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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

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

FOR THE TRANSITION PERIOD FROM --------------- TO --------------- .

COMMISSION FILE NUMBER 0-21289

CYBERMEDIAT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 95-4347239
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)

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

(310) 581-4700
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
------------------------

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

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK $0.01 PAR VALUE
------------------------

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and 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 of information
statements incorporated by reference in Part III of this form 10-K or any
amendment to this Form 10-K. [ ]

The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 20, 1998, was approximately $72,479,000 based on the
closing price reported for such date on the Nasdaq National Market System. For
purposes of this disclosure shares of Common Stock held by each executive
officer and director and by each holder of 5% or more of the outstanding shares
of Common Stock have been excluded from this calculation because such persons
may be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.

As of March 20, 1998, Registrant had 12,725,203 shares of Common Stock
outstanding
------------------------

DOCUMENTS INCORPORATED BY REFERENCE

Parts of the Proxy Statement for the Registrant's 1998 Annual Meeting of
Stockholders (the "Proxy Statement") are incorporated by reference into Part III
of this Annual Report on Form 10-K.
================================================================================
2

PART 1

THIS ANNUAL REPORT ON FORM 10-K FOR CYBERMEDIA, INC. (THE "COMPANY"), AND
THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE CONTAIN FORWARD-LOOKING
STATEMENTS THAT HAVE BEEN MADE PURSUANT TO THE PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. SUCH FORWARD-LOOKING STATEMENTS ARE
BASED ON CURRENT EXPECTATIONS, ESTIMATES AND PROJECTIONS ABOUT CYBERMEDIA'S
INDUSTRY, MANAGEMENT'S BELIEFS, AND CERTAIN ASSUMPTIONS MADE BY CYBERMEDIA'S
MANAGEMENT. WORDS SUCH AS "ANTICIPATES," "EXPECTS," "INTENDS," "PLANS,"
"BELIEVES", "SEEKS", "ESTIMATES", VARIATIONS OF SUCH WORDS AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THESE
STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE SUBJECT TO CERTAIN
RISKS, UNCERTAINTIES AND ASSUMPTIONS THAT ARE DIFFICULT TO PREDICT; THEREFORE,
ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED OR FORECASTED IN ANY
SUCH FORWARD-LOOKING STATEMENTS. SUCH RISKS AND UNCERTAINTIES INCLUDE THOSE SET
FORTH HEREIN UNDER "FACTORS THAT MAY EFFECT FURTHER RESULTS" ON PAGES 19 THROUGH
28, AS WELL AS THOSE NOTED IN THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE.
UNLESS REQUIRED BY LAW, THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY
ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS OR OTHERWISE. HOWEVER, READERS SHOULD CAREFULLY REVIEW THE RISK FACTORS
SET FORTH IN OTHER REPORTS OR DOCUMENTS THE COMPANY FILES FROM TIME TO TIME WITH
THE SECURITIES AND EXCHANGE COMMISSION, PARTICULARLY THE QUARTERLY REPORTS ON
FORM 10-Q AND ANY CURRENT REPORTS ON FORM 8-K.

ITEM 1. BUSINESS

BUSINESS

Cybermedia, Inc. (the "Company"), a Delaware corporation, was incorporated
in California in November 1991, and was subsequently reincorporated in Delaware
in October 1996. CyberMedia is a leading provider of automatic service and
support software products for Windows-based PC users. The Company's products,
which include First Aid, UnInstaller, Guard Dog Deluxe, Oil Change, and
CyberMedia Support Server, enable users to support their PCs and reduce their
reliance on costly and increasingly scarce technical support services. The
Company has had at least one product among the top ten best-selling Windows
business software sold in the United States (by number of units) in each month
from January 1996 through December 1997, according to PC Data. On December 8,
1997 the Company introduced the CyberMedia Support Server (CSS) Repair Engine
for Workgroups, the first product in the CyberMedia Support Server line of
Automatic Technical Support products and services, targeting the business and
enterprise markets. CSS is designed for workgroups within larger corporations
and small-to mid-size businesses and developed specifically to address the PC
technical support burden and the rising total cost of PC ownership (TCO).

In today's typical Windows-based PC configuration, the integration of a
wide range of hardware and software components from different vendors coupled
with a greater use of the Internet has resulted in an increase in the number and
types of system errors, technical difficulties and security concerns. PC users,
corporate Information Systems (IS) administrators and software and hardware
vendors share a common need for the timely resolution of technical support
problems. These technical support problems are compounded by the complexity of
today's PC environment and a decline in the technical sophistication of the
average PC user. In response to cost pressures and often unmanageable levels of
technical support calls, many software and hardware vendors are scaling back or
completely eliminating the technical support that they once provided free of
charge. In the enterprise market, widespread deployment of PCs has resulted in
rising support costs and total cost of ownership. These costs have arisen due to
non-standard desktop configurations, software conflicts and incompatibilities,
and the increasingly complex nature of PC applications.

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The Company believes that the Internet is emerging as a medium for vendors
to quickly and cost-effectively disseminate software updates and patches to
correct problems or resolve compatibility issues associated with their products.
Despite the potential benefits of the Internet, the Company believes that few PC
users have the time or technical knowledge required to identify, locate,
download and install the updates and patches that apply to their PCs. In
addition, PC users accessing the Internet need to maintain security and privacy
as well as to protect their PCs from viruses and other threats.

The Company has developed an automated approach to technical service and
support that enables the Company to deliver software support solutions to
Windows-based PC users. The Company's products are based on its scalable
ActiveHelp architecture that allows for the support of a broad range of PC
products and enables the Company's products to be regularly updated through the
Internet. The Company's products utilize a knowledge base of general and
system-specific information encompassing a wide range of software applications,
PC hardware and peripherals, networks and security threats. The Company's
objective is to capitalize on the growing need for technical support by being
first to market with innovative products and product upgrades that leverage the
Company's proprietary technology and incorporate feedback from its user base.

The Company's products enable PC users to fix, update, clean and guard
their PCs. The Company's flagship First Aid family of products is designed to
detect, diagnose and resolve a wide range of software conflicts and enable PC
users to diagnose and resolve problems without relying on costly and
increasingly scarce technical support services. In addition to First Aid, the
Company markets UnInstaller, Guard Dog Deluxe and Oil Change. UnInstaller allows
users to safely uninstall unwanted Windows applications, identify and delete
duplicate or unwanted files, and move applications to different folders, drives
or computers while maintaining intact existing links. Guard Dog Deluxe is a
personal Internet privacy and security software product that protects PC users
by maintaining a "firewall" around critical and sensitive information, such as
passwords and financial records as well as by providing traditional anti-virus
protection. Oil Change is an Internet-based software product that is designed to
provide a solution for PC users to locate many of the most recent software
updates and patches applicable to their systems and download and install them,
often automatically, through the Internet.

The Company is currently developing a line of automatic service and support
products to address the needs of the enterprise market. The first product in
this line, CSS Repair Engine, was released in December 1997. Leveraging First
Aid's recognition and repair functionality, CSS Repair Engine provides IS
administrators with centralized and automated detection, diagnosis and
resolution of a wide range of software conflicts and configuration problems
associated with Windows-based client PCs.

PRODUCTS

The Company's products enable users to support their PCs while reducing
reliance upon costly and increasingly scarce technical support services. The
Company's scalable ActiveHelp architecture supports a broad range of PC products
by providing the following: automatic diagnosis and resolution of computer
problems, protection of system integrity by creating a backup of all changes to
critical configuration files, regular and automatic updating of system and
application files through the Internet, safe and controllable uninstallation and
transportation of installed programs, and protection against many Internet-borne
viruses, hostile Java applets, ActiveX controls and privacy threats. Each of the
Company's products includes a 60-day unconditional money-back guarantee. The
Company's ActiveHelp product family is currently comprised of the following
products:

First Aid

The First Aid family of products is designed to automatically detect,
diagnose and resolve a wide range of software conflicts and configuration
problems associated with Windows-based PCs using the Company's knowledge base of
product and vendor-specific technical support information. This knowledge base,
which is installed locally on a PC when First Aid is installed, can be updated
by connecting through the Internet to the Company's regularly updated ActiveHelp
Center server.

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In 1994, 1995 and 1996 virtually all of the Company's sales were from the
First Aid family. The First Aid family of products has included First Aid, First
Aid 95, First Aid 95 Deluxe, First Aid 97, First Aid 98 and First Aid 98 Deluxe.
First Aid products are currently available for Windows 95, Windows 3.1 and
Windows for Workgroups 3.11.

Key features of the First Aid family include the following:

- Fixes many configuration and setup problems with Windows applications by
ensuring that all Dynamic Linking Library (DLL) files required by an
application at startup are present in the correct directories. Locates
and copies misplaced DLLs to the correct directories when needed.

- Performs feature-by-feature checks on many popular applications. Detects
and fixes problems caused by misplaced DLLs and invalid entries in
Windows configuration files.

- Detects setup problems with many popular multimedia cards and CD-ROM
drives. Corrects problems by installing proper drivers and modifying
configuration files as needed.

- Identifies and resolves many setup problems with modems, on-line access
services and local area networks.

- Intercepts many General Protection Faults and other crashes. Returns
users to their original application where they can save their work that
may have been lost otherwise.

- Verifies whether disk caches, memory buffers and other parameters on a PC
have been set for optimal performance. Makes recommendations that can
help boost PC performance.

- Allows users to recover hard disk space by removing and archiving
infrequently used features in many popular applications.

- Automatically monitors changes in a PC's configuration files. Enables
users to restore the PC to a prior working configuration if the PC fails
to work properly.

- Creates an emergency disk that backs up critical files and parameters.
The emergency disk can be used to reboot and restore a PC's setup files
in the event those files are destroyed.

- Enables users to update the First Aid knowledge base on their PCs through
automatic downloads from the ActiveHelp Center server, an up-to-date
knowledge base residing on the Company's Internet server.

First Aid 98

First Aid 98 was introduced in the third quarter of 1997. The fifth
generation of First Aid products, First Aid 98 includes all of the features of
previous versions with the following added features:

- Repairs many Internet access problems by examining the entire PC Internet
setup -- modem, browser and Internet service provider settings -- and
readjusting the system, or reinstalling or updating files.

- Identifies damaged or corrupted program and system files and replaces
them with the original files from the manufacturer, alleviating the need
to reinstall entire programs or Windows itself.

- Features a simpler, easier to use graphical interface.

- Addresses many start-up problems by reinstalling critical components of
Windows which may be damaged or missing.

The First Aid 98 Deluxe version includes anti-virus protection and removal
as well as a PC Cleaning Kit and Guide for cleaning the computer monitor,
keyboard, mouse, disk drive, CD-ROMs and the CPU exterior.

UnInstaller

UnInstaller allows users to uninstall unwanted Windows applications,
identify and delete duplicate or unwanted files, and move applications to
different folders, drives or computers while maintaining intact

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existing links. UnInstaller allows the PC user to "clean out" unneeded files and
applications and thereby free up valuable disk space and improve the PCs
performance.

The Company acquired the worldwide distribution and future development
rights to MicroHelp UnInstaller from Luckman Interactive, Inc. in April 1997. In
May 1997, the Company introduced the product as UnInstaller 4.5, a faster,
Internet-enabled version.

Guard Dog Deluxe

Introduced in September of 1997, Guard Dog Deluxe is a personal Internet
privacy and security software product designed for Windows 95 users. Guard Dog
Deluxe protects PC users by maintaining a personal "firewall" around critical
and sensitive information, such as passwords and financial records, as well as
by providing anti-virus protection. Guard Dog Deluxe can detect attacks from
sources such as hostile ActiveX controls and Java applets as well as viruses
addressed by other anti-virus software products. It also automatically blocks
unwanted "cookies" (data files that are placed on a PC by Web sites to collect
information including the PC user's browsing habits), and blocks search requests
and other data entered at a Web site from being forwarded silently to other
sites.

Oil Change

Oil Change, which is currently available for Windows 95, is an
Internet-based software product that is designed to provide a solution for PC
users to locate easily many of the most recent software updates and patches
applicable to their systems and download and install them through the Internet.
Oil Change enables PC users to keep their systems up-to-date, thereby enhancing
overall system performance and avoiding problems frequently encountered as a
result of outdated software and device drivers.

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

CyberMedia Support Server

The Company is leveraging its ActiveHelp architecture to develop a line of
automatic service and support products to address the needs of the enterprise
market. The first product in this line, CSS Repair Engine for Workgroups, was
released in December, 1997. Leveraging the latest First Aid recognition and
repair functionality, CSS Repair Engine provides IS administrators with
centralized and automated detection, diagnosis and resolution of a wide range of
software conflicts and configuration problems associated with Windows-based
client PCs. CSS Repair Engine's administration console allows control by system
administrators through a web browser. A TimeTrak feature controls use of problem
applications, such as games in the network environment, and allows restoration
of machines with damaged registries, failed installations, and other related
problems by allowing controlled restoration of previous registry and
configuration settings. CSS Repair Engine for Workgroups has been initially
released for the Windows NT Servers 4.0 supporting Windows 95, Windows 3.x and
Windows NT clients.

TECHNOLOGY

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

Each of the Company's products incorporates Agents, client-level software
that detects and solves problems locally at the user's PC. These Agents connect
to the Company's ActiveHelp Center server through the Internet to access
centralized knowledge bases of technical support information. Information on the

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ActiveHelp Center server is regularly updated and expanded using the ActiveHelp
Studio, the Company's tools set. ActiveHelp Studio enables technical support
information to be defined and added to the ActiveHelp Center server in a
standardized format.

DISTRIBUTION, MARKETING AND STRATEGIC ALLIANCES

Distribution

The Company sells its products to individual and corporate users primarily
through retail distribution channels. In addition, the Company sells its
products to end users through direct mail and the Internet. The Company is
expanding the marketing and sale of its products internationally and through
certain strategic partners. The Company also is seeking to expand its
distribution to include Value Added Resellers (VAR) in order to access the
enterprise market.

Domestic. The Company's principal domestic channels of distribution are
through software distributors for resale to the retail sales channel. Net sales
to the Company's top two distributors, Ingram Micro and Navarre, accounted for
approximately 25% and 25% of net revenues, respectively both in 1997 and in
1996, and 16% and 9%, respectively, in 1995. The Company's products are
currently available at more than 10,000 locations through major retailers,
including CompUSA Inc., Sam's Club, Micro Center, Egghead Software, Computer
City, Fry's Electronics, Inc., Office Depot, Inc., Best Buy and Price Costco
Inc.

The Company monitors the levels of purchases and returns on a customer by
customer basis. Sales are made subject to rights of return and reserves are
established at time of shipment for future return of product based on product
history, analysis of retail sell-through and other factors. Product returns, or
obligations resulting from the Company's price protection policy, that exceed
the Company's reserves could adversely affect the Company's business, results of
operations and financial condition.

International. The Company markets its products through authorized
distributors in the United Kingdom, Australia, Japan, Germany, France and Italy
who resell to retail stores. International sales accounted for approximately 10%
and 19% of the Company's net revenues in 1996 and 1997, respectively. The
Company has developed localized versions of certain of its ActiveHelp products
for the French, German, United Kingdom, Japanese and Italian markets.

Marketing

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

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

The Company's sales and marketing force as of December 31, 1997 consisted
of 63 people, all of whom receive salaries, commissions, and/or incentive bonus
compensation. The Company's in-house marketing department coordinates most of
the design and development of the Company's product packaging, advertisements
and promotional items. The Company expects to increase its use of outside
agencies to support the promotional efforts of the Company's product families
and the expansion into new markets.

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Strategic Alliances

The Company has established strategic alliances with third-party vendors to
enhance the functionality and increase the distribution of its automatic service
and support products. Set forth below are examples of some of the agreements
into which the Company has entered.

The Company has entered into relationships with third parties including
Diamond Multimedia Systems, Inc., NEC Technologies, Inc., Fujitsu PC
Corporation, AST Research, Inc. and a division of Sony Electronics, Inc. for
bundling certain of its products. In addition, the Company has entered into an
agreement with CompUSA Inc. to bundle customized versions of certain of its
products with extended service agreements sold to CompUSA Inc. PC customers. The
Company joined with CompuServe Incorporated to provide automatic updates to PC
users by integrating Oil Change with CompuServe's premium on-line service,
Computing Pro.

In September, 1997, the Company announced an agreement with Broderbund
Software, Inc. to promote Oil Change as an easy method for consumers to update
their computer games with the latest sound and video drivers and patches.

