noncancellable
operating leases having initial terms in excess of one year, including the
10-year lease signed in April 1997, are as follows:

YEARS ENDING MARCH 31, AMOUNT
------------------------------------------- ------------

1998....................................... $ 741,021
1999....................................... 1,278,388
2000....................................... 1,144,109
2001....................................... 1,125,528
2002....................................... 1,207,174
Thereafter................................. 7,074,720
------------
$ 12,570,940
============

Rent expense for the years ended March 31, 1997, 1996 and 1995 was $620,596,
$413,185 and $65,000, respectively.

F-9
47

TRITEAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. BUSINESS SEGMENT AND GEOGRAPHIC AREA INFORMATION

The Company conducts its business within one industry segment. Total export
sales for the years ended March 31, 1997, 1996 and 1995 were $509,540,
$1,256,790 and $49,110, respectively.

During fiscal 1997, 1996 and 1995, sales to government resellers and
agencies of the U.S. Government approximated 81%, 34% and 12%, of revenues,
respectively; related accounts receivable were $7,692,087 and $2,495,475 at
March 31, 1997 and 1996, respectively. Sales to individual customers (primarily
government resellers) exceeding 10% or more of revenues in each year ended March
31 were as follows: during 1997, two customers accounted for 37% and 36% of
revenues, respectively; during 1996, two customers accounted for 18% and 12% of
revenues, respectively; and during 1995, three customers accounted for 29%, 12%
and 11% of revenues, respectively.

7. STOCKHOLDERS' EQUITY

Common Stock

During fiscal 1997, the Company raised net proceeds of approximately
$20,400,000 and $24,300,000 through the completion of its IPO and follow-on
public offering, respectively.

Stock Option Plans

From March 1, 1993 to May 31, 1995, the Company granted an aggregate of
669,000 non-qualified stock options to certain executive officers and key
employees of the Company. The exercise price of such options was $0.25 per
share, the fair value of the common stock on the date of grant as determined by
the Board of Directors. Such options vest over a three-year period in accordance
with the original vesting schedule of the options. In July 1995, the Company
canceled such options and issued 669,000 shares of common stock to certain
officers and key employees under restricted stock purchase agreements (the
"Agreements"). Pursuant to the Agreements, the Company has the option to
repurchase, at the original option issue price of $0.25 per share, the unvested
shares in the event of termination of employment. At March 31, 1997 and 1996,
144,667 and 307,667 shares were subject to repurchase by the Company,
respectively.

During 1995, the Company adopted the 1995 Stock Option Plan (the "Plan"),
under which 1,350,000 shares of the Company's Common Stock were reserved for
issuance upon exercise of options granted by the Company. The Plan provides for
the grant of both incentive and nonstatutory stock options to officers,
directors, employees and consultants of the Company. Options granted by the
Company generally vest over a three-to-four year period and are exercisable for
a period of 10 years from the date of grant. Options generally are granted at
the fair market value of the shares at the date of grant as determined by the
Board of Directors.

The Company recorded $188,000 of deferred compensation for options granted
during the year ended March 31, 1996, representing the difference between the
option exercise price and the deemed fair market value for financial statement
presentation purposes. The Company is amortizing such compensation ratably over
the vesting period of the options. During the years ended March 31, 1997 and
1996, the Company charged to operations $51,600 and $36,100, respectively, for
amortization of such deferred compensation.

F-10
48

TRITEAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

A summary of stock option transactions, including 899,350 non-qualified
stock options granted outside of the Plan, is as follows:

WEIGHTED
AVERAGE
OPTION PRICE PRICE
SHARES PER SHARE PER SHARE
------------- -------------- -------------

Outstanding at March 31, 1994............ 555,000 $ 0.001 -0.25 $ 0.03
Granted................................ 787,900 $ 0.25 $ 0.25
--------- --------------
Outstanding at March 31, 1995............ 1,342,900 $ 0.001 -0.25 $ 0.16
Granted................................ 731,550 $ 0.25 -5.00 $ 0.82
Canceled............................... (706,750) $ 0.001 -0.50 $ 0.19
--------- --------------
Outstanding at March 31, 1996............ 1,367,700 $ 0.001 -5.00 $ 0.72
Granted................................ 513,797 $ 6.00 -22.50 $ 14.60
Exercised.............................. (179,275) $ 0.001 -3.50 $ 0.27
Canceled............................... (21,191) $ 0.25 -18.375 $ 2.54
========= ===============
Outstanding at March 31, 1997............ 1,681,031 $ 0.001-22.50 $ 4.98
========= ===============

