PERSISTENCE SOFTWARE INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K
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(MARK ONE)

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

OR

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

FOR THE TRANSITION PERIOD FROM __________ TO __________.

COMMISSION FILE NUMBER: 000-25857

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

DELAWARE 94-3138935
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER
ORGANIZATION) IDENTIFICATION NO.)

1720 SOUTH AMPHLETT BLVD., THIRD FLOOR
SAN MATEO, CALIFORNIA 94402
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 372-3600

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

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

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

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

The aggregate market value of the voting stock held by non-affiliates of
the registrant was approximately $187.5 million as of February 29, 2000 based
upon the closing sale price on the Nasdaq National Market reported for such date
of $16.8125 per share. Shares of Common Stock held by each officer and director
and by each person who owns 10% of more of the outstanding Common Stock have
been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.

There were 19,362,158 shares of the registrant's Common Stock issued and
outstanding as of February 29, 2000.

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates information by reference from the definitive proxy
statement for the 2000 Annual Meeting of Stockholders to be held on June 8,
2000.
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We own or have rights to trademarks or trade names that we use in
conjunction with the sale of our products and services. "Persistence," as well
as the logo for "Live Object Cache," are registered trademarks owned by us. We
have registrations pending for the use of our logo with "Persistence," as well
as "PowerTier." "PowerSync," "Command Center," "PowerPage" and "The Engine for
E-Commerce" are also trademarks of ours. This annual report on Form 10-K also
makes reference to trademarks and trade names of other companies that belong to
them.

PART I

ITEM 1. BUSINESS.

COMPANY OVERVIEW

Persistence is a leading provider of transactional application
servers -- software that processes transactions between users and back-end
computer systems in electronic commerce systems. By caching data, or moving
information stored in back-end computer systems closer to users, our software
dramatically reduces network traffic, resulting in both better network
performance and faster transaction processing. In addition, PowerTier
application servers implement Sun Microsystems' full Enterprise JavaBeans
standard to enable businesses to deploy sophisticated Java applications, which
readily scale, or accommodate rapidly increasing numbers of users. Our PowerTier
family of transactional application servers offers the speed, scalability and
reliability to enable the next generation of sophisticated, high-volume
electronic commerce applications. Our major customers include AT&T, Boeing,
Cisco, FedEx, Fujitsu, Instinet, Intershop, Lucent, Morgan Stanley Dean Witter,
Motorola, Nokia, Norwest and ShopNow.com.

INDUSTRY BACKGROUND

The Internet has evolved into a global communications medium enabling
millions of people to share information and conduct business electronically. As
the Internet's popularity has increased, companies in industries ranging from
securities trading to book selling are extending their core business processes
over the Web to conduct electronic commerce with customers, suppliers and
partners. The growth of these electronic commerce offerings has led to
significant growth in the number of users and transactions conducted over the
Web.

While creating new business opportunities, the significant growth of
electronic commerce has also created tremendous technological challenges for
electronic commerce companies struggling to meet the needs of rapidly increasing
numbers of users. These companies are discovering that their existing Internet
software infrastructure is unable to support thousands of concurrent users or
process up to thousands of transactions per second. Even casual observers of the
Internet are familiar with these limitations, which include:

- Poor performance: Initial electronic commerce offerings were not designed
to scale to handle large numbers of users. Internet users accessing these
systems often experience lengthy delays as the number of concurrent users
increases.

- System failures: Initial electronic commerce offerings did not anticipate
the level of robustness required to operate 24 hours a day, 7 days a
week. Internet users accessing these systems at peak volume can
experience frequent system crashes.

- Limited adaptability: Initial electronic commerce offerings were built on
software infrastructures that offered only limited ability for
customization and personalization. To remain competitive, companies must
continuously enhance and differentiate their electronic commerce
offerings.

While these problems have been well-publicized in the business-to-consumer
market, we believe that business-to-business interactions face even more
pronounced problems due to the added complexity of managing transactions between
multiple companies. In addition, the growth of the business-to-business
electronic commerce market is expected to outpace the growth of the
business-to-consumer market. While Forrester Research estimates that the
business-to-consumer market in the United States is expected to grow

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from $7.8 billion in 1998 to $108 billion in 2003, they estimate that the
business-to-business electronic commerce market in the United States will grow
even more rapidly, from $43 billion to $1.3 trillion, in this same period.