The Company has entered into strategic technological alliances including
agreements with ServiceWare Inc. and Trend Micro, Inc. Under the ServiceWare
Inc. relationship, the Company is integrating ServiceWare Inc.'s new knowledge
management products, Knowledge-Pak Architect and Knowledge-Pak Viewer, across
its entire product line, including its upcoming enterprise product offerings.
This will enable the Company to expand its own ActiveHelp knowledge base of
problem solving information by allowing administrators to incorporate additional
sources of knowledge and customize the standard knowledge base content shipped
with ActiveHelp products. This added functionality will also provide users of
the Company's software products with greater flexibility in adding custom
resolutions to resolve PC support specific to their local environment.

Under the Trend Micro, Inc. relationship, the Company is integrating Trend
Micro's anti-virus technology into the Company's ActiveHelp product family.
Trend Micro's anti-virus technology has first been integrated into First Aid 98
Deluxe and Guard Dog Deluxe.

There can be no assurance that any of these agreements will generate
revenues for the Company or that they will not be amended or terminated prior to
their expiration because of changed commercial conditions or otherwise. For
example, in October of 1997, the Company amended its distribution agreement with
Phoenix Technologies, Ltd. and currently does not expect to recognize
significant revenues in connection with such amended agreement.

TECHNICAL SUPPORT

The Company provides support to purchasers of its software products. End
users are able to consult directly with software support personnel with respect
to software use, hardware problems and peripheral needs or receive on-line
support. For retail customers, the Company offers extended weekday service
coverage and six hours of support on both Saturday and Sunday. Also, the Company
provides a substantial amount of its technical support through on-line forums,
such as America Online, Inc. and CompuServe. For enterprise market clients, the
Company currently intends to offer a variety of fee-based options, providing a
range of service levels designed to meet the technical support requirements of
enterprise clients. In Europe, technical support is provided through third
parties. As of December 31, 1997, the Company employed 35 technical support
personnel.

PRODUCT DEVELOPMENT

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

The Company's principal current product development efforts include: (i)
enhancing its ActiveHelp Center knowledge bases to provide support for new
third-party products and updates and patches to current applications, (ii)
increasing the functionality of its current products, (iii) adapting its
products to the enterprise market, (iv) localizing its products for the
international market and (v) developing additional products that address
evolving automatic service and support requirements.

The Company supplements its in-house product development by engaging
work-for-hire software engineers in India. In addition, the Company from time to
time engages other software engineers on a contract basis. The Company has
exclusive ownership of all products developed by such engineers and has no
royalty obligations to these engineers.

Research and development expenses during 1995, 1996 and 1997 were
approximately $964,000, $3.3 million and $9.3 million, respectively. In
addition, during 1997 the Company expensed an aggregate of $11.3 million arising
from acquired in process research and development. As of December 31, 1997, the
Company had 98 full-time employees in research and development.

COMPETITION

The PC software industry is intensely competitive and characterized by
short product life cycles and frequent new product introductions. The Company
competes with software companies of varying sizes and resources, including
Network Associates, Inc., Symantec Corp., Quarterdeck Corporation, SystemSoft
Corporation and others. Furthermore, the Company may compete with other
companies that introduce automatic service and support, security and anti-virus
protection software products. Many of the Company's existing and potential
competitors have substantially greater financial, technical and marketing
resources than the Company. Moreover, there are no proprietary barriers to entry
that could keep existing and potential competitors from developing similar
products or selling competing products in the Company's markets. To the extent
that the Company's competitors bundle their software products with leading
hardware, application software or system vendors, or if one or more of the
system vendors, such as Microsoft Corporation ("Microsoft"), Intel or
International Business Machines (IBM) succeeds in incorporating functionality
comparable, or perceived as comparable, to that offered by the Company into its
products, (or separately offers comparable products), the Company's business,
results of operations and financial condition could be materially adversely
affected. There can be no assurance that the Company will be able to compete
successfully with existing or potential competitors. In particular, Microsoft's
"Zero Administration for Windows" initiative is a collection of technologies
from Microsoft that make the Windows family of systems easier to use for the end
user and easier to manage for IS administrators. There can be no assurance that
any such action by Microsoft, IBM, Intel, or others would not render the
Company's products uncompetitive or obsolete. Furthermore, there can be no
assurance that other software companies with longer operating histories,
significantly greater financial, technical, marketing or other resources,
significantly greater name recognition or a larger installed base of customers
than the Company will not introduce products comparable, or perceived as
comparable, to those of the Company. Increased competition may result in the
loss of shelf space or a reduction in demand or sell-through of the Company's
products, any of which could have a material adverse effect on the Company's
business, results of operations and financial condition.

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may result in price reductions requiring the Company to increase unit sales in
order to maintain historic levels of net revenues, reduced gross margins and
loss of market share, any of which could have a material adverse effect on the
Company's business, operating results 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 pressures faced by the Company will
not materially and adversely affect its business, financial condition and
results of operations.

The enterprise software market targeted by the CyberMedia Support Server
product line is expected to be subject to intense competition from a number of
sources including solutions currently in use by IS administrators. There can be
no assurance that the Company's product line will gain acceptance in the
enterprise market or that, if accepted, competitors with longer operating
histories, significantly greater financial, technical, marketing and other
resources, significantly greater name recognition and a larger installed base of
customers than the Company will not introduce products comparable, or perceived
as comparable, to those of the Company.

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

PROPRIETARY RIGHTS

The Company's success is heavily dependent upon its proprietary software.
The Company relies primarily on a combination of copyright, trademark and trade
secret laws, employee confidentiality and nondisclosure agreements and
third-party nondisclosure agreements and other methods of protection common in
the industry to protect its proprietary rights. The Company licenses its
products primarily under "shrink wrap" license agreements that are not signed by
licensees and therefore may be unenforceable under the laws of certain
jurisdictions. In addition, the Company has two United States patent
applications pending and intends to seek international and further United States
patents on its technology. There can be no assurance that patents will issue
from the Company's pending applications or that any claims allowed from the
pending patent applications or those hereafter filed will be of sufficient scope
or strength, or be issued in all countries where the Company's products can be
sold, to provide meaningful protection or any commercial advantage to the
Company or that any patents which may be issued to the Company will not be
challenged and invalidated. Although from time to time CyberMedia obtains
copyright registrations on certain items of its technology, existing copyright
laws provide only limited protection. Despite the Company's efforts to protect
its proprietary rights, unauthorized parties may attempt to copy or otherwise
obtain and use products or technology that the Company considers proprietary,
and third parties may develop similar technology independently. Policing
unauthorized use of the Company's products is difficult, and while the Company
is unable to determine the extent to which piracy of its software products
exists, software piracy can be expected to be a persistent problem. There can be
no assurance that the Company's means of protecting its proprietary rights will
be adequate. In addition, there can be no assurance that the Company's
competitors will not independently develop technologies and products that are
substantially equivalent or superior to those of the Company without violating
the Company's proprietary rights.

As the number of software products in the industry increases and the
functionality of these products increasingly overlaps, software developers may
become increasingly subject to infringement claims. From time to time, the
Company has received communications from third parties asserting that certain
products may infringe upon the intellectual property rights of others. To date,
no such claim has resulted in litigation or the payment of any damages. However,
there can be no assurance that existing or future infringement claims against
the Company with respect to current or future products will not result in costly
litigation or require the Company to enter into royalty bearing licenses with
third parties or to discontinue use of certain portions of the Company's
technology if licenses are not available on acceptable terms.
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"CyberMedia" and "First Aid" are registered U.S. trademarks of the Company.
The Company also claims trademark protection in the United States and/or has
applications pending in the U.S. Patent and Trademark Office for more than a
dozen additional trademarks.

The Company intends to continue expansion of the international distribution
of its products. The laws of some foreign countries either do not protect the
Company's proprietary rights or offer only limited protection for those rights.
The Company has not registered its copyrights in any foreign countries. While in
most foreign countries registration is not required in order to receive
copyright protection, the ability to bring an enforcement action and obtain
certain remedies depends on compliance with that country's copyright laws.
Consequently, the Company's failure to register its copyrights abroad may make
enforcement of these rights more difficult or reduce the available remedies in
any enforcement action. The Company is currently pursuing further foreign
registration of its trademarks on a limited basis, but due to the substantial
costs involved and potential prior existing rights, unfavorable laws or other
obstacles to obtaining trademark protection, the Company may not be able to
prevent a third party from using its trademarks in a foreign jurisdiction.

"CyberMedia" is a registered United Kingdom trademark, and "First Aid" is a
registered Australian trademark of the Company. The Company is currently
pursuing further foreign registration of its trademarks on a limited basis, but
due to the substantial costs involved and potential prior existing rights,
unfavorable laws or other obstacles to obtaining trademark protection, the
Company may not be able to prevent a third party from using its trademarks in a
foreign jurisdiction.

OPERATIONS

The production of the Company's software products includes media
duplication, purchased component assembly, printing of user manuals and final
packaging. The Company contracts with outside parties to perform these functions
to the Company's specifications and quality standards. The Company currently
does not have long-term agreements with any of these parties. Although the
Company believes that alternative resources exist or can be obtained, a
disruption of the Company's relationship with any of these outside parties could
adversely affect the Company's business, results of operations and financial
condition until replacement sources are established. In addition, any material
changes in product and service quality and pricing or failure to adhere to the
Company's specifications by these outside parties could adversely affect the
Company's business, results of operations and financial condition. The Company
has attempted to mitigate the risk of any such disruption by maintaining certain
levels of "safety stock" inventories and using second source vendors in certain
limited situations. In the past, the Company has experienced material
difficulties and delays in the manufacture and assembly of its products. There
can be no assurance that the Company will not continue to experience such
difficulties in the future. As of December 31, 1997, the Company had a total of
15 employees in operations.

BACKLOG

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

EMPLOYEES

As of December 31, 1997, the Company employed a total of 257 full-time
employees, including 12 in operations, 63 in sales and marketing, 35 in
technical support, 98 in research and development and 28 in finance and
administration. The Company also employs, from time to time, a number of
temporary and part-time employees as well as consultants on a contract basis.
The Company has experienced both employment growth as well as turnover from
attrition in the past year and expects to hire personnel during the next twelve
months in each of these areas. The Company's future success will depend in part
on its ability to attract, train, retain and motivate highly qualified
employees, who are in great demand. There can be no assurance that the Company
will be successful in attracting and retaining such personnel. The Company's
employees are not represented by a collective bargaining organization, and the
Company has never experienced a work stoppage

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or strike. The Company considers its employee relations to be good.

EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of the Company as of December 31, 1997 were as
follows:

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

Unni S. Warrier......................... 43 President, Chief Executive Officer
and Chairman of the Board
Leonard L. Backus....................... 45 Vice President, International
Sales
Jeffrey W. Beaumont..................... 45 Vice President, Finance, Chief
Financial Officer and Treasurer
Robert Davis............................ 39 Vice President, Marketing

Subsequent to year end, Mr. Backus, Mr. Beaumont and Mr. Warrier each
resigned, on January 1998, February 1998, and March 1998, respectively.
Permanent replacements for the positions previously held by Mr. Beaumont and Mr.
Warrior have not yet been named.

Mr. Warrier served as President, Chief Executive Officer and Chairman of
the Board of the Company from November 1991 to March 1998. From February 1991 to
November 1991, he served as an independent consultant. From May 1989 to February
1991, he served as President and Chief Executive Officer of NetLabs, Inc., a
maker of UNIX network management products, which Mr. Warrier co-founded. Mr.
Warrier holds a B. Tech. in Physics from the Indian Institute of Technology of
Kanpur, India and an M. Tech. in Computer Science from the Indian Institute of
Technology of Madras, India. Mr. Warrier has also completed coursework for a
Ph.D. in Computer Science from the University of California, Los Angeles.

Mr. Backus served as Vice President, International Sales of the Company
from April 1996 to January 1998. Prior to joining the Company, from October 1995
to April 1996, he served as a Principal for Technology Marketing Alliance, a
consulting company. Prior to that, Mr. Backus served as Vice President,
International Sales and Marketing, of MediaVision Technology, Inc., a computer
hardware manufacturer from July 1994 to October 1995, and as Director of
International Sales of MediaVision Technology, Inc. from February 1991 to July
1994. Mr. Backus holds a B.S. in Electrical Engineering from the University of
Washington and an M.S. in Electrical Engineering from the University of Southern
California.

Mr. Beaumont served as Vice President, Finance and Chief Financial Officer
of the Company from December 1995 to February 1998. From June 1995 to December
1995, he served as an independent consultant to various companies. Prior to
joining the Company, from October 1994 to June 1995, he served as Chief
Financial Officer of Blyth Holdings, Inc., a software development company. From
August 1989 to October 1994, Mr. Beaumont served as Chief Financial Officer at
Davidson & Associates, Inc., an educational software development company. Mr.
Beaumont holds a B.A. in History from Hamilton College and an M.B.A. from the
University of Michigan.

Mr. Davis has served as Vice President, Marketing of the Company since June
1997. From April 1995 to May 1997 he served as Vice President of Marketing and
Business Development at Iterated Systems, Inc., a software company. From June
1991 to December 1994 he held the positions of Vice President and general
manager of the Connectivity Products Division and Senior Vice President of
Corporate Marketing at Novell, Inc., a software company. Mr. Davis holds a B.S.
in Electrical Engineering from Purdue University and an M.B.A. in marketing from
Santa Clara University.

ITEM 2. PROPERTIES

The Company leases approximately 73,000 square feet of office space in
Santa Monica, California, approximately 8,000 square feet in San Jose,
California and approximately 10,000 square feet in Tigard, Oregon. The Santa
Monica facility serves as the Company's headquarters. The Company believes that

10
12

suitable additional or alternative space will be available in the future on
commercially reasonable terms as needed.

ITEM 3. LEGAL PROCEEDINGS

The Company and an individual officer of the Company have been named and
served as defendants in a civil complaint filed in the Los Angeles County
Superior Court on December 22, 1997 by Brad Kingsbury. Mr. Kingsbury is a former
employee of the Company. The complaint, as filed, alleges against the Company
certain causes of action including breach of contract, breach of good faith and
fair dealing, fraud and negligent misrepresentation arising from an alleged
grant of stock options and alleged accelerated vesting of such options. The
Company intends to vigorously defend against any and all such claims and
allegations.

The Company has filed in June 1997 a civil complaint against Roderick
Manhattan Group for royalties owed in the amount of approximately L239,000.
Roderick Manhattan Group has counterclaimed in the amount of approximately
L167,000 for lost commissions, marketing costs and value of goods returned.

On February 4, 1998, the Company filed a lawsuit in United States District
Court for the Northern District of California against Symantic Corporation,
ZebraSoft, Inc. and certain of ZebraSoft, Inc.'s individual officers and
directors alleging that the defendants violated federal copyright laws and
misappropriated the Company's trade secrets in developing and distributing a
computer software program competitive with the Company's UnInstaller program,
and the Company is seeking money damages and injunctive relief against the
defendants.

On March 11, 1998, defendants Symantec and ZebraSoft filed counterclaims
against the Company for slander, libel, product disparagement and related state
law claims. The defendants' counterclaims seek unspecified money damages and
injunctive relief. The Company intends to defend against the counterclaims
vigorously.

On March 13, 1998, a shareholder class action complaint was filed against
the Company and certain of its current and former officers and directors. The
complaint, Ong v. CyberMedia, No. 98-1811, was filed in the Central District of
California. The complaint alleges a class period between July 22, 1997 and March
13, 1998. The complaint asserts claims under Sections 10(b) and 20(a) of the
Securities and Exchange Act of 1934. On March 19, 1998, a second class action
complaint was filed against the Company and certain of its officers and
directors. The complaint, Brown v. CyberMedia, No. B C187898, was filed in the
Superior Court of Los Angeles County. It alleges a class period from March 31,
1997 through March 12, 1998, and asserts claims under Sections 25400 and 25500
of the California Corporations Code, Sections 1709-1710 of the California Civil
Code, and Section 17200 of the California Business and Professions Code. On
March 24, 1998, a third class action complaint was filed against the Company and
certain of its officers and directors. The complaint, John v. CyberMedia, No.
98-2085, was filed in the Central District of California. The complaint alleges
a class period between March 31, 1997 and March 13, 1998. The complaint assets
claims under Sections 10(b) and 20(a) of the Securities and Exchange Act of
1934. The Company intends to defend against these actions vigorously.

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

No matters were submitted to a vote of security holders during the fourth
quarter of 1997.

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PART II

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

MARKET INFORMATION FOR COMMON EQUITY

The Common Stock of the Company commenced trading publicly on the Nasdaq
National Market on October 23, 1996 and is traded under the symbol CYBR. The
following table sets forth for the periods indicated the high and low sales
prices for the Common Stock as reported on the Nasdaq National Market.