A detail of the options outstanding at March 31, 1997 is as follows:

WEIGHTED
AVERAGE
REMAINING WEIGHTED
RANGE OF OPTIONS CONTRACTUAL LIFE AVERAGE PRICE OPTIONS
EXERCISE PRICES OUTSTANDING IN YEARS PER SHARE EXERCISABLE
----------------- ---------------- ----------------- -------------- --------------

$ 0.001 - 5.00 1,174,274 7.57 $ 2.62 631,793
$ 5.01 - 10.00 87,475 9.14 $ 6.29 --
$ 10.01 - 15.00 147,150 9.58 $ 13.00 --
$ 15.01 - 20.00 261,632 9.75 $ 18.31 --
$ 20.01 - 22.50 10,500 9.77 $ 21.11 --
--------- ---- ------- -------
1,681,031 8.29 $ 12.20 631,793
========= ==== ======= =======

At March 31, 1997, options to purchase 631,793 common shares, were
exercisable and options to purchase 389,044 common shares were available for
future grant.

The Company has elected to follow APB No. 25, "Accounting for Stock Issued
to Employees," and related Interpretations in accounting for its employee and
director stock options because, as discussed below, the alternative fair value
accounting provided for under SFAS No. 123 requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB No. 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.

Adjusted pro forma information regarding net income (loss) and net income (loss)
per share is required by SFAS No. 123, and has been determined as if the Company
had accounted for its employee stock options under the fair value method of that
Statement. For options granted in the year ended March 31, 1996 and the period
prior to the Company's IPO, the fair value for options was estimated at the date
of grant using the "minimum value" method for option pricing with the following
weighted-average assumptions: risk-free interest rate of 6%; dividend yield of
0%; and a weighted average expected life of the option of eight years. For
options granted from August 6, 1996 to March 31, 1997, the fair value of the
options were estimated at the date of grant using the "Black-Scholes" method

F-11
49

TRITEAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

for option pricing with the following weighted average assumptions: risk-free
interest rate of 6%; dividend yield of 0%; expected volatility of 65%; and
weighted-average expected life of the option of eight years.

For purposes of adjusted pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period. The effect
of applying SFAS No. 123 for purposes of providing pro forma disclosures is not
likely to be representative of the effects on reported net income (loss) for
future years. The Company's pro forma information is as follows:

YEARS ENDED MARCH 31,
-------------------------------
1997 1996
------------- -------------

Net loss:
As reported ........................ $ (1,909,843) $ (4,841,592)
============= =============
Pro forma .......................... $ (2,779,233) $ (4,904,296)
============= =============

Net loss per share:
As reported ........................ $ (0.23) $ (0.72)
============= =============
Pro forma .......................... $ (0.33) $ (0.73)
============= =============

Warrant

In connection with the Line of Credit Facility (Notes 3 and 4), the Company
issued a warrant for the purchase of 32,277 shares of common stock at $2.13 per
share. This warrant was exercised during fiscal 1997.

Employee Stock Purchase Plan

On June 11, 1996, the Company adopted the 1996 Employee Stock Purchase Plan
(the "Purchase Plan") and reserved 250,000 shares for issuance thereunder. The
Purchase Plan became effective upon the completion of the Company's IPO. The
Purchase Plan permits eligible employees to purchase common stock, through
payroll deductions of up to 15% of the employee's compensation, at a price equal
to 85% of the fair market value of the common stock at either the beginning or
the end of the offering period, whichever is lower. During fiscal 1997, the
Company issued 36,368 shares of common stock under the Purchase Plan.