In large part, the problems facing these organizations, both in
business-to-business and business-to-consumer electronic commerce, are derived
from the continuing evolution and increasing sophistication of web-based
applications. In the early days of the Internet, organizations turned to the Web
for information publishing, decision support and simple transaction processing.
This first generation of web-based applications focused on extending legacy
applications to the Internet. These applications were typically not business-
critical, and had relatively simple interactions and limited functionality. The
web application server emerged as the infrastructure used to support these first
generation applications.

Today, use of the Web has changed dramatically as the Web has emerged as a
leading platform for conducting electronic commerce. The number of individuals
and organizations conducting transactions over the Internet has increased
significantly, as organizations have offered increasingly sophisticated and
feature-rich electronic commerce applications. At the same time, as
organizations have begun to conduct significant volumes of business over the
Internet, system failures and delays in transaction processing have ceased to be
mere inconveniences and have become serious impediments to doing business. To
achieve a competitive advantage in today's environment, many businesses are
looking to create web-based electronic commerce offerings that are available 24
hours per day, 7 days per week and that enhance customer loyalty by leveraging
partner, supplier and third party relationships. Complicating these challenges
further is the need to rapidly develop and deploy these applications on
"Internet time."

As the Internet has evolved into a critical business platform, the
limitations of the software infrastructure used to support electronic commerce
have become apparent. The first generation web application servers were not
designed to accommodate the high transaction volumes and high performance
requirements that characterize electronic commerce today.

The next generation of electronic commerce will require a fundamentally new
software infrastructure, based on an application server platform optimized for
high volume transaction processing over the Internet. The platform must provide:

- Real-time scalability: accommodate up to thousands of end users with
consistent sub-second response times;

- High availability: handle system failures without interruption and
without losing critical information for potentially thousands of
concurrent users;

- Rapid adaptability: allow companies to continuously improve their
business processing through automated development and management of
differentiated electronic commerce offerings; and

- Business-to-business integration: enable businesses to extend their
processing across organizational boundaries.

PERSISTENCE SOLUTION

Our PowerTier family of products consists of transactional application
servers that are specifically designed to enable high volume, high performance
electronic commerce applications. Our products, PowerTier for EJB and PowerTier
for C++, address the scalability, availability and adaptability demands that
typically occur when delivering business solutions over the Internet. Our
products offer the following key benefits:

Real-Time Response for Thousands of Concurrent Users. Our PowerTierplatform
was designed specifically to accommodate high volume transaction processing and
the data integrity requirements of distributed applications. The platform
utilizes our patented caching technology. Caching is a process in which
relational data is pulled out of back-end systems and into the PowerTier server
cache, which allows the data to be shared and manipulated at the application
server level. Replication between PowerTier server caches using the PowerSync
feature allows a cluster of PowerTier servers to provide highly scalable
performance as the number
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of users increases. This architecture helps reduce the work load on back-end
systems and accelerates application performance. The effect of this architecture
is to minimize unnecessary network traffic and thereby enable high performance
and reliability even with significant transaction volumes. We believe our
PowerTier platform offers performance that is orders of magnitude faster than
traditional non-caching application servers.

Dramatic Reductions In Time-to-Market for Electronic Commerce
Applications. Our PowerTier platform decreases time to market and development
cycles for sophisticated electronic commerce applications due to our proprietary
and patented object-to-relational mapping technology. This technology enables
the automatic generation of software code, which minimizes basic, low-level
programming tasks, such as security and database access. The PowerTier platform
accelerates development by giving developers access to data in a familiar way,
as software components, and provides application developers with a framework to
rapidly build electronic commerce applications.

Protects and Leverages Existing Information Technology Investments. The
PowerTier platform enables developers to build new electronic commerce
applications while simultaneously integrating existing back-end systems.
PowerTier's flexible architecture integrates with disparate database servers,
web servers and multiple clients, while supporting multiple programming
languages and computing platforms. PowerTier provides enhanced flexibility and
interoperability to link existing enterprise applications and systems, allowing
businesses to leverage their investments in information technology and extend
them over the Internet.