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

FISCAL YEAR ENDED DECEMBER 31, 1996
Fourth Quarter (from October 23, 1996)........... $25.500 $14.250
FISCAL YEAR ENDING DECEMBER 31, 1997
First Quarter.................................... 22.000 7.875
Second Quarter................................... 20.500 8.500
Third Quarter.................................... 28.250 12.500
Fourth Quarter................................... 30.875 13.625
FISCAL YEAR ENDING DECEMBER 31, 1998
First Quarter (through March 20, 1998)........... 16.75 6.75

On March 20, 1998 the last reported sale price of the Common Stock of the
Company on the Nasdaq National Market was $7.50. As of March 20, there were
approximately 364 holders of record of the Company's Common Stock.

DIVIDEND POLICY

The Company has never declared or paid any cash dividends on its Common
Stock and does not anticipate paying any cash dividends in the foreseeable
future. The Company currently intends to retain its earnings, if any, for use in
the operation of its business. In addition, an existing loan agreement prohibits
the Company from paying cash dividends on its capital stock without the lender's
written consent. See Note 5 of Notes to Consolidated Financial Statements.

ITEM 6. SELECTED FINANCIAL DATA

The following selected consolidated financial data presented below for each
of the years in the five-year period ended December 31, 1997, are derived from
the consolidated financial statements of the Company, which financial statements
have been audited by KPMG Peat Marwick LLP, independent certified public
accountants. The consolidated financial statements as of December 31, 1996 and
1997, and for each of the years in the three-year period ended December 31,
1997, are included elsewhere in this Report. Statement of operations data for
the years ended December 31, 1993 and 1994 and balance sheet data as of December
31, 1993, 1994 and 1995 is derived from audited financial statements not
included herein. The selected financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial

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Condition and Results of Operations" and the Consolidated Financial Statements
and Notes thereto included elsewhere in this Report.

FISCAL YEAR ENDED DECEMBER 31,
-----------------------------------------------
1993 1994 1995 1996 1997
------ ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

STATEMENT OF OPERATIONS DATA:
Net revenues........................... $ 55 $ 241 $ 4,797 $38,524 $ 71,227
Cost of revenues....................... 14 106 2,103 11,991 14,477
Gross profit........................... 41 135 2,694 26,533 56,750
Operating expenses:
Research and development............ 468 544 964 3,300 9,333
Sales and marketing................. 220 439 4,036 24,125 39,464
General and administrative.......... 84 247 987 2,941 6,940
One-time in-process research and
development and acquisition
expenses.......................... -- -- -- -- 11,341
------ ------- ------- ------- --------
Total operating expenses....... 772 1,230 5,987 30,366 67,078
------ ------- ------- ------- --------
Operating loss......................... (731) (1,095) (3,293) (3,833) (10,328)
Other income (expense)................. -- (19) (58) 351 1,170
------ ------- ------- ------- --------
Loss before taxes...................... (731) (1,114) (3,351) (3,482) (9,158)
Income tax expense..................... 1 1 1 1 2,582
------ ------- ------- ------- --------
Net loss............................... $ (732) $(1,115) $(3,352) $(3,483) $(11,740)
====== ======= ======= ======= ========
Net loss per share(1).................. $(0.57) $ (0.86) $ (2.56) $ (0.88) $ (0.97)
====== ======= ======= ======= ========
Shares used to compute net loss per
share(1)............................ 1,282 1,295 1,311 3,943 12,128
BALANCE SHEET DATA:
Working capital (deficit)........... $ (333) $ (671) $ 434 $42,727 $ 33,578
Total assets........................ 25 189 3,855 56,450 60,103
Total liabilities................... 635 1,344 3,848 12,782 23,459
Total stockholders' equity
(deficiency)...................... (610) (1,155) 7 43,668 36,644

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

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

The discussion in Management's Discussion and Analysis of Financial
Condition and Results of Operations contains trend analysis and other
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of
1934, as amended. Actual results could differ materially from those set forth in
such forward looking statements as a result of the factors set forth under
"Factors That May Affect Future Results" and other risks detailed from time to
time in the Company's reports filed with the Securities and Exchange Commission.

OVERVIEW

The Company is a leading provider of software products that provide
automatic service and support to PC users in the Windows environment. The
Company commenced operations in November 1991 and introduced its first automatic
service and support product, Win Win, in 1993. The Company introduced First Aid
95, the first Windows 95 compatible version of its ActiveHelp product line, in
September 1995. During 1996 and 1997, over 90% and over 75%, respectively, of
the Company's net revenues were attributable to sales of its First Aid products.

In October 1996, the Company introduced Oil Change, a product that updates
many software applications and device drivers on a user's PC over the Internet.
During the second quarter of 1997, the Company acquired MicroHelp UnInstaller, a
product that uninstalls Windows applications and incorporated

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the MicroHelp UnInstaller software code in the development of its new
UnInstaller product introduced in May of 1997. In September 1997, the Company
released First Aid 98, and Guard Dog Deluxe, a personal security and privacy
product for Internet users. The Company also has a number of new product
development efforts under way, including its first enterprise product, CSS
Repair Engine, which was released during 1997 and international versions of
First Aid 98. A portion of future revenues is dependent on the success of these
activities. There can be no assurance that Oil Change, UnInstaller, Guard Dog
Deluxe, First Aid 98 or CSS Repair Engine will achieve or sustain significant
market acceptance, and the failure of any of these products to achieve or
sustain such acceptance could have a material adverse effect on the Company's
future financial results.

The Company has a limited operating history upon which to base an
evaluation of its business and prospects. From inception to December 31, 1997,
the Company generated net sales of approximately $114.8 million, of which $109.8
million, or 96% of such amount, was generated in 1996 and 1997. The Company has
incurred net losses in each of the last seven fiscal years. At December 31,
1997, the Company had an accumulated deficit of $20.8 million. With the
introduction of First Aid 95, the Company began focusing on building its product
line and establishing brand name awareness of its products, which resulted in
significantly increased operating expenses. The Company anticipates that its
operating expenses may increase in absolute dollars or as a percent of revenues
in the future as a result of efforts to expand its sales and marketing
operations to fund greater levels of product development and to increase its
administrative infrastructure. The Company expects to fund operations from
currently available cash and investment balances, cash generated from
operations, if any, and existing credit lines. The Company also believes that
additional debt or equity offerings will be available to it should the need
arise. Future operating results will depend upon many factors, including the
demand for the Company's software products, the level of product and price
competition, the Company's success in introducing new products, the Company's
success in expanding its direct and indirect distribution channels, the
Company's success in selling products in the enterprise market, the Company's
success in attracting and retaining motivated and qualified personnel, the
growth of activity on the Internet and the Web, the ability of the Company to
develop or acquire new products and to control costs and general economic
conditions. Many of these factors are beyond the Company's control. There can be
no assurance that the Company will be successful in addressing such risks.

The Company sells its products primarily to distributors for resale to the
retail channel. In addition, the Company sells its products to end users through
direct mail and over the Internet. Sales to the Company's top two distributors,
Ingram Micro and Navarre, accounted for approximately 25% and 25%, respectively,
of the Company's net revenues in 1997 and 1996. No other single customer
accounted for more than 10% of net revenues during these periods. Net revenues
from direct sales in 1997 and 1996 represented approximately 8% and 30% of net
revenues in each of these periods, respectively. Sales from direct mail, which
comprise a large proportion of direct sales, have historically operated at lower
profitability levels than sales through distributors. Accordingly, quarterly
shifts in the mix of sales through distributors and through direct sales could
cause fluctuations in the Company's profitability. There can be no assurance
that the mix of sales or the relative profitability by distribution channel will
remain at current levels in the future.

Revenues are generated from sales of software to distributors, resellers
and end-users and are recognized upon shipment of products, net of provisions
for estimated future returns and price protection, provided that no significant
vendor obligations remain and collection of accounts receivable is deemed to be
probable. With the introduction of First Aid 95 in September 1995, CyberMedia
implemented a policy of offering customers updates to its ActiveHelp products
over the Internet at no additional cost. Given this policy and because updates
are a fundamental and integral part of its ActiveHelp products, the Company
defers a portion of all First Aid, Oil Change, UnInstaller, Guard Dog Deluxe and
CSS revenues ratably over estimated update periods, generally one year from the
date of sale. At December 31, 1997 the Company's consolidated balance sheet
included $3.7 million of unearned revenues which will be recognized ratably over
the estimated update periods, generally one year. To the extent that revenues
from these products continue to grow on a quarterly basis, the total amount of
deferred revenue may increase and be reported on the consolidated balance sheet
as unearned revenue.

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The Company monitors the levels of purchases and returns on a customer by
customer basis. Sales are made subject to certain rights of return and reserves
are established at time of shipment for potential future return of product based
on product history, analysis of retail sell-through and other factors.

During the fourth quarter of 1997, the Company shipped significant
quantities of three of its products which had been initially introduced during
the second and third quarters of 1997. Based upon information provided by
certain distributors subsequent to December 31, 1997 and management's estimates
using such information, the Company anticipates that a material amount of these
fourth quarter shipments will be returned pending retail channel sell-through of
quantities shipped in earlier periods. Accordingly, the Company recorded in its
fourth quarter, $12.6 million of reserves for future returns of these shipments.

During the first quarter of 1998 the Company worked with its major
distributors to adjust inventory levels and bring their accounts receivable
balances current. These distributors have responded at a level which the Company
believes is appropriate to meet the demand in the market for the Company's
products. As a result, the Company has announced that it expects to report
revenues between $5-$8 million for the quarter ending March 31, 1998.

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

On April 2, 1997, the Company acquired certain assets from Luckman
Interactive, Inc. which included ownership in all intellectual property rights
to MicroHelp UnInstaller, a product requiring significant modifications
including incorporation of the Company's ActiveHelp technologies prior to
completion and introduction. Accordingly, this acquisition was accounted for
largely as in-process research and development and was expensed during the
quarter ended June 30, 1997. Effective April 14, 1997, CyberMedia acquired Walk
Softly, Inc., an Internet privacy software developer, in exchange for CyberMedia
common stock. The acquisition of Walk Softly, Inc. was a pooling-of-interests,
however, due to insignificance of the financial position and results of
operations of Walk Softly, Inc. prior to the acquisition, the financial
statements of the Company prior to 1997 have not been restated. On September 30,
1997, the Company acquired certain rights from ServiceWare Inc. which included
access and resale rights to certain ServiceWare Inc. technology for
incorporation in future products. This transaction was accounted for largely as
in-process research and development and was expensed during the quarter ended
September 30, 1997.

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RESULTS OF OPERATIONS

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

YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
----- ----- -----

Net revenues................................................ 100.0% 100.0% 100.0%
Cost of revenues............................................ 43.8 31.1 20.3
----- ----- -----
Gross profit.............................................. 56.2 68.9 79.7
Operating expenses:
Research and development.................................. 20.1 8.6 13.1
Sales and marketing....................................... 84.1 62.6 55.5
General and administrative................................ 20.6 7.6 9.7
One-time in-process research and development and
acquisition expenses................................... -- -- 15.9
----- ----- -----
Total operating expenses.......................... 124.8 78.8 94.2
----- ----- -----
Operating loss.............................................. (68.6) (9.9) (14.5)
----- ----- -----
Other income (expense), net................................. (1.2) 0.9 1.6
----- ----- -----
Loss before income taxes.................................... (69.8) (9.0) (12.9)
----- ----- -----
Income tax expense.......................................... -- -- 3.6
----- ----- -----
Net loss.................................................... (69.8)% (9.0)% (16.5)%
===== ===== =====

COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996

Net Revenues. Net revenues increased 85% from $38.5 million for the period
ended December 31, 1996 to $71.2 million for the same period in 1997. The
Company's net revenues consist of license fees for its software products, less a
provision for estimated returns. The Company sells its products primarily to
distributors for resale to retailers as well as directly to consumers, through
direct mail, the Internet and software catalogs. The growth in net revenues
during these periods was largely attributable to the launch of UnInstaller 4.5
in May 1997 and Guard Dog Deluxe in September 1997 and the expansion of the
Company's international business. The Company does not believe that the
historical growth rates of its net revenues will be sustainable or are
indicative of future results.

For the years ended December 31, 1996 and 1997, the percentage of net
revenues from international sales was approximately 7% and 19%, respectively.
The increase in net revenues from international sales as a percentage of net
revenues between these periods was due to the expansion of the Company's
international operations and the introductions of localized German, Japanese,
French, Italian and International English versions of many of its products. As a
result of the expansion of its international operations, the Company now
denominates certain international sales in local currencies, primarily in Europe
and Japan. As a result, the Company is subject to the risks associated with
fluctuations in currency exchange rates. The Company does not currently engage
in hedging transactions and there can be no assurance that it will not incur
significant losses related to currency fluctuations. Other risks inherent in the
Company's international sales include longer payment cycles, unexpected changes
in regulatory requirements, seasonality due to the slowdown in European business
activity during the third quarter, and tariffs and other trade barriers. There
can be no assurance that these factors will not have a material adverse effect
on the Company's future business, financial condition and results of operations.

Cost of Revenues. Cost of revenues increased 21% from $12.0 million for the
year ended December 31, 1996 to $14.5 million for the same period in 1997. Cost
of revenues consists primarily of the cost of product media, product
duplication, documentation, order fulfillment and royalties. The increase in
cost of revenues was due primarily to increased unit shipments of the Company's
products.

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Gross Margin. For the years ended December 31, 1996 and 1997, gross margins
were 69% and 80%, respectively. Gross margins in 1997 were positively affected
by a decrease in the percentage of net revenues represented by direct sales
during the period; such direct sales typically generate a lower gross margin
than sales through distributors. Gross margins also increased during 1997 due to
a reduction in the net deferrals of revenue associated with post sale
obligations to customers. This reduction in the net deferrals resulted both from
the change in the Company's product mix in 1997 to products with less demand for
post-sale customer support and therefore lower deferral rates, and from the
effect of increasing amounts of previously deferred revenue related to the
general increase in sales over the past years being amortized into net revenue
in 1997.

Research and Development. Research and development expenses increased 183%
from $3.3 million for the year ended December 31, 1996 to $9.3 million for the
same period in 1997, representing 9% and 13% of revenue, respectively. Research
and development expenses consist primarily of personnel costs and, to a lesser
extent, payment to third parties for contract services required to conduct the
Company's development efforts. The increase in research and development expenses
was primarily attributable to an increase in personnel as the Company increased
its product development efforts to support new product introductions and
upgrades. The Company believes that significant investments in product
development are required to remain competitive. As a consequence, the Company
anticipates that it will continue to devote substantial resources to research
and development.

Sales and Marketing. Sales and marketing expenses increased 64% from $24.1
million for the year ended December 31, 1996 to $39.5 million for the same
period in 1997, representing 63% and 55% of net revenues, respectively. Sales
and marketing expenses consist primarily of costs of all sales and marketing
personnel, sales commissions, co-op and other advertising costs, postage and
printing costs associated with direct mail sales, package design costs, trade
show costs and costs of preparing promotional materials. The increases in the
dollar amount of sales and marketing were due primarily to increases in co-op
advertising, increases in the number of sales and marketing personnel employed
to address new sales opportunities and support the introduction of new products,
and expansion of international sales and marketing efforts. The Company expects
that sales and marketing expenditures will increase in absolute dollars as it
invests in expanding its third-party distribution channels, introduces new
products such as CSS and expands its operations outside the United States.

General and Administrative. General and administrative expenses increased
136% from $2.9 million for the year ended December 31, 1996 to $6.9 million for
the same period in 1997, representing 8% and 10% of net revenues, respectively.
General and administrative expenses consist primarily of personnel costs for
finance, administration, operations and general management, as well as legal,
accounting and facilities expenses. The increase in general and administrative
expenses was due principally to growth in the infrastructure of the Company's
finance, administrative and operations groups in order to support the Company's
expanded operations. The Company expects that its general and administrative
expenses will increase in absolute dollars in the future as it expands its
staffing, information systems and infrastructure.

One-Time In-Process Research and Development and Acquisition Expenses. In
April 1997 the Company acquired certain assets from Luckman Interactive, Inc.
which included ownership in all intellectual property rights to MicroHelp
UnInstaller, for approximately $9.0 million. This acquisition was accounted for
largely as in-process research and development and was expensed during the
quarter ended June 30, 1997. On September 30, 1997, the Company acquired certain
rights from ServiceWare Inc. for $2.4 million which included access and resale
rights to certain ServiceWare Inc. technology for use in future products. This
technology was considered to have no alternative future use and was expensed
during the quarter ended September 30, 1997 as one-time in-process research and
development and acquisition expense.