Common Stock Reserved

At March 31, 1997, a total of 2,283,707 shares of the Company's Common Stock
have been reserved for the issuance pursuant to the exercise of options and the
purchase of stock under the 1996 Employee Stock Purchase Plan.

F-12
50

TRITEAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. INCOME TAXES

The provision for (benefit from) income taxes consists of the following:

YEARS ENDED MARCH 31,
---------------------------------------------
1997 1996 1995
------------ ------------ ------------

CURRENT
Federal ..................................... $ -- $ -- $ --
State ....................................... -- -- 800
------------ ------------ ------------
Total current ............................... -- -- 800
DEFERRED
Federal ..................................... -- (85,900) 46,900
State ....................................... -- (9,600) 100
------------ ------------ ------------
Total deferred .............................. -- (95,500) 47,000
============ ============ ============
Total provision for (benefit from) income taxes $ -- $ (95,500) $ 47,800
============ ============ ============

The reconciliation of the Company's income tax provision (benefit) computed
at the Federal statutory rate in effect for each of the three years presented
below to the recorded provision for (benefit from) income taxes is as follows:

YEARS ENDED MARCH 31,
-------------------------------------------
1997 1996 1995
----------- ----------- -----------

Provision (benefit) at Federal statutory rate .... $ (661,500) $(1,694,600) $ 57,300
State income tax provision, net of federal benefit -- -- 600
Net operating loss not benefited ................. 661,500 1,599,100 --
Permanent differences and other .................. -- -- (10,100)
=========== =========== ===========
Provision (benefit) at effective rate ............ $ -- $ (95,500) $ 47,800
=========== =========== ===========

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.

Significant components of the Company's net deferred tax liabilities are as
follows:

MARCH 31,
-----------------------------
1997 1996
----------- -----------

Deferred tax liabilities:
Accrual to cash adjustments .............. $ -- $ (187,400)
Section 481 adjustment ................... (376,400) --
----------- -----------
Total deferred tax liabilities ........ (376,400) (187,400)
Deferred tax assets:
Capitalized research expense ............. 201,700 76,400
Accruals and reserves .................... 787,300 --
Net operating loss carryforwards ......... 2,549,300 1,835,400
Research tax credit carryforwards ........ 311,200 43,900
Depreciation ............................. 64,500 38,600
Other .................................... 36,300
----------- -----------
Total deferred tax assets ............. 3,950,300 1,994,300
Depreciation .............................. (3,573,900) 1,806,900
----------- -----------
Net deferred tax assets ............... 376,400 187,400
----------- -----------
$ -- $ --
=========== ===========

F-13
51

TRITEAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

A valuation allowance of $3,573,900 has been recognized to offset the entire
amount of deferred tax assets as realization of such assets is uncertain.
Approximately $ 701,000 of the valuation allowance for deferred tax assets
relates to benefits of stock option deductions which, when recognized, will be
allocated directly to additional paid-in capital.

As of March 31, 1997, the Company has approximately $6,656,000 and
$3,662,000 of Federal and state net operating loss carryforwards, respectively.
The difference between the Federal and state tax loss carryforwards is primarily
attributable to the capitalization of research expenses for California purposes
and the 50% limitation on the California tax loss carryforwards. These Federal
and state carryforwards will begin expiring in 2010 and 2000, respectively,
unless previously utilized. The Company also has Federal and state research tax
credit carryforwards of approximately $228,800 and $126,800, respectively, which
will begin expiring in 2009, unless previously utilized.

Federal and California tax laws limit the utilization of net operating loss
and tax credit carryforwards that arise prior to certain cumulative changes in a
corporation's ownership resulting in a change of control of the Company.
However, the Company believes that such limitations will not have a material
impact on the utilization of the carryforwards.

9. EMPLOYEE RETIREMENT PLAN

The Company has established a 401(k) defined contribution retirement plan
(the "Plan") covering all employees. The Plan provides for voluntary employee
contributions from 1% to 15% of annual compensation (as defined). The Company
may contribute such amounts as determined by the Board of Directors. There were
no employer contributions to the Plan during the years ended March 31, 1997,
1996 and 1995.

F-14