Leadership in Emerging Standards. Customers are increasingly seeking open,
standards-based technology solutions that enable them to develop and implement
new applications rapidly. Our PowerTier products provide application server
solutions that implement the full EJB specification to enable businesses to
deploy high performance, scalable Java applications for the enterprise. We
worked with the Sun Microsystems consortium to define an industry-wide component
standard to be used when building enterprise applications with the Java
language. It is this standard upon which our PowerTier platform is built, and we
believe that this emerging platform has the potential to dramatically simplify
the development of distributed, multi-tier electronic commerce applications. Sun
recently introduced the Java 2 Platform, Enterprise Edition (J2EE), which is a
suite of enterprise java technology specifications. EJB is now part of J2EE.
Persistence became one of Sun's first J2EE licensees, and we intend to certify
PowerTier for EJB as a J2EE compliant solution in 2000. As EJB and other
emerging electronic commerce standards evolve, we intend to continue to be a
leading adopter and contributor to these technologies.

Optimized Platform For Business-to-Business Electronic Commerce. Our
transactional application server is designed and optimized to enable complex
online transactions, providing the necessary scalable, reliable and secure
infrastructure. Platforms designed to support the next generation of
business-to-business electronic commerce applications must handle hundreds and
potentially thousands of concurrent users while simultaneously providing
reliability and security, and enabling connections to a myriad of existing and
emerging back-end applications. In addition, we believe our PowerTier products
are particularly well suited for multi-party, multi-step business-to-business
transactions that require server-to-server communication.

PERSISTENCE STRATEGY

Our objective is to become the leading provider of transactional
application server software products that comprise the Internet software
infrastructure for high volume, high performance electronic commerce
applications. To achieve this goal, we intend to:

Capture Market Share in the Emerging Business-to-Business Electronic
Commerce Market. We intend to become the market leader in providing software
infrastructure to enable sophisticated business-to-business electronic commerce
applications. To achieve this objective, we will continue to make significant
investments in building our sales and marketing organizations. We continue to
launch a variety of sales and marketing programs designed to capture market
share. For example, we use a seeding strategy to extend our market share by
offering a development version of our software that may be downloaded over the
Internet to provide wide dissemination of our product to developers. We also
offer educational courses and webcasts on our products and the advantages of
EJB. We will continue to collaborate with our innovative and advanced customers
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develop and deliver product features that address their needs. We believe that
this collaboration focuses our overall product development effort and speeds our
time-to-market.

Extend Technology Leadership Position in Standards-Based Platforms for Next
Generation Electronic Commerce. We intend to extend our technology leadership in
the transactional application server market by enhancing our underlying
technology to offer real-time scalability, high availability and rapid
adaptability for the next generation of electronic commerce applications. To
achieve this objective, we will continue to make significant investments in our
research and development organization. In addition, we intend to be a leader in
the definition and adoption of emerging technology standards, such as EJB, which
we believe have the potential to dramatically simplify the development of
distributed, multi-tier applications. We have been a pioneer in the areas of
caching and object-relational mapping, and hold several patents on core
technologies. We intend to continue to innovate and create new enabling
technologies for electronic commerce.

Expand Product Platform to Offer Complementary Solutions. In addition to
extending our technology leadership, we intend to broaden and enhance our
product platform to incorporate complementary solutions for developing and
deploying sophisticated electronic commerce applications. We will continue to
make investments in our research and development organization for many of these
product initiatives. We will also consider, from time to time, bolstering these
internal efforts with strategic acquisitions. For example, we have recently
acquired servlet engine technology, which provides the network infrastructure
through which HTTP requests and responses are processed and routed to the
PowerTier for EJB application server. Thus, the servlet engine will be the link
between the world of HTML and the transaction processing world of our
application server. The addition of these complementary technologies will enable
us to offer a broader platform for our customers.

Increase Partnerships With Systems Integrators. We intend to continue to
develop and expand relationships with systems integrators. We believe these
third parties can effectively market our products through their existing
relationships with our target market customers. In addition, our PowerTier
platform is often included as part of an enterprise-wide system deployment, in
which the system integrator plays a leading role. We believe that these
relationships will provide additional marketing and sales channels for our
products and facilitate the successful deployment of customer applications. We
are currently working with a number of systems integrators, including Cambridge
Technology Partners, Computer Sciences Corporation, Cysive, Electronic Data
Systems, ENEA Data, Genesis Development Corporation, Lante, Leading Edge Systems
and Unisys.

Leverage Installed Customer Base. We believe that there are significant
opportunities to expand the use of our products throughout our current customer
base. Although most organizations initially deploy our products on a
departmental or pilot basis, we believe that initial customer success with these
deployments will lead to significant opportunities for enterprise-wide adoption.
Further, we believe that most companies, including our customers, are just
beginning to fully capitalize on the opportunities created by the Web. As these
companies increasingly migrate their core business processes to the Web, we
believe they will need additional licenses of our software to support and enable
their new electronic commerce applications.