Other Income. For the years ended December 31, 1996 and 1997, other income
(expense) was $351,000 and $1.2 million, respectively. Other income (expense)
consists of interest income, interest expense and currency related losses and
gains.

The increase in 1997 was due largely to interest income earned on a larger
invested balance of cash equivalents and marketable securities.

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Provision for Income Taxes. The provision for income taxes includes
estimated foreign taxes attributable to international activities during the year
ended December 31, 1997 as well as US federal and state taxes. Due to
significant timing differences associated with expenses recognized for financial
statement purposes but not yet allowed for tax purposes, the Company will be
required to pay certain federal, state and foreign income taxes for 1997. To the
extent that such tax payments are not recoverable through carryback provisions
and it is not more likely than not that such payments will result in a tax
benefit in future periods, the Company expensed tax payments made or to be made
for 1997. The Company had federal and state net operating loss carry-forwards of
approximately $3.1 million at December 31, 1997. These loss carry-forwards
expire at various dates beginning in the year 2006 and are subject to certain
limitations as prescribed by Section 382 of the Internal Revenue Code of 1986,
as amended.

COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995

Net Revenues. Net revenues were $4.8 million and $38.5 million in 1995 and
1996, respectively, representing a $33.7 million increase for 1996 over 1995.
The majority of the Company's net revenues have been derived from domestic sales
in the United States, with international sales representing approximately 10% in
1996 and less than 5% of net revenues in 1995. The growth in net revenues in
1996 was largely attributable to increased market acceptance of First Aid 95,
the introduction of First Aid 95 Deluxe in March 1996 and the introduction of
First Aid 97 in November 1996. In addition, introduction of Oil Change and
localized German, French and British versions of First Aid during the second
half of 1996 contributed to revenue growth.

Cost of Revenues. Cost of revenues were $2.1 million and $12.0 million in
1995 and 1996, respectively, representing a $9.9 million increase in 1996. Total
royalty expenses were less than 5% of net revenues in each of these periods. The
increase in cost of revenues was due primarily to increased unit shipments of
the Company's products.

Gross Margin. For the years ended December 31, 1995 and 1996, gross margins
were 56% and 69% respectively. Gross margins in 1996 were positively affected by
a decrease in the percentage of net revenues represented by direct sales, which
generated a lower gross margin than sales through distributors during the
period.

Research and Development. Research and development expenses increased by
242% from $964,000 in 1995 to $3.3 million in 1996, representing 20% and 9% of
net revenues in these years, respectively. The increase in research and
development expenses in this period was primarily attributable to an increase in
personnel as the Company increased its product development efforts to accelerate
the timing of new product introductions and upgrades.

Sales and Marketing. Sales and marketing expenses increased 503% from $4.0
million in 1995 to $24.1 million in 1996, representing 84% and 63% of net
revenues in these years, respectively. The increase in the dollar amount of
sales and marketing expenses in this period was due primarily to increases in
direct mail marketing, costs associated with new product introductions,
increased co-op advertising and increases in the number of sales and marketing
personnel employed to address new sales opportunities and to support the
introduction of new products.

General and Administrative. General and administrative expenses increased
198% from $1.0 million in 1995 to $2.9 million in 1996, representing 21% and 8%
of net revenues in these years, respectively. The increase in the dollar amount
of general and administrative expenses during this period was due principally to
growth in the infrastructure of the Company's finance, administrative and
operations groups in order to support the Company's expanded operations. The
decrease in general and administrative expenses as a percentage of net revenues
during this period was due primarily to the growth in net revenues.

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

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

LIQUIDITY AND CAPITAL RESOURCES

Initially, the Company financed its operations primarily through private
sales of Preferred Stock totaling $10.5 million and a grant of $318,000
administered by the Industrial Credit and Investment Corporation of India.
Furthermore, in October 1996, the Company completed an initial public offering
of 2,875,000 shares of Common Stock (including the underwriters' over-allotment
of 375,000 shares) at $16.00 per share. Net proceeds to the Company from the
initial public offering were approximately $41.5 million. In 1996 and 1997, the
Company used $8.3 million and $12.6 million of cash, respectively, in operating
activities. During these periods, the Company used net cash in operating
activities principally to support increases in accounts receivable and inventory
associated with increased net revenues; such use was partially offset by
increases in accounts payable, accrued expenses, income taxes and unearned
revenues.

In 1996 and 1997, the Company's capital spending activities consisted of
purchases of furniture, fixtures and equipment, primarily PCs and accessories in
the amount of $1.0 million and $3.9 million, respectively. Also in 1997, the
Company invested net amounts of $1.0 million in marketable securities and
$393,000 in trademarks and other assets in connection with acquisitions of
in-process research and development. The Company expects that its capital
expenditures will increase as the Company's employee base continues to grow. At
December 31, 1996 and 1997, the Company had no material commitments for capital
expenditures.

At December 31, 1997, the Company had $26.0 million in cash, cash
equivalents and marketable securities and $33.6 million in working capital. At
December 31, 1997, the Company had commitments for cash outlays of approximately
$4.0 million associated with the acquisition of MicroHelp UnInstaller and
technology from ServiceWare Inc. payable over the next two years. Subsequent to
December 31, 1997, approximately $600,000 of this obligation has been paid. The
Company believes that its current cash and investment balances, cash available
under its line of credit and cash flows from operations, if any, will be
sufficient to meet these needs. The Company also has available a $1.0 million
unsecured revolving line of credit which expires in May 1998. In addition, the
Company has, from time to time, utilized accounts receivable based financing
made available by commercial banks including sales of trade accounts receivable
to such commercial banks. Such arrangements are non-recourse, except for sales
returns and marketing credits. In 1997, the Company sold $4.8 million of trade
accounts receivable without recourse (subject to sales returns and marketing
credits) of which $552,000 remained outstanding at December 31, 1997 which
amount was satisfied in full subsequent to year-end.

The Company believes that its current cash and investment balances and cash
flows from operations, if any, will be sufficient to meet its working capital
and capital expenditure requirements for at least the next 12 months.

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

The Company recognizes that some of its internal computer systems and
programs have not yet been certified by supplying vendors as being Year 2000
compliant. In 1998, the Company intends to appoint a Year 2000 compliance
committee to determine the extent to which it is vulnerable to such date
truncation problems. There can be no guarantee that the systems of the Company's
suppliers, distributors and others upon which the Company's systems and/or
personnel rely will be timely converted, or that a failure to convert or an
incompatible conversion by one of these parties would not have a material
adverse effect on the Company.

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New releases of the Company's software have been designed to address
processing for the year 2000 to the extent it has been required. It is the
Company's intent to have all of its actively supported software users on
releases of its software which are ready for the year 2000 by the end of 1999.
However, to the extent that others such as system integrators make use of the
Company's software in developing solutions for third parties, the Company may
have no knowledge as to the year 2000 readiness of those third party products.
In addition, it is possible third parties could assert claims against the
Company or its customers concerning year 2000 issues and, regardless of their
merits or lack thereof, these claims could be material.

The Company does not yet have an estimate of the costs associated with Year
2000 compliance work.

IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS

In October 1997, the American Institute of Certified Public Accountants
("AICPA") released Statement of Position 97-2, "Software Revenue Recognition"
("SOP 97-2"). Among other things, SOP 97-2 eliminates the distinction between
significant and insignificant vendor obligations promulgated by SOP 91-1 and
requires each element of a software arrangement to meet certain criteria in
order to recognize revenue allocated to that element. Additionally, SOP 97-2
requires that total fees under an arrangement be allocated to each element in
the arrangement based upon vendor specific objective evidence, as defined. SOP
97-2 is effective for software transactions entered into by the Company in
fiscal 1998 and subsequent periods.

As a result of certain issues raised in applying SOP 97-2, the AICPA issued
a Statement of Position which will delay for one year the effective date of
certain provisions of SOP 97-2 with respect to what constitutes vendor-specific
objective evidence of fair value of the delivered software element in certain
multiple-element arrangements that include service elements entered into by
entities that never sell the software elements separately. The Company does not
anticipate that the adoption of SOP 97-2 and the new SOP will have a material
effect on the Company's results of operations. However, the ultimate resolution
of the implementation issues referred to above, or additional issues not yet
raised or addressed by the AICPA, could change the Company's expectation.

FACTORS THAT MAY AFFECT FUTURE RESULTS

Limited Operating History and History of Operating Losses. The Company has
only a limited operating history upon which to base an evaluation of its
business and prospects. The Company commenced operations in November 1991 and
introduced its first automatic service and support product, Win Win, in 1993.
The Company introduced the first Windows compatible version of its ActiveHelp
product line in September 1995. From inception to December 31, 1997, the Company
generated net revenues of approximately $114.8 million, of which $109.8 million,
or 96% of such amount, was generated in 1996 and 1997. The Company has incurred
net losses in each of the last seven fiscal years, resulting in an accumulated
deficit of $20.8 million at December 31, 1997. In addition, since 1992, the
Company's operating expenses have increased significantly as a result of efforts
to expand its sales and marketing operations, including international sales, to
fund greater levels of product development and to increase its administrative
infrastructure. The Company's net revenues in 1997 increased 85% over the net
revenues for the same period in 1996. This increase was attributable, in part,
to sales of software products the rights to which the Company acquired through
acquisitions in 1997. There can be no assurance that the Company's net revenues
will continue to remain at or increase from the level experienced in 1997 or
that net revenues will not decline. The Company anticipates that in the future
it will make significant investments in its operations, particularly to support
sales activities, and that as a result, operating expenses will increase
significantly as the Company develops and introduces new products and expands
into new markets such as international, enterprise and OEM. If net revenues do
not increase correspondingly, the Company is likely to continue to incur net
losses and its financial condition will be materially adversely affected. The
Company has not yet achieved profitability on an annual basis, and there can be
no assurance that the Company will achieve or sustain profitability on a
quarterly basis or annual basis. Furthermore, operating results for future
periods are subject to numerous uncertainties. The Company's prospects must be
considered in light of the risks encountered by companies with limited operating
histories, particularly companies in new and rapidly evolving markets. While the
Company believes that it has sufficient cash resources to meet its obligations
for the next twelve months, no assurance exists that current cash and
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cash equivalent balances, and cash from operations and existing credit lines
will be sufficient to fund future operations of the Company or that outside
sources of funds will be available when and if such funds are needed. In
addition, the Company's future operating results will depend upon, among other
factors, the demand for the Company's software products, the level of product
and price competition, the Company's success in expanding its direct and
indirect distribution channels, the Company's success in attracting and
retaining motivated and qualified personnel, the ability of the Company to
expand its international sales, develop and market new products and product
upgrades and manage product transitions, the ability of the Company to control
costs, the growth of activity on the Internet and the World Wide Web (the
"Web"), and general economic conditions. Many of these factors are beyond the
Company's control. If the Company is not successful in addressing such risks,
the Company's business, results of operations and financial condition will be
materially adversely affected.

Risk of Product Returns. The Company's business includes a substantial risk
of product returns from distributors, retailers and end users, either through
the exercise of contractual return rights or as a result of the Company's policy
of assisting customers in balancing and updating inventories. Individual end
users may return products within 60 days of the date of purchase for a full
refund. Most retailers, distributors and end users also have the ability to
return products for a full refund. The rate of product returns may increase
because of a variety of factors, including competitors' promotional or other
activities, an increase in the proportion of the Company's business attributable
to mass merchandisers, overstocking by the Company's distributors or retailers
due to unrealized demand for new products, or a decline in the demand for the
Company's products as compared to historical levels. As the Company introduces
new products and enters new markets where the Company has had limited
experience, the risk of product returns may increase. In particular, the Company
has recently introduced First Aid 98, a major upgrade of First Aid 97, and Guard
Dog Deluxe, a first-time product release. In addition, in the event the
Company's packaging is claimed to infringe on intellectual property rights of
third parties, the Company could be required to recall its distributed products
for repackaging or to cease shipping product in its current packaging, which
could materially adversely affect the business, results of operations, and
financial condition of the Company. In particular the Company has agreed to
change the packaging of its UnInstaller product following February 1998. To the
extent this product is returned after February 1998, such products may not be
resold.

Although the Company establishes reserves based on estimated future returns
of products, taking into account the timing of new product introductions,
promotional activities, distributor and retailer inventories of the Company's
products and other factors, there can be no assurance that actual levels of
returns will not significantly exceed amounts anticipated by the Company. There
can be no assurance that the level of returns will not significantly increase in
the future. Particularly in light of recent new product introductions, any
material increase in the level of returns could materially adversely affect the
Company's business, results of operations and financial condition.

Potential Fluctuations in Quarterly Results. The Company's quarterly
operating results have fluctuated in the past and are expected to fluctuate
significantly in the future. These fluctuations may arise as a result of a
number of factors, including the number and timing of new product introductions,
upgrades and product enhancements by the Company or its competitors, purchasing
patterns of distributors and customers,

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marketing and promotional programs, pricing and other competitive pressures,
order deferrals and product returns in anticipation of new products or upgrades
to existing products, the mix of distribution channels through which the
Company's products are sold, the Company's decisions regarding hiring and other
expenses, market acceptance of the Company's products, market acceptance of
commerce over the Internet, technological limitations of the Internet, the
developing nature of the market for the Company's products, general economic
conditions and other factors. The Company generally ships products as orders are
received and, accordingly, the Company has historically operated with relatively
little backlog. As a result, quarterly revenues depend predominantly on the
volume and timing of orders received during a particular quarter, both of which
are difficult to forecast.In fact, the Company typically generates a large
percentage of its quarterly revenues during the last few weeks of the quarter. A
significant portion of the Company's operating expenses are relatively fixed in
the short term, and planned expenditures are based on sales forecasts. To the
extent that such expenses precede or are not subsequently followed by increased
net revenues, the Company's business, results of operations and financial
condition will be materially adversely affected. In addition, the consumer
software industry in which the Company operates has seasonal elements. In recent
years, the consumer software industry has experienced relatively lower demand
for software products in the summer months. If net revenues fall below the
Company's expectations, expenditure levels as a percentage of total net revenues
could be disproportionately high, and operating results would be immediately and
adversely affected. The Company believes that period-to-period comparisons of
its operating results are not meaningful and should not be relied upon as any
indication of future performance. Due to the foregoing factors, among others, it
is likely that the Company's future quarterly operating results from time to
time will not meet the expectations of securities analysts or investors, which
may have an adverse effect on the price of the Company's Common Stock.

Management of Growth; Dependence on Key Personnel. The Company's business
has grown rapidly in recent years and such growth has placed and, if sustained,
will continue to place, significant demands on the Company's management and
resources. Recently, the Company has significantly increased the scale of its
operations to support increased sales volumes and to address critical
infrastructure and other requirements. This increase included substantial
investments in sales and marketing to support sales activities and the hiring of
a number of new employees, which have resulted in higher operating expenses.
Between December 31, 1995 and December 31, 1997, the number of Company employees
increased from approximately 20 to approximately 257. Subsequent to December 31,
1997, the Company's Chief Executive Officer and Chief Financial Officer
resigned. The Company is currently engaged in a search for replacements for
these positions. The Company's ability to manage the business and bear the costs
of future expansion, should it occur, will depend upon the Company's ability to
recruit and retain a new Chief Executive Officer and a new Chief Financial
Officer as well as the successful expansion of its sales, marketing, research
and development, customer support and administrative infrastructure and the
ongoing implementation and improvement of a variety of internal management
systems, procedures and controls. There can be no assurance that the Company
will be able to attract, manage and retain personnel or will not experience
significant problems with respect to any infrastructure expansion or the
attempted implementation of systems, procedures and controls. Any failure in one
or more of these areas would have a material adverse effect on the Company's
business, results of operations and financial condition.

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

The Company is dependent upon certain of its executive officers and has
entered into employment agreements with certain of its executive officers in
order to help assure their retention by the Company. However, there can be no
assurance that any such employment agreements will sufficiently incent such
executive officers to remain with the Company. The Company does not maintain any
key person insurance policies on the lives of any of its executive officers. The
loss of or inability to retain these key executive officers

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for any reason could have a material adverse effect upon the Company's business,
results of operations and financial condition.