Strengthen International Presence. We believe there are significant
international opportunities for our products and services. We intend to continue
to build our sales, marketing and services organizations in Europe and Asia to
capitalize on these opportunities. Currently, we have established direct sales
operations in the United Kingdom, Germany, France, Shanghai and Hong Kong. In
addition to our direct sales operations, we also distribute our products
throughout Europe and Asia with distributors and systems integrators. We intend
to continue to build and extend these international third-party distributor and
systems integrator relationships.

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PRODUCTS

Our PowerTier platform is a family of transactional application server
products that deliver scalability, high availability and rapid adaptability for
high volume, high performance electronic commerce applications. Our current
product line consists of PowerTier for EJB, which was released in 1998, and
PowerTier for C++, which was released in 1997. The following table describes the
major features and benefits of our PowerTier platform.

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PRODUCT FEATURES BENEFITS
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POWERTIER FOR Shared transactional object cache Enables real-time scalability by
ENTERPRISE JAVABEANS reducing database traffic
Application server cache Allows cooperative processing
Synchronization across organizational boundaries
Application server failover Delivers high availability by
replicating information across
clusters of application server
caches
PowerPage Enhances developer productivity
Integrated end-to-end systems, Delivers out of box productivity
including: and an end-to-end development and
- Servlets deployment platform
- Web server
- XML server
- EJB application server
EJB 1.1-compliant security Simplifies developer inclusion of
encryption encryption
Support for EJB standard Protects customers' IT
investments as a result of open
solution
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POWERTIER FOR C++ Shared transactional object cache Enables real-time scalability by
reducing database traffic
Application server cache Allows cooperative processing
Synchronization across organizational boundaries
Application server failover Delivers high availability by
replicating information across
clusters of application server
caches
Support for CORBA standard Protects customers' IT
investments as a result of open
solution
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PowerTier for EJB

Our PowerTier for EJB application server platform incorporates our patented
technologies into one of the few J2EE-based transactional application servers.
The EJB and J2EE standards, as defined by the Java Software division of Sun
Microsystems, are gaining rapid acceptance as a programming language for complex
enterprise applications. J2EE provides a consistent way to program and integrate
services for companies building distributed business-to-business applications
with the Java programming language.

The EJB standard specifies container-managed persistent objects, which
automate the mapping between EJB components and relational database tables. This
feature allows programmers to build complex applications quickly by making
relational data look like software components, which can be easily manipulated.
We worked with the Sun Microsystems consortium to help define the initial EJB
standard, and we continue to contribute to new versions of the EJB standard. Our
PowerTier for EJB platform now runs on the Windows NT and Unix operating
systems, and we currently anticipate it will be available for running on the
Linux operating system in the second quarter of 2000.

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Our latest version of PowerTier for EJB, PowerTier 6 with PowerPage, is
designed to simplify the complex task of developing high performance, scalable
web applications and eliminate the need to compromise between powerful
application servers and simplicity of web page creation. The PowerTier 6
application server is designed to have an end-to-end J2EE development platform
that enhances development team productivity and allows scalable, flexible
applications to be rolled out at internet speed.

PowerPage is designed to give web developers a head start by providing them
with a pre-built HTML framework from which to work, as well as an EJB-based
back-end for maintainability and scalability. PowerPage is also designed to
automatically generate Java Server Pages (JSPs), which provide the interface
between the browser and the EJB server. The end result of the design is to have
dynamic HTML pages with access to EJBs, thus greatly reducing the manual coding
of hundreds of lines required for a distributed application.

PowerTier 6 also:

- Is also designed to be security compliant with Sun's EJB 1.1
specification, providing integrated and comprehensive authorization,
authentication and encryption capability for new applications

- Includes an enterprise class Servlet Engine tightly integrated with
PowerTier 6, with support for Java servlets and JSPs. The Servlet Engine
is designed to be scalable and fault tolerant.
[POWERTIER 6 CHART]

PowerTier for C++

Our PowerTier for C++ product is a high-performance transactional
application server platform, which is based on our patented technologies and the
Common Object Request Broker Architecture, or CORBA, standard for communication
between distributed applications. The CORBA standard is managed by an industry
group called the Object Management Group, of which we are a contributing member.
We are also one of the authors, along with Oracle, IBM and others, of an
emerging component of the overall CORBA standard, called the Persistent State
Service specification. Our PowerTier for C++ platform runs on the Windows NT and
Unix operating systems. We have licensed the J2EE platform and are a contributor
to the Java standard.