Product Concentration; Risks Associated with Upgrades and New
Products. During 1996 and 1997, over 90% and over 75%, respectively, of the
Company's net revenues were attributable to sales of its First Aid products.
Although the Company anticipates that sales of its First Aid products will
account for a substantial portion of its net revenues in the future, the Company
believes that sales of its new products, such as Oil Change, UnInstaller, Guard
Dog Deluxe, and CSS also will contribute significantly. There can be no
assurance that net revenues from the Company's products will continue to grow at
historical rates or sustain current levels. The Company's future financial
performance will depend in large part on the successful development,
introduction and customer acceptance of UnInstaller, Guard Dog Deluxe, Oil
Change, and other new product offerings and enhanced versions of Company
products including CyberMedia Support Server, the Company's enterprise product
line. A decline in the demand for First Aid or other ActiveHelp products,
failure to achieve market acceptance of upgrades to such products or new
products or failure of net revenues derived from such products to meet the
Company's expectations, whether as a result of competition, technological change
or other factors, would have a material adverse effect on the Company's
business, results of operations and financial condition.

Competition. The PC software industry is intensely competitive and
characterized by short product life cycles and frequent new product
introductions. The Company competes with software companies of varying sizes and
resources, including Network Associates, Inc., Symantec Corp., Quarterdeck
Corporation, SystemSoft Corporation and others. Furthermore, the Company may
compete with other companies that introduce automatic service and support,
security and anti-virus protection software products. Many of the Company's
existing and potential competitors have substantially greater financial,
technical and marketing resources than the Company. Moreover, there are no
proprietary barriers to entry that could keep existing and potential competitors
from developing similar products or selling competing products in the Company's
markets. To the extent that the Company's competitors bundle their software
products with leading hardware, application software or operating system
vendors, or if one or more of the system vendors, such as Microsoft, IBM, Intel
or others, succeeds in incorporating functionality comparable, or perceived as
comparable, to that offered by the Company into its products, (or separately
offers comparable products), the Company's business, results of operations and
financial condition could be materially adversely affected. There can be no
assurance that the Company will be able to compete successfully with existing or
potential competitors. In particular, Microsoft's "Zero Administration for
Windows" initiative is a collection of technologies from Microsoft that make the
Windows family of systems easier to use for the end user and easier to manage
for IS administrators. There can be no assurance that any such initiative by
Microsoft or others would not render the Company's products uncompetitive or
obsolete. Furthermore, there can be no assurance that other software companies
with longer operating histories, significantly greater financial, technical,
marketing or other resources, significantly greater name recognition or a larger
installed base of customers than the Company will not introduce products
comparable, or perceived as comparable, to those of the Company. Increased
competition may result in the loss of shelf space or a reduction in demand or
sell-through of the Company's products, any of which could have a material
adverse effect on the Company's business, results of operations and financial
condition.

The Company also expects that competition will increase as a result of
software industry consolidations. 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 Company's prospective customers. Accordingly, it is possible that
current and potential 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, operating
results and financial condition. In addition, the Company provides price
protection to its distributors in the event the Company reduces its prices.
There can be no assurance that the Company will be able to compete successfully
against current and future competitors or that competitive pressures faced by
the Company will not materially and adversely affect its business, financial
condition and results of operations.

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The enterprise software market targeted by the CyberMedia Support Server
product line is expected to be subject to intense competition from a number of
sources including solutions currently being utilized by IS administrators. There
can be no assurance that the Company's product line will gain acceptance in the
enterprise market or that, if accepted, competitors with longer operating
histories, significantly greater financial, technical, marketing and other
resources, significantly greater name recognition and a larger installed base of
customers than the Company will not introduce products comparable, or perceived
as comparable, to those of the Company.

Dependence on Distribution Channels. The Company currently sells its
products primarily through distributors for resale to the retail channel. Sales
to such distributors accounted for approximately 69% and 65% of the Company's
net revenues in 1996 and 1997, respectively.

Sales to a limited number of distributors have constituted and are expected
to continue to constitute a substantial portion of the Company's net revenues.
Net sales to the Company's top two distributors, Ingram Micro Inc. ("Ingram
Micro") and Navarre Corporation ("Navarre"), accounted for approximately 25% and
25%, respectively, of net revenues in 1996 and 1997. The loss of, or reduction
in, orders from any of these distributors could have a material adverse effect
on the Company's business, results of operations and financial condition.
Historically, margins for distributors in the PC software industry have been
low, competition has been intense and distributors have relied on timely
payments from their customers. Financial difficulties of any distributors could
render the Company's associated accounts receivable uncollectible, which could
have a material adverse effect on the Company's business, results of operations
and financial condition. In addition, any special distribution arrangements or
product pricing arrangements that the Company may implement for strategic
purposes in one or more of its distribution channels could materially adversely
affect its margins.

The distribution channels through which consumer software products are sold
have been characterized by rapid change, including consolidations and financial
difficulties of certain distributors and retailers and the emergence of new
retailers such as general mass merchandisers. In addition, due to an increase in
the number of software applications, there are an increasing number of companies
competing for access to these channels. Retailers of the Company's products
typically have a limited amount of shelf space and promotional resources, and
there is intense competition for high quality and adequate levels of shelf space
and promotional support from the retailers. The Company believes this
competition for shelf space will increase in the near term as competitors
introduce new automatic service and support software. The competition for access
to distribution channels also, from time to time, results in the Company
offering extended payment terms and other incentives to its distribution
partners to maintain adequate shelf space for its products. There can be no
assurance that distributors and retailers will continue to purchase the
Company's products or provide the Company's products with adequate levels of
shelf space and promotional support, the lack of which would have a material
adverse effect on the Company's business, results of operations and financial
condition. The Company has entered into, and seeks to continue to establish,
strategic alliances with third-party vendors to increase the distribution of its
automatic service and support products. To date none of these agreements or
strategic alliances has generated significant revenues and there can be no
assurance that any of these agreements or strategic alliances will be a material
source of revenues for the Company. In addition, there can be no assurance that
these agreements and alliances will not be amended or terminated prior to their
expiration because of changed commercial conditions or otherwise.

Dependence on Microsoft Windows and Windows NT. The Company's success is
dependent on the continued widespread use of the Windows and Windows NT
operating systems for PCs. The Company's ActiveHelp products are designed to
automatically detect, diagnose, resolve and help prevent common

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problems in the Windows and Windows NT environments. Although Windows operating
systems are currently used by many PC users, other companies, including
International Business Machines Corporation, Apple Computer, Inc. and Sun
Microsystems, Inc., have developed or are developing other operating systems
that compete, or will compete, with Windows. In the event that any of these
alternative operating systems become widely accepted in the PC marketplace,
demand for the Company's products could be adversely affected, thereby
materially adversely affecting the Company's business, results of operations and
financial condition. In addition, Microsoft may introduce new operating systems
to replace Windows or Windows NT or could incorporate some or many of the key
features of the Company's products in new versions of its operating systems,
thereby eliminating the need for users to purchase the Company's products.
Specifically, the Company expects Microsoft to release Windows '98 in calendar
1998. To the extent that the Company's products are not compatible with Windows
'98, the Company may need to significantly update its products. In addition, the
Company may experience significant returns. The inability to adapt current
products or to develop new products for use with any new operating systems on a
timely basis would have a material adverse effect on the Company's business,
results of operations and financial condition.

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

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

New Product Development and Technological Change. Substantially all of the
Company's net revenues have been derived, and substantially all of the Company's
future net revenues are expected to be derived, from the sale of its automatic
service and support products. The market for such products is characterized by
rapid technological advances, evolving industry standards in computer hardware
and software technology and frequent new product introductions and enhancements.
The Company's products must be continually updated to address the new and
evolving technical support requirements of third-party hardware and software.
Failure to anticipate technical difficulties that arise from use of these
third-party products and incorporate solutions to such difficulties into the
Company's products would have a material adverse effect on continued market
acceptance of the Company's products. The Company's ability to design, develop,
test and support on a timely basis new software products, updates and
enhancements that respond to technological developments and emerging industry
standards in the Company's current market as well as new markets such as the
enterprise market is critical to the Company's future success. There can be no
assurance that the Company will be successful in such efforts or that the
Company will not experience difficulties that could delay or prevent the
successful development, introduction and marketing of new products and
enhancements, or that its new

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products, upgrades and enhancements will adequately meet the requirements of the
marketplace and achieve market acceptance. The introduction of new products,
upgrades or enhanced versions of existing products is subject to the risk of
development delays due to resource constraints, availability of technical
employees, technological change and other reasons. In addition, the Company may
encounter difficulties or delays in developing products for the enterprise
market for which the technical and functional requirements for products are
different from and are often more complex than those in the retail market. If
the Company is unable to develop on a timely basis new software products,
upgrades or enhancements to existing products or if such new products, upgrades
or enhancements do not achieve market acceptance, the Company's business,
results of operations and financial condition would be materially adversely
affected.

The Company supplements its in-house product development by engaging
work-for-hire software engineers in India. In addition, the Company from time to
time engages other software engineers on a contract basis. Any loss of the
services of these engineers due to political or economic instability or for any
other reason could adversely affect the Company's product development efforts
and thereby could materially adversely affect the Company's business, results of
operations and financial condition.

Dependence on the Internet. The commercial viability of the Company's
products and the Company's ability to execute its strategy to leverage the
Internet as a platform for its products and services are dependent upon the
continued development and acceptance of the Internet. In addition, the Company's
future success may be dependent upon continued growth in the use of the Internet
in order to support the distribution of products and future upgrades. The use of
the Internet as a distribution channel is new and unproven and represents a
significant departure from traditional distribution methods employed by software
companies. Critical issues concerning the commercial use of the Internet
(including security, reliability, cost, ease of use, accessibility, speed and
potential tax or other government regulation) remain unresolved and may affect
the use of the Internet as a medium to support the functionality of the
Company's products as well as to distribute software. There can be no assurance
that the use of the Internet will be effective for either current or future
products. The failure of the development and acceptance of the Internet would
have a material adverse effect on the Company's business, results of operations
and financial condition. The Company's future success depends, in part, upon the
future growth of the Internet for commercial transactions. There can be no
assurance that communication or commerce over the Internet will become
widespread and it is not known whether this market will develop to the extent
necessary for demand for the Company's products to emerge and become
sustainable. The Internet may not prove to be a viable commercial marketplace
for a number of reasons, including inadequate bandwidth and a lack of secure
payment mechanisms. To the extent that the Internet continues to experience
significant growth in the number of users and level of use, there can be no
assurance that the Internet infrastructure will continue to be able to support
the demands placed upon it. Moreover, the Internet could lose its viability due
to delays in the development or adoption of new standards and protocols required
to handle increased levels of Internet activity or due to increased government
regulation. Changes in or insufficient availability of telecommunications
services to support the Internet also could result in slower response times
which might adversely affect customers' ability or willingness to access or
purchase the Company's products or upgrades over the Internet. In addition, the
security and privacy concerns of existing and potential customers, as well as
concerns related to computer viruses, may inhibit the growth of the Internet
marketplace generally and the customer base for the Company's products in
particular. If use of the Internet does not continue to grow, if the Internet
infrastructure does not effectively support customer demand or if hardware and
software vendors do not continue to post updates and patches on the Internet,
the Company's business, results of operations and financial condition could be
materially adversely affected.

Limited Protection of Proprietary Rights. The Company's success is heavily
dependent upon its proprietary software. The Company relies primarily on a
combination of copyright, trademark and trade secret laws, employee
confidentiality and nondisclosure agreements and third-party nondisclosure
agreements and other methods of protection common in the consumer software
industry to protect its proprietary rights. The Company licenses its products
primarily under "shrink wrap" license agreements that are not signed by
licensees and therefore may be unenforceable under the laws of certain
jurisdictions. In addition, the Company has two United States patent
applications pending and intends to seek international and further United States
patents on its technology. There can be no assurance that patents will issue
from the Company's pending

26
28

applications or that any claims allowed from the pending patent applications or
those hereafter filed will be of sufficient scope or strength, or be issued in
all countries where the Company's products can be sold, to provide meaningful
protection or any commercial advantage to the Company or that any patents which
may be issued to the Company will not be challenged and invalidated. Although
from time to time the Company obtains copyright registrations on certain items
of its technology, existing copyright laws provide only limited protection.
Despite the Company's efforts to protect its proprietary rights, unauthorized
parties may attempt to copy or otherwise obtain and use the Company's products
or technology that the Company considers proprietary, and third parties may
develop similar technology independently. Furthermore, there can be no assurance
that others will not infringe the Company's intellectual property rights.
Policing unauthorized use of the Company's intellectual property rights and
products is difficult. While the Company is unable to determine the extent to
which piracy of its software products exists, software piracy can be expected to
be a persistent problem. There can be no assurance that the Company can
meaningfully protect its intellectual property rights. A failure by the Company
to meaningfully protect its intellectual property rights could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company also relies, in part, on technology licenses from third
parties. In the event that such licensees are terminated, the Company would need
to license similar technology from alternative sources or develop its own
technology. In the event the Company could not license such similar technology
on commercially viable terms or otherwise successfully develop its own
technology, the Company's business, results of operation and financial condition
could be materially adversely affected. In addition, there can be no assurance
that the Company's competitors will not independently develop technologies and
products that are substantially equivalent or superior to those of the Company
without violating the Company's proprietary rights, the commercialization of
which could have a material adverse effect on the Company's business, results of
operations and financial condition.

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

27
29

disruptions could jeopardize the security of information stored in and
transmitted through the computer systems of the individuals and businesses
utilizing the Company's products, which could result in significant liability to
the Company and also may deter customers and potential customers from using the
Company's services. Persistent problems continue to affect public and private
data networks. For example, in a number of networks, hackers have bypassed
network security and misappropriated confidential information.

Volatility of Stock Price. The market price of the shares of Common Stock
is likely to be highly volatile and could be subject to wide fluctuations in
response to factors such as actual or anticipated variations in the Company's
operating results, announcements of technological innovations, new products or
new contracts by the Company or its competitors, third party product reviews or
awards on the Company's or its competitors' products, developments with respect
to patents, copyrights or proprietary rights, changes in financial estimates by
securities analysts, conditions and trends in the software and other technology
industries, adoption of new accounting standards affecting the software
industry, general market conditions and other factors. Further, the stock market
has experienced extreme 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 or disproportionate to the
operating performance of such companies. Declines in market prices generally may
adversely affect the market price of the Company's Common Stock. The Company has
been named as a defendant in class action litigation which could result in
substantial costs and a diversion of management attention and resources, which
would have a material adverse effect on the Company's business, results of
operations and financial condition. There can be no assurance that additional
actions will not be brought against the Company. In addition, the Company is
aware that on March 18, 1998, plaintiffs Mark Novisoff, Timothy O'Pry, Janet Van
Pelt and Thomas Lynch (collectively, the "Amending Plaintiffs") filed a motion
for leave to file an amended complaint for the purpose of, inter alia, adding
the Company as a defendant to a lawsuit the Amending Plaintiffs filed on March
2, 1998 in Los Angeles Superior Court against Luckman Interactive, Inc. The
Company is not currently a party to this lawsuit. The motion is scheduled for a
hearing on April 22, 1998. There can be no assurance that the court will not
permit such amended complaint to be filed. These market fluctuations, as well as
general economic, political and market conditions, such as recessions or
international currency fluctuations, may adversely affect the market price of
the Common Stock.

Product Liability. The Company's software products may contain errors or
failures. There can be no assurance that, despite testing by the Company and
testing and use by current and potential customers, errors will not be found in
products after commencement of commercial shipments. The occurrence of any such
errors could result in the loss of, or a delay in, market acceptance of the
Company's products, which would have a material adverse effect on the Company's
business, results of operations and financial condition. The Company's license
agreements with its customers typically contain provisions designed to limit the
Company's exposure to potential claims for damages. It is possible, however,
that the limitation of liability provisions contained in the Company's license
agreements may not be effective under the laws of certain jurisdictions.
Although the Company has not experienced any such claims to date, the sale and
support of the Company's products may entail the risk of such claims. While the
Company has obtained insurance against product liability risks, there can be no
assurance that such insurance will provide adequate coverage. The Company does
not currently carry errors and omissions coverage which may protect against
allegations that the Company's products have failed to perform adequately. Any
such claims for damages brought against the Company could have a material
adverse effect on the Company's business, results of operations and financial
condition.

Risks Associated with Recent Acquisitions; Potential Future
Acquisitions. In April 1997, the Company acquired certain assets of Luckman
Interactive, Inc. and acquired Walk Softly, Inc. The integration of acquired
assets, groups and product lines is typically difficult, time consuming and
subject to a number of inherent risks. The integration of product lines requires
the coordination of the research and development and sales and marketing efforts
of the acquired groups and the Company. Such combinations have and will continue
to require substantial attention from management. The diversion of the attention
of management and any difficulties encountered in the transition process could
have a material adverse impact on the Company's business, financial condition
and results of operations. In addition, the process of assimilating and managing
acquisitions could cause the interruption of, or a loss of momentum in, the
activities of the Company's

28
30

business, which could have a material adverse effect on the Company. There can
be no assurance that the Company will realize the anticipated benefits of any of
these acquisitions.