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Patented Technology Platform

Our application server cache software architecture and cache replication
technology have been designed to serve as the foundation for a variety of
scalable electronic commerce applications.

- Shared Caching. Our cache technology is the foundation for the high
performance characteristics of our transactional application server. To
maximize performance, dynamic information such as product inventory data
is retrieved from a database into the application server cache. This
in-memory information may be accessed simultaneously by multiple users,
saving each user from having to access a disk-based database for that
information. This feature reduces network traffic between the application
server and the database, delivering higher performance.

- Transactional Caching. To enable users to get a consistent view of
information within the shared cache, our technology prevents one user
from seeing uncommitted changes made by another user. The ability of our
shared application server cache to isolate users from dynamic changes to
component information, such as inventory data, differentiates our
application server cache from other caching technologies which can only
manage static information, such as web pages. This feature allows high
performance caching of dynamic or transactional information.

- Cache Replication. Our cache replication technology provides the
foundation for the scalability, stateful availability and fault tolerance
of our transactional application server. We define stateful availability
as a system that can transfer a user in the middle of a complex business
operation, such as a portfolio valuation, from one application server to
another without interruption or losing business state, such as the user's
portfolio information. To provide stateful scalability, information from
one application server cache can be synchronized with information in one
or more other application server caches. Companies can deploy additional
replicated application server caches to increase their ability to support
more users, allowing them to use several smaller computers to do the work
of one larger and more expensive computer. Users' requests are
automatically routed to the application server with the most free
capacity, enabling high performance, notwithstanding increases in user
volumes. In the event of an application server failure, that application
server's responsibilities are automatically reassigned to another
application server, improving system availability.

- Cluster Management. We have developed complementary, proprietary
administration software, which enables remote administration for clusters
of application servers, reducing both administrative costs and the
possibility of error. This management software also enables centralized
monitoring, via a standard web browser, of the cluster through any
individual application server. This feature contributes to greater system
availability and reduced administrative costs.

- Development Automation. Our PowerTier development environment includes
frameworks to automate or eliminate many development tasks. The
proprietary and patented object-relational mapping feature automatically
generates the software code to translate software components into
relational databases. This feature reduces the programming time required
to build enterprise applications. The PowerTier application server
includes pre-built software services for data management, transaction
management and communications, relieving the developer from having to
build these services from scratch.

- Standards-based. The PowerTier application server platform uses an open
architecture that is based on industry standards such as Java, C++,
CORBA, Windows NT, UNIX, SQL, J2EE, EJB and others.

We believe that research and product development will be a key to our
success as a leader in the transactional application server market. Our research
and development expenditures totaled $3.0 million for 1997, $4.2 million for
1998 and $6.4 million for 1999.

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CUSTOMERS

Our software products are licensed to customers worldwide for use in a wide
range of electronic commerce applications, including real-time electronic
trading, supply chain management, internet network management, application
outsourcing and customer relationship management. The following table lists a
representative selection of customers who have purchased our products.

E-COMMERCE/INTERNET
budget.com
Cisco*
Computer Science Corp.
DiCarta
Fujitsu*
Globe ID Software
Imind*
Internet Pro
Intershop
Mercata
NBC Internet
Netscape
Object Space
Open Environment
Pipeline Software
ShopNow.com*
Smallworld.com
Systemax
Uyisys
4T Solutions

COMMUNICATIONS
AT&T*
Bell Atlantic
BellCore*
BellSouth
Bull Ingenerie (France Telecom)
CellularOne Group
Cross Keys Systems
Lucent*
Motorola*
Nextel
Nokia*
Qualcomm
Scientific-Atlanta
Sequel Systems
Sprint
Telstra (Australia)

FINANCIAL SERVICES/EXCHANGES
Capital Group
Capital One Financial
CNP Assurances*
Instinet*
JP Morgan
Morgan Stanley Dean Witter*
Nike Securities
Norwest*
Wofex

TRANSPORTATION & LOGISTICS
Air Canada
Air France
Executive Jet
FedEx*
Sabre Group Holdings (American Airlines)
Transquest Information (Delta Airlines)*

MANUFACTURING & DISTRIBUTION
Asea Brown Boveri Power T&D
Boeing
Enron
IBM*
Non-Stop Solutions
Perkin-Elmer*
Raytheon
SuperValu*
Titan Systems
Xerox

OTHER
Caldwell-Spartin
Fermi National Accelerator Laboratory
National Aeronautics and Space
Administration

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* Denotes customers who have ordered at least $500,000 in products.

In 1999, sales of products and services to Cisco accounted for 13% of our
total revenues.

The following case studies illustrate how selected customers have used our
products to address their electronic commerce and core business application
needs. These case studies are based on information supplied by these customers,
however we believe the information is accurate in all material respects.
Reuters, the parent of Instinet, and Cisco are both major stockholders in our
company.

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Real-Time Electronic Trading Network

Instinet Corporation. Instinet is the world's largest electronic agency
broker in equity securities. Historically, trading in fixed income securities
occurred almost exclusively over the telephone. Instinet revolutionized this
telephone-based fixed income trading with a global electronic broker trading
service for fixed income dealers that can accommodate up to 1,000 transactions
per second. It has designed a system that was just brought live in the U.S.,
which is expected to use hundreds of replicated PowerTier application servers
operating in concert when fully deployed to meet the performance and scalability
requirements of its electronic fixed income broker service.

Intranet Supply Chain Management

Federal Express Corporation. The world's largest express transportation
company, FedEx transports more than three million items to over 200 countries
each business day, using a fleet of more than 620 aircraft and 44,000 vehicles.
In its effort to improve on-time deliveries, FedEx has built a global operations
center to monitor and control the movement of shipments worldwide. The global
operations center functions as the nerve center of the FedEx transportation
system, handling daily occurrences including changing flight schedules,
emergency maintenance, inclement weather and excess package volumes. Because the
company's existing mainframe systems lacked the required flexibility and
performance, FedEx turned to us for help in building a high performance intranet
system. By managing complex flight schedule information from multiple data
sources within a PowerTier application server cache, the global operations
center can provide real-time contingency plans, enabling FedEx to provide
consistently high on-time package delivery rates and superior customer service.
FedEx estimates that, using the PowerTier development environment, it has been
able to significantly reduce development time for new system functionality
compared to development in its traditional mainframe environment.

Internet Service Provider Network Management

Cisco Systems, Inc. A worldwide leader in networking for the Internet,
Cisco Systems is committed to delivering hardware and software solutions that
enable Service Providers to meet the rapid growth of the Internet. The Cisco
Service Management System, or CSM, gives Service Providers sophisticated tools
to automate time consuming network management tasks. For this system, Cisco
required a highly scalable, standards-based application server platform for
deploying network management applications for managed business services such as
virtual private networks, Internet telephony and electronic commerce. To meet
these requirements, Cisco chose the PowerTier platform. For the Cisco IP Manager
product within the CSM system, PowerTier application server caching enables
real-time simulation of network configuration changes, preventing costly network
outages. The PowerTier development environment also enables Cisco to create a
common component framework that can be reused to reduce development time for
future CSM network services.

Application Outsourcing over the Internet

Celera Genomics. Celera provides gene discovery and characterization
services for drug discovery and development. Celera's GeneTag technology is a
novel gene expression analysis method that enables pharmaceutical companies to
develop new and potentially life-saving drugs by discovering and monitoring
genes involved in disease. Celera's BioScope software application allows
customers to access their data securely and remotely over the Internet. To allow
clients to quickly analyze and view the GeneTag results, Celera needed a
sophisticated software platform that could process hundreds of thousands of gene
expression comparisons while avoiding data bottlenecks. Celera selected
PowerTier to achieve these goals. The BioScope application utilizes the
PowerTier application server cache for high volume data analysis. With the
PowerTier development environment, Celera has been able to use both the Java and
C++ languages to deliver the BioScope software application in only four months.

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SALES AND MARKETING

We sell our products through both a direct sales force and third party
distributors. As of December 31, 1999, we had 56 people in our sales and
marketing organization, of which 42 were in the United States, 11 were in our
United Kingdom, Germany, and France offices, and three were in our Hong Kong and
Shanghai offices. To support the complex enterprise nature of our sales, our
direct sales force is organized into two-member teams of one sales
representative and one sales engineer. We intend to increase the size of our
direct sales force and to establish additional sales offices domestically and
internationally.