Future acquisitions by the Company may result in the diversion of
management's attention from the day-to-day operations of the Company's business
and may include numerous other risks, including difficulties in the integration
of the operations, products and personnel of the acquired companies. Future
acquisitions by the Company also have the potential to result in dilutive
issuances of equity securities, the incurrence of debt and amortization expenses
related to goodwill and other intangible assets. While there are currently no
such acquisitions planned or being negotiated, Company management frequently
evaluates the strategic opportunities available to it and may in the near- or
long-term pursue acquisitions of complementary businesses, products or
technologies.

Risks Associated With Global Operations. During 1997, approximately 17% of
total net revenues were from sales to customers outside of the United States.
The Company is expanding its sales operations outside of the United States which
will require significant management attention and financial resources. The
Company's ability to expand its product sales internationally is dependent on
the successful development of localized versions of the Company's products,
establishment of distribution channels, acceptance of such products and the
acceptance of the Internet internationally. The Company expects to commit
significant resources to customizing its products for selected international
markets and to developing international sales and support channels. The
Company's products rely on a knowledge base that contains detailed information
based on specific English language versions of third-party hardware and software
applications. This knowledge base must be recreated for each foreign language
version that is developed to support foreign releases of such products, many of
which have been modified from their United States releases. There can be no
assurance that this task can be completed in a timely or cost-effective manner
or that enough products can be supported to ensure customer acceptance. The
Company believes that successful execution of a global strategy is critical to
maintaining its current market position and competitive advantage. Failure to
successfully expand its products to international markets could cause the
Company to lose business to global competitors or prevent the development of
strategic relationships with global hardware and software vendors.

International operations are subject to a number of risks, including costs
of customizing products for foreign countries, dependence on independent
resellers, multiple and conflicting regulations regarding communications, use of
data and control of Internet access, longer payment cycles, unexpected changes
in regulatory requirements, import and export restrictions and tariffs,
difficulties in staffing and managing foreign operations, greater difficulty or
delay in accounts receivable collection, potentially adverse tax consequences,
the burdens of complying with a variety of foreign laws, the impact of possible
recessionary economic environments in economies outside the United States and
political and economic instability. An increase in the value of the United
States dollar relative to foreign currencies could make the Company's products
more expensive and, therefore, potentially less competitive in foreign markets.
If the Company increases its international sales, its net revenues may also be
affected to a greater extent by seasonal fluctuations resulting from lower sales
that typically occur during the summer months in Europe and other parts of the
world. Moreover, the laws of certain foreign countries in which the Company's
products may be sold may not protect the Company's intellectual property rights
to the same extent as do the laws of the United States, thus increasing the
possibility of piracy of the Company's products.

In addition, the European Monetary Union is embarking on a multi-year
introduction and conversion to a common currency, the Euro. There can be no
assurance that the Company can adopt or modify its systems and processes in a
timely and cost effective manner to accept this new currency. Any delays or
inability to conduct business using the Euro could materially adversely affect
the Company's business, results of operations and financial condition.

Reliance on Outside Resources. The Company relies upon independent
contractors to perform a number of tasks, including product duplication and
packaging, reproduction of manuals and brochures and order fulfillment. The
Company depends on these outside parties to perform such functions to the
Company's specifications and quality standards. The Company currently does not
have long-term agreements with any of these outside parties. The Company
supplements its in-house product development by engaging work-for-hire

29
31

software engineers in India. In addition, the Company from time to time engages
other software engineers on a contract basis. Although the Company believes that
alternative resources exist or can be obtained, a disruption of the Company's
relationship with any of these outside parties or the failure of these outside
parties to continue to provide quality supplies and services on a timely basis
could materially adversely affect the Company's business, results of operations
and financial condition.

Anti-takeover Provisions. The Company's Board of Directors has the
authority to issue up to 2,000,000 shares of Preferred Stock and to determine
the price, rights, preferences, privileges and restrictions, 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 holders of any Preferred Stock that may be
issued in the future. The issuance of Preferred Stock may delay, defer or
prevent a change in control of the Company. In addition, Section 203 of the
Delaware General Corporation Law, to which the Company is subject, restricts
certain business combinations with any "interested stockholder" as defined by
such statute. The statute may delay, defer or prevent a change in control of the
Company.

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32

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEPENDENT AUDITORS' REPORT

The Board of Directors
CyberMedia, Inc.:

We have audited the accompanying consolidated balance sheets of CyberMedia,
Inc. and subsidiaries as of December 31, 1997 and 1996 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CyberMedia,
Inc. and subsidiaries as of December 31, 1997 and 1996 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997 in conformity with generally accepted accounting
principles.

[/s/ KPMG Peat Marwick LLP]

Long Beach, California
March 25, 1998

31
33

CYBERMEDIA, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS

DECEMBER 31, 1996 DECEMBER 31, 1997
----------------- -----------------

Current assets:
Cash and cash equivalents................................. $39,322,000 $25,059,000
Marketable securities..................................... -- 1,001,000
Trade accounts receivable, net............................ 12,318,000 19,851,000
Inventory................................................. 2,365,000 3,590,000
Prepaid expenses.......................................... 1,270,000 1,417,000
Deferred taxes............................................ -- 3,619,000
Other current assets...................................... 185,000 1,091,000
----------- -----------
Total current assets.............................. 55,460,000 55,628,000
Furniture, fixtures and equipment, net...................... 990,000 4,191,000
Other assets................................................ -- 284,000
----------- -----------
$56,450,000 $60,103,000
=========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 7,004,000 $ 8,753,000
Accrued expenses.......................................... 1,247,000 2,917,000
Related party payable..................................... -- 618,000
Income taxes payable...................................... -- 2,787,000
Unearned revenues......................................... 4,024,000 3,655,000
Grant payable............................................. 413,000 390,000
Current portion of capital lease.......................... 45,000 17,000
Deferred obligation for acquired research and
development............................................ -- 2,913,000
----------- -----------
Total current liabilities......................... 12,733,000 22,050,000
Capital lease obligation and deferred rent.................. 49,000 284,000
Deferred obligation for acquired research and development... -- 1,125,000
----------- -----------
Total liabilities................................. 12,782,000 23,459,000
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.01, 2,000,000 shares
authorized; none issued and outstanding................ -- --
Common stock, $0.01 par value. Authorized 50,000,000
shares; issued and outstanding 11,825,354, and
12,511,654 shares in 1996 and 1997, respectively....... 119,000 126,000
Additional paid-in capital................................ 52,583,000 57,587,000
Accumulated deficit....................................... (9,034,000) (20,774,000)
Cumulative foreign currency translation adjustment........ -- (295,000)
----------- -----------
Total stockholders' equity........................ 43,668,000 36,644,000
----------- -----------
$56,450,000 $60,103,000
=========== ===========

See accompanying notes to consolidated financial statements.
32
34

CYBERMEDIA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1996 1997
----------- ----------- ------------

Net revenues........................................... $ 4,797,000 $38,524,000 $ 71,227,000
Cost of revenues....................................... 2,103,000 11,991,000 14,477,000
----------- ----------- ------------
Gross profit......................................... 2,694,000 26,533,000 56,750,000
Research and development............................... 964,000 3,300,000 9,333,000
Sales and marketing.................................... 4,036,000 24,125,000 39,464,000
General and administrative............................. 987,000 2,941,000 6,940,000
One-time in-process R&D and acquisition expenses....... -- -- 11,341,000
----------- ----------- ------------
Total operating expenses..................... 5,987,000 30,366,000 67,078,000
----------- ----------- ------------
Loss from operations................................. (3,293,000) (3,833,000) (10,328,000)
----------- ----------- ------------
Interest income, net................................... 22,000 420,000 1,191,000
Other (expense)........................................ (80,000) (69,000) (21,000)
----------- ----------- ------------
Loss before income taxes............................. (3,351,000) (3,482,000) (9,158,000)
Income tax expense..................................... 1,000 1,000 2,582,000
----------- ----------- ------------
Net loss............................................. $(3,352,000) $(3,483,000) $(11,740,000)
=========== =========== ============
Basic and diluted net loss per common share............ $ (2.56) $ (0.88) $ (0.97)
=========== =========== ============
Common shares used in computing per share amounts...... 1,311,000 3,943,000 12,128,000
=========== =========== ============

See accompanying notes to consolidated financial statements.
33
35

CYBERMEDIA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

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

Balance at December 31, 1994................. 2,816,801 $28,000 -- $ -- -- $ --
Issuance of Series A Preferred Stock in
exchange for cash........................... 142,857 2,000 -- -- -- --
Issuance of Common Stock upon exercise of
stock options............................... -- -- -- -- -- --
Conversion of notes payable into Series B
Preferred Stock............................. -- -- 635,714 6,000 -- --
Issuance of Series B Preferred Stock in
exchange for cash........................... -- -- 5,735,715 58,000 -- --
Net loss..................................... -- -- -- -- -- --
---------- ------- ---------- ------- ---------- --------
Balance at December 31, 1995................. 2,959,658 30,000 6,371,429 64,000 -- --
Issuance of Series C Preferred Stock in
exchange for cash........................... -- -- -- -- 1,666,667 17,000
Issuance of Common Stock upon exercise of
stock options and warrants.................. -- -- -- -- -- --
Issuance of Common Stock upon Conversion of
Series A, B and C Preferred Stock........... (2,959,658) (30,000) (6,371,429) (64,000) (1,666,667) (17,000)
Issuance of Common Stock upon initial public
offering, net of underwriting discounts and
offering costs of $4,444,000................ -- -- -- -- -- --
Net loss..................................... -- -- -- -- -- --
---------- ------- ---------- ------- ---------- --------
Balance at December 31, 1996................. -- -- -- -- -- --
Issuance of Common Stock upon exercise of
stock options and warrants.................. -- -- -- -- -- --
Issuance of Common Stock upon acquisition of
Walk Softly................................. -- -- -- -- -- --
Tax benefits from stock option exercises..... -- -- -- -- -- --
Additional costs related to initial public
offering.................................... -- -- -- -- -- --
Issuance of warrants for acquisition of
in-process R&D.............................. -- -- -- -- -- --
Warrants exercised in cashless transaction... -- -- -- -- -- --
Net loss..................................... -- -- -- -- -- --
Foreign currency translation adjustment...... -- -- -- -- -- --
---------- ------- ---------- ------- ---------- --------
-- $ -- -- $ -- -- $ --
========== ======= ========== ======= ========== ========

CUMULATIVE
COMMON STOCK ADDITIONAL FOREIGN STOCKHOLDERS'
--------------------- PAID-IN ACCUMULATED CURRENCY EQUITY
SHARES AMOUNT CAPITAL DEFICIT TRANSLATION (DEFICIENCY)
---------- -------- ----------- ------------- ----------- -------------

Balance at December 31, 1994................. 1,172,500 $ 12,000 $ 1,004,000 $ (2,199,000) $ -- $ (1,155,000)
Issuance of Series A Preferred Stock in
exchange for cash........................... -- -- 48,000 -- -- 50,000
Issuance of Common Stock upon exercise of
stock options............................... 50,000 1,000 2,000 -- -- 3,000
Conversion of notes payable into Series B
Preferred Stock............................. -- -- 439,000 -- -- 445,000
Issuance of Series B Preferred Stock in
exchange for cash........................... -- -- 3,958,000 -- -- 4,016,000
Net loss..................................... -- -- -- (3,352,000) -- (3,352,000)
---------- -------- ----------- ------------- --------- ------------
Balance at December 31, 1995................. 1,222,500 13,000 5,451,000 (5,551,000) -- 7,000
Issuance of Series C Preferred Stock in
exchange for cash........................... -- -- 4,983,000 -- -- 5,000,000
Issuance of Common Stock upon exercise of
stock options and warrants.................. 2,228,977 22,000 566,000 -- -- 588,000
Issuance of Common Stock upon Conversion of
Series A, B and C Preferred Stock........... 5,498,877 55,000 56,000 -- -- --
Issuance of Common Stock upon initial public
offering, net of underwriting discounts and
offering costs of $4,444,000................ 2,875,000 29,000 41,527,000 -- -- 41,556,000
Net loss..................................... -- -- -- (3,483,000) -- (3,483,000)
---------- -------- ----------- ------------- --------- ------------
Balance at December 31, 1996................. 11,825,354 119,000 52,583,000 (9,034,000) -- 43,668,000
Issuance of Common Stock upon exercise of
stock options and warrants.................. 563,832 6,000 2,778,000 -- -- 2,784,000
Issuance of Common Stock upon acquisition of
Walk Softly................................. 122,468 1,000 8,000 -- -- 9,000
Tax benefits from stock option exercises..... -- -- 1,391,000 -- -- 1,391,000
Additional costs related to initial public
offering.................................... -- -- (261,000) -- -- (261,000)
Issuance of warrants for acquisition of
in-process R&D.............................. -- -- 750,000 -- -- 750,000
Warrants exercised in cashless transaction... -- -- 338,000 -- -- 338,000
Net loss..................................... -- -- -- (11,740,000) -- (11,740,000)
Foreign currency translation adjustment...... -- -- -- -- (295,000) (295,000)
---------- -------- ----------- ------------- --------- ------------
12,511,654 $126,000 $57,587,000 $ (20,774,000) $(295,000) $ 36,644,000
========== ======== =========== ============= ========= ============

See accompanying notes to consolidated financial statements.

34
36

CYBERMEDIA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1996 1997
----------- ----------- ------------

Cash flows from operating activities:
Net loss.................................................. $(3,352,000) $(3,483,000) $(11,740,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 19,000 237,000 810,000
Deferred taxes.......................................... -- -- (3,619,000)
Deferred rent........................................... -- -- 235,000
Warrants exercised in cashless transaction.............. -- -- 338,000
Warrants issued for acquired R&D........................ -- -- 750,000
Changes in assets and liabilities:
Trade accounts receivable, net.......................... (1,143,000) (11,136,000) (7,533,000)
Inventory............................................... (407,000) (1,953,000) (1,225,000)
Prepaid expenses........................................ (84,000) (1,159,000) (147,000)
Other current assets.................................... (10,000) (175,000) (906,000)
Accounts payable........................................ 1,362,000 5,384,000 1,749,000
Accrued expenses and related party payables............. 189,000 828,000 2,288,000
Income taxes payable.................................... -- -- 4,178,000
Unearned revenues....................................... 677,000 3,347,000 (369,000)
Grant payable........................................... 276,000 (194,000) (23,000)
Deferred obligation for acquired R&D.................... -- -- 4,038,000
Other liabilities....................................... (25,000) -- --
----------- ----------- ------------
Net cash used in operating activities................. (2,498,000) (8,304,000) (11,176,000)
Cash flows used in investing activities -- purchase of:
Marketable securities..................................... -- -- (1,001,000)
Furniture, fixtures and equipment......................... (67,000) (1,043,000) (3,901,000)
Goodwill and other assets................................. -- -- (394,000)
----------- ----------- ------------
Net cash used in investing activities................. (67,000) (1,043,000) (5,296,000)
Cash flows from financing activities:
Proceeds from the issuance of Series A Preferred Stock.... 50,000 -- --
Proceeds from the issuance of Series B Preferred Stock.... 4,016,000 -- --
Proceeds from the issuance of Series C Preferred Stock.... -- 5,000,000 --
Payments of capital lease obligations..................... (1,000) (25,000) (28,000)
Proceeds from the issuance of Common Stock upon exercise
of stock options and warrants........................... 3,000 588,000 2,793,000
Proceeds from (repayments of) note payable................ 445,000 (500,000) --
Proceeds from the issuance of Common Stock upon initial
public offering (additional offering expenses).......... -- 41,556,000 (261,000)
Proceeds from the receipt of grant........................ -- -- --
----------- ----------- ------------
Net cash provided by financing activities............. 4,513,000 46,619,000 2,504,000
----------- ----------- ------------
Effect of exchange rate changes on cash..................... -- -- (295,000)
----------- ----------- ------------
Net increase(decrease) in cash and cash equivalents... 1,948,000 37,272,000 (14,263,000)
Cash and cash equivalents at beginning of period............ 102,000 2,050,000 39,322,000
----------- ----------- ------------
Cash and cash equivalents at end of period.................. $ 2,050,000 $39,322,000 $ 25,059,000
=========== =========== ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest................................................ $ 80,000 $ 69,000 $ 402,000
Income taxes............................................ $ 1,000 $ 440,000 $ 1,560,000
Supplemental disclosure of noncash investing and financing
activities:
Tax benefits from stock option exercises.................. -- -- 1,391,000
Conversion of notes payable into Series B Preferred
Stock................................................... $ 445,000 $ -- $ --
Acquisition of equipment through capital lease
agreements.............................................. $ 26,000 $ 94,000 $ --

See accompanying notes to consolidated financial statements.
35
37

CYBERMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Pooling of Interests

CyberMedia, Inc. (the "Company"), a Delaware corporation, develops and
markets software products that provide automatic service and support to PC users
in the Windows environment. Products are principally sold to distributors and
directly to consumers. The Company also markets its products internationally
through its wholly-owned subsidiaries, CyberHelp Ltd. in Ireland and CyberMedia
KK in Japan and through certain distribution and licensing agreements. For the
years ended 1996 and 1997, approximately 10% and 19%, respectively, of the
Company's net revenues were from international sales. Prior to 1996,
international sales were less than 5% of net revenues. In 1997, European
business accounted for 13%, 4% and 4% of the Company's net revenues, loss before
taxes and net loss, respectively. Assets located in Europe were less than 10% of
total assets in 1996 and 1997.

In April 1997, the Company acquired, in a transaction accounted for as a
pooling of interests, all of the outstanding shares of Walk Softly, Inc. 122,468
shares of common stock were issued in connection with this acquisition. The
results of operations of Walk Softly, Inc. were insignificant; accordingly,
results of operations for periods prior to the transaction have not been
restated.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All intercompany transactions have been
eliminated in consolidation.

Cash Equivalents

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

Marketable Securities

Marketable securities, considered by the Company to be available-for-sale,
consist primarily of bankers' acceptances and commercial paper of large U.S.
corporations. The securities are stated at cost, which approximates market.

Inventory

Inventory, consisting of software product and related packaging materials,
is stated at the lower of cost (first-in, first-out method) or market. Inventory
is shown net of valuation allowances of $430,000 and $74,000 at December 31,
1996 and 1997, respectively.

Revenue Recognition

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

36
38
CYBERMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Revenue Related Allowances

Allowances for sales returns and doubtful accounts are established based
upon historical experience and management's estimates as shipments are made. The
allowance for sales returns and doubtful accounts aggregated $1,523,000 and
$15,749,000 at December 31, 1996 and 1997, respectively, and is shown as a
reduction of accounts receivable on the accompanying balance sheets. The
allowance for sales returns includes the Company's estimation of costs related
to its price protection policy. Such costs have historically been immaterial.

Unearned Revenues

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

Research and Development and Purchased In-Process R & D

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

The Company has acquired certain software code, including non-exclusive
rights to use software code developed by others, with the intent to incorporate
such purchased technology in future products. Where such purchased technology
rights are determined to have no alternative future use other than in
development of future products, the Company expenses amounts paid. During 1997,
the Company expensed an aggregate of $11,341,000 in connection with two
acquisitions of such in process research and development.

In the first acquisition, the Company paid cash of $4.0 million, agreed to
pay additional minimum guaranteed amounts of $4.5 million and issued warrants to
purchase 150,000 shares of the Company's common stock at $9.13 per share. The
warrants were valued at $750,000 (see note 7). In the second

37
39
CYBERMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

acquisition, the Company paid cash of $1.1 million and agreed to pay an
additional $1.3 million in installments due through September 1998.

Depreciation and Amortization

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

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

Income Taxes

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

Computation of Net Loss per Share

In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, Earnings per Share. The Company has reflected the provisions of SFAS 128 in
the accompanying consolidated financial statements for all periods presented.
SFAS 128 replaces the presentation of primary Earnings Per Share ("EPS") with a
presentation of basic EPS, which excludes dilution and is computed by dividing
income available to common shareholders by the weighted average number of common
shares outstanding for the period. The Statement also requires the dual
presentation of basic and diluted EPS on the face of the income statement for
all entities with complex capital structures. Diluted EPS is computed similarly
to fully diluted EPS pursuant to Accounting Principles Board (APB) Opinion No.
15. Due to the losses reported by the Company in each of the last three years,
any potential common shares to be included in diluted earnings per share as a
result of common stock options and warrants are anti-dilutive and thus diluted
earnings per share and basic earnings per share are equal. Potentially dilutive
securities not included in the computation of basic earnings per share consisted
of stock options and warrants outstanding as of December 31, 1997. See Notes 7
and 8.

In February 1998, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 98 which changes the calculation of
earnings per share in periods prior to initial public offerings as previously
applied under SAB No. 83. When a registrant issued common stock, warrants,
options, or other potentially dilutive instruments for consideration or with
exercise prices below the initial public offering price within a one year period
prior to the initial filing of a registration statement relating to an initial
public offering, SAB No. 83 required such equity instruments to be treated as
outstanding for all periods presented in the filing using the anticipated
initial public offering price and the treasury stock method. Under SAB No. 98,
when common stock options, warrants, or other potentially dilutive instruments
have been issued for nominal consideration during the periods covered by income
statements in the filing, those nominal issuances are to be reflected in
earnings per share calculations for all periods presented. Based on the
Company's current understanding of the definition of "nominal consideration,"
the Company has concluded that during all

38
40
CYBERMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

periods prior to the Company's initial public offering, no equity instruments
were issued for nominal consideration. Per share results for periods prior to or
including the Company's initial public offering have been restated in accordance
with SAB No. 98.

Financial Instruments

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

Long-Lived Assets

The Company evaluates long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying value of an asset may not be
recoverable. If the estimated future cash flows (undiscounted and without
interest charges) from the use of an asset are less than the carrying value, a
write-down would be recorded to reduce the related asset to the appropriate
value.

Use of Estimates

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

(2) FURNITURE, FIXTURES AND EQUIPMENT

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

DECEMBER 31,
------------------------
1996 1997
---------- ----------

Office furniture and equipment.............. $ 348,000 $1,524,000
Computer equipment and purchased software... 923,000 3,621,000
---------- ----------
1,271,000 5,165,000
---------- ----------
Less accumulated depreciation............... (281,000) (974,000)
---------- ----------
$ 990,000 $4,191,000
========== ==========

Assets acquired under capitalized leases, which are principally included in
computer equipment above, at December 31, 1996 and 1997 aggregated $168,000 and
$62,000 respectively. Accumulated depreciation related to these assets
aggregated $57,000 and $43,000 at December 31, 1996 and 1997, respectively.

39
41
CYBERMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(3) ACCRUED EXPENSES

Accrued expenses consist of the following:

DECEMBER 31,
------------------------
1996 1997
---------- ----------

Accrued compensation and related expenses... $ 363,000 $ 979,000
Accrued IPO related expenses................ 419,000 --
Accrued advertising......................... 339,000 1,938,000
Other....................................... 126,000 --
---------- ----------
$1,247,000 $2,917,000
========== ==========

(4) GRANT PAYABLE

In August 1992, the Company received a grant under the Program for the
Advancement of Commercial Technology Provided by the United States Agency for
International Development and administered by the Industrial Credit and
Investment Corporation of India Limited ("ICICI"). As of December 31, 1994, the
Company had received $318,000, which had been allocated to the Company
concurrent with the development of its products. Under the terms of the
agreement, the Company is obligated to repay up to $795,000, through royalties
based on product sales, as defined. The Company accrued royalty expense related
to this grant of $276,000 during the year ended December 31, 1995. During the
year ended December 31, 1996, the Company had reduced the royalty amount accrued
to $95,000, which represented the total royalty amount the Company expected to
pay in addition to the original grant amount of $318,000. During 1997, the
Company paid ICICI $409,000 and accrued the remaining $386,000 representing the
maximum amount payable under the terms of the grant.

(5) FINANCING ARRANGEMENTS

The Company had a revolving line of credit of $3,000,000 bearing interest
at the prime rate plus 1% which expired in April 1997. As of December 31, 1996,
the Company had no outstanding borrowings on this revolving line of credit which
was collateralized by all assets of the Company. The Company was restricted
under the revolving line of credit from declaring or paying a dividend on any of
its capital stock without bank consent. The Company currently has a $1,000,000
unrestricted line of credit which bears interest at the prime rate, and is
collateralized by all assets of the Company. At December 31, 1997 the Company
had no outstanding borrowings on this line of credit.

The Company has from time to time utilized receivable based financing made
available by commercial banks including sales of trade accounts receivable to
such commercial banks. Such arrangements are non-recourse, except for sales
returns and marketing credits. On September 30, 1997 the Company sold $4,831,000
of trade accounts receivable without recourse (subject to sales returns and
marketing credits). At December 31, 1997, $552,000 of such accounts receivable
remained outstanding; however subsequent to December 31, 1997, such amounts were
satisfied in full.

40
42
CYBERMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(6) INCOME TAXES

The provision for income taxes, all current, for the years ended December
31, 1995 and 1996 consists solely of the annual minimum California franchise tax
of approximately $1,000. The tax provision for 1997 is summarized as follows:

CURRENT DEFERRED TOTAL
---------- ----------- ----------

Federal....................... $5,029,000 $(3,619,000) $1,410,000
State......................... 1,080,000 -- 1,080,000
Foreign....................... 92,000 92,000
---------- ----------- ----------
Total income tax
expense........... 6,201,000 $(3,619,000) $2,582,000
=========== ==========
Reduction of taxes for stock
option exercises............ 1,391,000
----------
Current taxes................. $4,810,000
==========

During 1997, the Company recognized tax benefits related to stock option
plans of $1,391,000. Such benefits were recorded as an increase to additional
paid in capital.

The provision for income taxes differs from the expected tax benefit
computed by applying the federal corporate tax rate of 34% to loss before income
taxes principally due to the effect of net operating loss carryforwards in 1995
and 1996. For 1997, the provision for income taxes differs from the expected tax
benefit computed using the federal corporate tax rate of 34% as follows:

Expected income tax benefit................................. $(3,114,000)
State tax benefit (net)..................................... (562,000)
Increase in valuation allowance............................. 7,152,000
Tax credits................................................. (1,007,000)
Permanent differences....................................... 110,000
Other....................................................... 3,000
-----------
Income tax expense................................ $ 2,582,000
===========

41
43
CYBERMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

DECEMBER 31,
-----------------------------------------
1995 1996 1997
----------- ----------- -----------

Deferred tax assets:
Allowances................ $ 307,000 $ 474,000 $ 6,414,000
Depreciation and
amortization........... -- -- 3,653,000
Accrued expenses.......... 32,000 140,000 586,000
Unearned revenues......... 243,000 1,333,000 1,392,000
Grant payable............. 127,000 (127,000) --
Net operating losses...... 1,506,000 1,124,000 1,164,000
Other..................... -- 47,000 553,000
----------- ----------- -----------
Total gross
deferred tax
assets.......... 2,215,000 2,991,000 13,762,000
Less valuation
allowance....... (2,215,000) (2,991,000) (10,143,000)
----------- ----------- -----------
Net deferred tax assets..... $ -- $ -- $ 3,619,000
=========== =========== ===========

The net change in the valuation allowance for the years ended December 31,
1995, 1996 and 1997 was an increase of $1,359,000, $776,000 and $7,152,000,
respectively. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the ability of the Company to recover taxes
previously paid, through carryback of future tax losses or upon the generation
of future taxable income during the periods in which those temporary differences
become deductible. Management considers projected future taxable income and tax
planning strategies in making this assessment. Based on the level of historical
taxable income and projections for future taxable income over the periods in
which the level of deferred tax assets are deductible, management believes that
it is not more likely than not that the Company will realize the benefits of all
these deductible differences at December 31, 1996 and 1997. Accordingly,
valuation allowances have been provided against gross deferred tax assets in
order to reduce deferred tax assets to an amount believed by management to be
recoverable through carryback of future expected tax losses to recover taxes
paid in 1997.

The Company had available at December 31, 1997 approximately $3,052,000 of
net operating losses to offset future Federal taxable income that expire
beginning in the year 2006. Use of these net operating losses will be limited
under rules governing changes in ownership of the Company. These rules restrict
the amount of the net operating loss carryforwards which may be used in a
particular year. The maximum amount of net operating loss carryforwards which
are available on an annual basis for use subsequent to the year ended December
31, 1997 is approximately $214,000.

(7) STOCKHOLDERS' EQUITY

Preferred Stock

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

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

42
44
CYBERMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

No dividends were declared during the years ended December 31, 1995, 1996
and 1997.

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

Common Stock

During October 1996, the Company completed an initial public offering of
its Common Stock whereby 2,500,000 shares were issued at $16 per share resulting
in net proceeds of approximately $37,200,000, after underwriting discounts and
commissions and before other expenses of the offering of $1,224,000.
Additionally, 375,000 shares for the underwriter's overallotment were issued at
$16 per share resulting in net proceeds of approximately $5,580,000, after
underwriter discounts and commissions.

Stock Warrants

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

The Company issued warrants for the purchase of 49,644 shares of Common
Stock at $1.40 per share during the year ended December 31, 1995 and issued
warrants for the purchase of 70,667 shares of Common Stock at an exercise price
of $4.50 per share during the year ended December 31, 1996. No value was
ascribed to the warrants because management was of the opinion that the impact
of any such value is negligible to the accompanying consolidated financial
statements. Warrants for the purchase of 50,643 shares of Common Stock were
exercised during the year ended December 31, 1996, resulting in the issuance of
46,933 shares of Common Stock. During 1997, 150,000 warrants exercisable at a
price of $9.13 were issued in connection with the acquisition of certain in
process research and development. These warrants were valued at $750,000 using
the Black-Scholes option-pricing model, which amount was recorded as in process
research and development expense. Warrants for the purchase of 157,000 shares of
Common Stock were exercised during the year ended December 31, 1997 resulting in
the issuance of 154,554 shares of Common Stock. Therefore, as of December 31,
1997, 62,668 warrants remained outstanding of which 25,000 expire in 1999 and
37,668 expire in 2002.

(8) STOCK OPTIONS

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

43
45
CYBERMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

number of shares of Common Stock reserved under the Amended 1993 Stock Plan to
3,902,000. Stock option activity under the plans is summarized as follows:

YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
1995 1996 1997
---------------------- ----------------------- -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- --------- ----------- --------- ----------- ---------

Balance at beginning
of period:......... 821,500 $0.08 1,846,025 $0.10 1,799,955 $ 2.83
Granted............ 1,074,525 0.11 1,401,420 3.64 1,371,587 14.37
Exercised.......... (50,000) 0.05 (1,315,892) 0.09 (382,638) 3.20
Canceled........... -- -- (131,598) 0.47 (394,027) 6.74
---------- ----------- -----------
Balance at end of
period............. 1,846,025 $0.10 1,799,955 $2.83 2,394,877 $ 8.74
========== =========== ===========
Exercisable stock
options............ 1,213,692 $0.08 341,181 $2.73 656,273 $ 3.59
========== =========== ===========
Price range of
options............ $0.08-0.14 $0.08-23.50 $0.14-24.25
========== =========== ===========

The weighted average contractual life of stock options outstanding as of
December 31, 1996 and 1997 was 9.2 years and 8.9 years, respectively. The
following table summarizes information about stock options outstanding and
exercisable at December 31, 1997:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- ---------------------------------
# OF OPTIONS WEIGHTED AVERAGE NUMBER
OUTSTANDING AT REMAINING EXERCISABLE AT
RANGE OF DECEMBER 31, CONTRACTUAL LIFE WEIGHTED AVERAGE DECEMBER 31, WEIGHTED AVERAGE
EXERCISE PRICES 1997 IN YEARS EXERCISE PRICE 1997 EXERCISE PRICE
--------------- -------------- ---------------- ---------------- -------------- ----------------

0.14................. 279,171 7.8 $ 0.14 148,213 $ 0.14
1.20................. 517,485 8.0 1.20 241,942 0.69
2.00-3.00............ 83,314 8.2 2.54 37,361 2.51
3.50-4.50............ 111,357 8.4 3.90 40,964 3.87
6.00-9.00............ 208,959 8.9 7.49 112,563 8.10
9.50-12.75........... 210,586 9.2 10.63 50,013 10.12
14.75-21.5........... 831,585 9.6 14.85 25,111 14.78
22.875-24.25......... 152,420 9.8 23.31 106 23.50
--------- -------
2,394,877 8.74 656,273 3.59
========= =======

In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation," which was effective for the
Company beginning January 1, 1996. SFAS No. 123 requires expanded disclosures of
stock-based compensation arrangements with employees and encourages (but does
not require) compensation cost to be measured based on the fair value of the
equity instrument awarded. Under SFAS No. 123, the fair value of stock-based
awards to employees is calculated through the use of option pricing models, even
though such models were developed to estimate the fair value of freely
tradeable, fully transferable options without vesting restrictions, which
significantly differ from the Company's stock option awards. These models also
require subjective assumptions, including future stock price volatility and
expected time to exercise, which greatly affect the calculated values. Companies
are permitted, however, to continue to apply APB Opinion No. 25, which
recognizes compensation cost based on the intrinsic value of the equity
instrument awarded. The Company has elected to continue to apply APB Opinion No.
25 in accounting for its stock-based compensation arrangements. Had the Company
determined compensation cost

44
46
CYBERMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

based on the fair value at the grant date for its stock options under SFAS No.
123, the Company's net loss and loss per share would have been increased to the
pro forma amounts indicated below:

YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1996 1997
----------- ----------- ------------

Net loss
As Reported.................................. $(3,352,000) $(3,483,000) $(11,740,000)
Pro forma.................................... $(3,383,000) $(4,026,000) $(13,622,000)
Net loss per share
As Reported.................................. $ (2.56) $ (0.88) $ (0.97)
Pro forma.................................... $ (2.58) $ (1.02) $ (1.12)

The weighted-average fair value of options granted during the years ended
December 31, 1995, 1996 and, 1997 was $0.08, $2.11 and $8.34, respectively,
using the Black-Scholes option-pricing model with the following weighted-average
assumptions: expected volatility of 70.4% in 1995 and 1996 and 69.1% in 1997,
risk-free interest rate of 6.4% in 1995 and 1996 and 5.5% in 1997, no expected
dividends and an expected life of 4 years.

In early 1997, the Company recorded $750,000 as in process research and
development expense, which was determined to be the value of 150,000 warrants
issued in connection with an acquisition of certain in process technologies. The
value of these warrants was determined using the Black-Scholes option pricing
model with the following assumptions: expected volatility of 70.4%, risk free
interest rate of 6.4%, no expected dividends and an expected life of two years.

Pro forma net loss reflects only options granted in 1995, 1996 and 1997.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net loss amounts presented
above because compensation cost is reflected over the option vesting periods of
up to four years and compensation cost for options granted prior to January 1,
1995 is not considered.

During the year ended December 31, 1996, the Company issued Common Stock to
certain directors who exercised unvested agreements. As defined more fully in
the stock option agreements, the Company retains the right to purchase such
stock at the original exercise price under terms similar to the original vesting
periods.

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

45
47
CYBERMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

Significant Customers

Net sales to certain customers represented 10% or more of the Company's net
revenues for the years ended December 31, 1995, 1996 and 1997. Net sales to
these customers were as follows:

FOR THE YEAR ENDED
DECEMBER 31,
--------------------
1995 1996 1997
---- ---- ----

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

Concentration of Credit Risk

Certain financial instruments potentially subject the Company to credit
risk. These financial instruments consist primarily of trade receivables. The
Company sells to distributors, resellers and directly to end-users. The Company
performs ongoing credit evaluations of its customers and maintains allowances
for doubtful accounts and estimates of potential future product returns. The
Company's three major customers in 1996 represented 34%, 17% and 12%,
respectively, of trade accounts receivable net, at December 31, 1996. The
Company's three major customers for 1997 represented 44%, 23% and 12%,
respectively, of trade accounts receivable net, at December 31, 1997.

Other Concentrations

One product line constitutes over 90% of the Company's net revenues for the
years ended December 31, 1995 and 1996 and 75% in the year ended December 31,
1997. Any technical difficulties or other factors affecting sales of this
product line could adversely affect operating results.

As of December 31, 1997, the Company received 100% of its fulfillment
services from three fulfillment firms. A delay in product shipments from these
fulfillment companies could result in a possible loss of sales, which could
adversely affect operating results.

(10) EMPLOYEE BENEFIT PLANS

During May 1996, the Company adopted a 401(k) Plan (the "Plan"). All
full-time employees who have reached age 18 and who have been employed for at
least 30 days are eligible to participate in the Plan. The Company may make
discretionary contributions to the Plan. As of December 31, 1997, the Company
did not make any contributions to the Plan.

During June 1996, the Company's Board of Directors and stockholders
approved the 1996 Employee Stock Purchase Plan, which is intended to qualify
under Section 423 of the Internal Revenue Code. A total of 100,000 shares of
Common Stock have been reserved for issuance under the Employee Stock Purchase
Plan. Employees are entitled to participate if they satisfy certain criteria, as
defined, in the Employee Stock Purchase Plan agreement. As of December 31, 1997,
26,640 shares of Common Stock have been issued from the Employee Stock Purchase
Plan.

(11) RELATED PARTY TRANSACTIONS

In connection with the sale of the Series B Preferred Stock, the Company's
founders and the holders of the Series A Preferred Stock and the Series B
Preferred Stock entered into a Key Employees' Right of First Refusal, Co-Sale
and Voting Agreement ("Voting Agreement"). Pursuant to the Voting Agreement, the
Company is obligated to designate certain individuals as directors of the
Company.

46
48
CYBERMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In October 1995, three of the Company's directors each received options to
purchase 75,000 shares of the Company's Common Stock. The options have an
exercise price equal to the fair market value of the stock at the date of grant
and vest over four years from the date of grant, subject to providing continued
consulting services to the Company. During the year ended December 31, 1996,
each of the directors exercised such options, including the unvested options,
and such shares are subject to repurchase on the same four-year vesting
schedule. See Note 8.

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

At December 31, 1997 the Company owed two of the Company's founders
$618,000, which monies had been deposited in the Company's bank account pending
exercise of their stock options. These monies are shown separately on the face
of the balance sheet.

(12) COMMITMENTS AND CONTINGENCIES

The Company leases office facilities under operating leases which expire on
October 31, 2002. Rent expense aggregated $79,000, $469,000, and $1,063,000 for
the years ended December 31, 1995, 1996 and 1997, respectively. The Company also
leases equipment under operating leases which expire within the next four years.
Future minimum lease payments under noncancelable operating leases as of
December 31, 1997 are as follows:

OPERATING
----------

Year ending December 31:
1998........................................... $1,665,000
1999........................................... 1,654,000
2000........................................... 1,323,000
2001........................................... 939,000
2002........................................... 783,000
----------
Total minimum lease payments........... $6,364,000
==========

The Company is from time to time subject to claims and litigation that
arise in the normal course of business. In the opinion of management, in part
based upon advice of counsel, such claims will not have a material impact upon
the Company's financial position or results of operations.

The Company has entered into employment agreements with Company founders
which include terms whereby the founders are to receive full payment of salary
and benefits for specified periods, as set forth more fully in the employment
agreements, in the event of early termination. See Note 14.

47
49
CYBERMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(13) SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS

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

Allowance for doubtful accounts:
December 31, 1995................. $ 3,000 97,000 $ -- $ 100,000
December 31, 1996................. 100,000 101,000 (21,000) 180,000
December 31, 1997................. 180,000 393,000 (82,000) 491,000
Reserve for sales returns:
December 31, 1995................. 9,000 921,000 (263,000) 667,000
December 31, 1996................. 667,000 3,234,000 (2,558,000) 1,343,000
December 31, 1997................. 1,343,000 19,640,000 (5,234,000) 15,749,000
Allowance for obsolete inventory:
December 31, 1995................. -- -- -- --
December 31, 1996................. -- 430,000 -- 430,000
December 31, 1997................. 430,000 -- (356,000) 74,000

Deletions included above were recorded for actual bad debts, sales returns
activity and disposal of excess and obsolete inventories, respectively.

(14) SUBSEQUENT EVENTS

On March 13, 1998, a shareholder class action complaint was filed against
the Company and certain of its current and former officers and directors. The
complaint, Ong v. Cybermedia, No. 98-1811, was filed in the Central District of
California. The complaint alleges a class period between July 22, 1997 and March
13, 1998. The complaint asserts claims under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934. The Company has not yet been served with the
complaint. On March 19, 1998, a second class action complaint was filed against
the Company and certain of its officers and directors. The complaint, Brown v.
CyberMedia, No. B C187898, was filed in the Superior Court of Los Angeles
County. It alleges a class period from March 31, 1997 through March 12, 1998,
and asserts claims under Sections 25400 and 25500 of the California Corporations
Code, Sections 1709 - 1710 of the California Civil Code, and Section 17200 of
the California Business and Professions Code. The Company intends to defend
against these actions vigorously.

In January, February and March 1998, the Company's Vice-President of
International Sales, Chief Financial Officer and Chief Executive Officer
resigned, respectively. Severance agreements with these individuals and certain
other employees who have resigned since December 31, 1997 include salary
extension and acceleration of certain stock option vesting periods. Aggregate
costs associated with these severance arrangements, estimated to be $1.4
million, will be recorded as expense in the Company's first quarter of calendar
1998.

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

Not applicable.

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50

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information regarding directors of the Company is incorporated by reference
to the information set forth in "ELECTION OF DIRECTORS -- Nominees" in the
Company's Proxy Statement for the Company's 1998 Annual Meeting of Stockholders
to be filed within 120 days after the end of the Company's fiscal year ended
December 31, 1997. The information concerning current executive officers of the
Registrant found under the caption "Executive Officers of the Registrant" in
Part 1 hereof is also incorporated by reference into this Item 10,

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item is incorporated by reference to
"ELECTION OF DIRECTORS -- DIRECTOR COMPENSATION AND EXECUTIVE COMPENSATION OF
EXECUTIVE OFFICERS" in the Company's Proxy Statement to be filed within 120 days
after the end of the Company's fiscal year ended December 31, 1997.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item is incorporated by reference to
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" in the
Company's Proxy Statement to be filed within 120 days after the end of the
Company's fiscal year ended December 31, 1997.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item is incorporated by reference to
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" in the Company's Proxy
Statement to be filed within 120 days after the end of the Company's fiscal year
ended December 31, 1997.

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

(a) The following documents are filed as part of this Annual Report on Form
10-K.

1. FINANCIAL STATEMENTS: the following documents are filed in Part II of
this Annual Report on Form 10-K.

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

Report of Independent Auditors.............................. 31
Consolidated Balance Sheets as of December 31, 1996 and
1997...................................................... 32
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996 and 1997.......................... 33
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1995, 1996 and 1997.............. 34
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997.......................... 35
Notes to Consolidated Financial Statements.................. 36

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

49
51

2. FINANCIAL STATEMENT SCHEDULES:

None.

3. EXHIBITS: The exhibits listed on the accompanying index to exhibits are
filed as part of, or incorporated by reference into this 10-K.

3.1(1) Restated Certificate of Incorporation of Registrant.
3.2(2) Bylaws of Registrant, as amended.
10.1(1) Form of Indemnification Agreement with directors and
officers.
10.2(1) Amended 1993 Stock Plan and form of agreements thereunder.
10.3(1) 1996 Employee Stock Purchase Plan and form of agreement
thereunder.
10.4(1) 1996 Director Option Plan and form of agreements thereunder.
10.5(3) Asset Purchase Agreement, dated as of April 2, 1997, between
the Registrant and Luckman Intractive, Inc., and agreements
related thereto.
10.6 Registration Rights Agreement, dated as of April 1, 1997,
between the Registrant and the Shareholders named therein.
10.7(1) Sublease Agreement dated December 1995 between Century
Southwest Cable Television, Inc. and the Registrant.
10.8(1) Business Loan Agreement dated April 30, 1996 between
Imperial Bank and the Registrant.
10.9(1)* Distribution Agreement dated February 28, 1996 between the
Registrant and Ingram Micro Inc.
10.10(1)* Distribution Agreement dated March 1, 1996 between the
Registrant and Navarre Corporation.
10.11(1)* Distributor Contract dated March 20, 1996 between the
Registrant and Micro Central, Inc.
10.12(1) Form of Employment Agreements dated March 12, 1995 between
the Registrant and the Founders.
10.13(1) Loan Agreement dated June 22, 1994 between ICICI and the
Registrant.
10.14(1) Form of Agreement dated August 26, 1996 between the
Registrant and certain executive officers.
10.15(1) Form of Severance agreement between the Registrant and Brad
Kingsbury.
10.16(1) Form of Severance agreement between the Registrant and
Charles M. Valentine.
10.17(4)* Software License and Distribution Agreement between the
Registrant and ServiceWare, Inc. dated September 30, 1997.
10.18 Agreement and Plan of Reorganization, dated as of April 1,
1997, by and among the Registrant, WS Acquisition Corp.,
Walk Softly, Inc. and certain Shareholders of Walk Softly,
Inc.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Auditors.
27.1 Financial Data Schedule.

- ---------------
* Confidential treatment has been requested with respect to certain portions
of this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.

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

50
52

(2) Incorporated by reference to the exhibits filed with the Registrant's
Current Report on Form 8-K filed on June 2, 1997.

(3) Incorporated by reference to the exhibits filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.

(4) Incorporated by reference to the exhibits filed with the Registrant's
Quarterly Report on Form 10-Q/A for the quarter ended September 30, 1997.

(b) Reports on Form 8-K. No reports on 8-K were filed during the fourth quarter
of 1997.

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53

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the Registrant has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of
State of California, on the 30th day of March 1998.

CYBERMEDIA, INC.

By: /s/ KANWAL REKHI
------------------------------------
Kanwal Rekhi
President, and Chairman of the Board
of Directors

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

SIGNATURE TITLE DATE
--------- ----- ----

/s/ KANWAL REKHI President, Chairman of the March 30, 1998
- ----------------------------------------------------- Board and Director
Kanwal Rekhi (Principal Executive Officer)

/s/ JANE E. WIKE Controller March 30, 1998
- ----------------------------------------------------- (Principal Financial and
Jane E. Wike Accounting Officer)

/s/ SUHAS PATIL Director March 30, 1998
- -----------------------------------------------------
Suhas Patil

/s/ RONALD S. POSNER Director March 30, 1998
- -----------------------------------------------------
Ronald S. Posner

/s/ JAMES R. TOLONEN Director March 30, 1998
- -----------------------------------------------------
James R. Tolonen

52
54

INDEX TO EXHIBITS

SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
-------- ----------- ------------

3.1(1) Restated Certificate of Incorporation of Registrant.........
3.2(2) Bylaws of Registrant, as amended............................
10.1(1) Form of Indemnification Agreement with directors and
officers....................................................
10.2(1) Amended 1993 Stock Plan and form of agreements thereunder...
10.3(1) 1996 Employee Stock Purchase Plan and form of agreement
thereunder..................................................
10.4(1) 1996 Director Option Plan and form of agreements
thereunder..................................................
10.5(3) Asset Purchase Agreement, dated as of April 2, 1997, between
the Registrant and Luckman Intractive, Inc., and agreements
related thereto.............................................
10.6 Registration Rights Agreement, dated as of April 1, 1997,
between the Registrant and the Shareholders named therein...
10.7(1) Sublease Agreement dated December 1995 between Century
Southwest Cable Television, Inc. and the Registrant.........
10.8(1) Business Loan Agreement dated April 30, 1996 between
Imperial Bank and the Registrant............................
10.9(1) * Distribution Agreement dated February 28, 1996 between the
Registrant and Ingram Micro Inc.............................
10.10(1)* Distribution Agreement dated March 1, 1996 between the
Registrant and Navarre Corporation..........................
10.11(1)* Distributor Contract dated March 20, 1996 between the
Registrant and Micro Central, Inc...........................
10.12(1) Form of Employment Agreements dated March 12, 1995 between
the Registrant and the Founders.............................
10.13(1) Loan Agreement dated June 22, 1994 between ICICI and the
Registrant..................................................
10.14(1) Form of Agreement dated August 26, 1996 between the
Registrant and certain executive officers...................
10.15(1) Form of Severance agreement between the Registrant and Brad
Kingsbury...................................................
10.16(1) Form of Severance agreement between the Registrant and
Charles M. Valentine........................................
10.17(4)* Software License and Distribution Agreement between the
Registrant and ServiceWare, Inc. dated September 30, 1997...
10.18* Agreement and Plan of Reorganization, dated as of April 1,
1997, by and among the Registrant, WS Acquisition Corp.,
Walk Softly, Inc. and certain Shareholders of Walk Softly,
Inc.........................................................
21.1 Subsidiaries of the Registrant..............................
23.1 Consent of Independent Auditors.............................
27.1 Financial Data Schedule.....................................

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

(2) Incorporated by reference to the exhibits filed with the Registrant's
Current Report on Form 8-K filed on June 2, 1997.

(3) Incorporated by reference to the exhibits filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.

(4) Incorporated by reference to the exhibits filed with the Registrant's
Quarterly Report on Form 10-Q/A for the quarter ended September 30, 1997.