Our sales cycle is relatively long, generally between three and nine
months. A successful sales cycle typically includes presentations to both
business and technical decision makers, as well as a limited pilot program to
establish technical fit.

We engage in a variety of marketing activities, including advertising,
public relations, seminars, trade shows and web site management. In particular,
we have made substantial marketing investments in education and training for the
EJB and C++ markets. We hold regular monthly seminars in order to train
developers in the EJB community. Our web site allows developers to download a
demonstration version of our products.

Systems integrators represent an important and growing referral channel for
our direct sales effort. Systems integrators frequently have relationships with
our target customers and often incorporate our PowerTier platform as part of a
much larger enterprise-wide system enhancement. Currently we have relationships
with global and regional systems integrators, including:

- Cambridge Technology Partners

- Cysive

- Computer Sciences Corporation

- Electronic Data Systems

- ENEA Data

- Genesis Development Corporation

- Lante

- Leading Edge Systems

- Unisys

In international markets, we plan to expand our sales through indirect
channels, such as distributors and original equipment manufacturers. As of
December 31, 1999, we were represented by eight international distributors, who
sell our products in Europe, Asia and Latin America.

COMPETITION

The market for our products is intensely competitive, subject to rapid
change and significantly affected by new product introductions and other market
activities of industry participants. We believe that the principal competitive
factors in our market are:

- performance, including scalability, integrity and availability;

- ability to provide a complete software platform;

- flexibility;

- use of standards-based technology;

- ease of integration with customers' existing enterprise systems;

- ease and speed of implementation;

- quality of support and service;
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- security;

- company reputation; and

- price.

Our competitors include both publicly and privately-held enterprises,
including BEA Systems (WebLogic), Secant Technologies, IBM (WebSphere), Inprise,
Iona Technologies, Oracle (OAS) and Sun Microsystems (iPlanet). Many customers
may not be willing to purchase our PowerTier platform because they have already
invested heavily in databases and other enterprise software components offered
by these competing companies. Many of these competitors have preexisting
customer relationships, longer operating histories, greater financial,
technical, marketing and other resources, greater name recognition and larger
installed bases of customers than we do. Moreover, there are other very large
and established companies, including Microsoft, who offer alternative solutions
and are thus indirect competitors. Further, dozens of companies, such as
Allaire, have announced their intention to support EJB and may compete against
us in the future. These competitors and potential competitors may be able to
respond more quickly to new or emerging technologies and changes in customer
requirements, or to devote greater resources to the development, promotion and
sale of their products than we can. See also "Risk Factors -- Because we compete
with Sun Microsystems, who controls the EJB application server standard, we face
the risk that they may develop this standard to favor their own products" and
"-- Microsoft has established a competing application server standard, which
could diminish the market potential for our products if it gains widespread
acceptance."

In addition, in the PowerTier for C++ market, many potential customers
build their own custom application servers, so we effectively compete against
our potential customers' internal information technology departments.

INTELLECTUAL PROPERTY RIGHTS

Our performance may depend on our ability to protect our proprietary rights
to the technologies used in our principal products. If we are not adequately
protected, our competitors can use the intellectual property that we have
developed to enhance their products and services, which would harm our business.
We rely on a combination of patents, copyright and trademark laws, trade
secrets, confidentiality provisions and other contractual provisions to protect
our proprietary rights, but these legal means afford only limited protection. As
of February 29, 2000, we had four issued United States patents and two pending
United States patent application with allowable subject matter. Despite any
measures taken to protect our intellectual property, unauthorized parties may
attempt to copy aspects of our products or to obtain and use information that we
regard as proprietary. In addition, the laws of some foreign countries may not
protect our proprietary rights as fully as do the laws of the United States.
Thus, the measures we are taking to protect our proprietary rights in the United
States and abroad may not be adequate. Finally, our competitors may
independently develop similar technologies.

The software industry is characterized by the existence of a large number
of patents and frequent litigation based on allegations of patent infringement
and the violation of other intellectual property rights. As the number of
entrants into our market increases, the possibility of an intellectual property
claim against us grows. For example, we may be inadvertently infringing a patent
of which we are unaware. In addition, because patent applications can take many
years to issue, there may be a patent application now pending of which we are
unaware, which will cause us to be infringing when it issues in the future. To
address these patent infringement claims, we may have to enter into royalty or
licensing agreements on disadvantageous commercial terms. Alternatively, we may
be unable to obtain a necessary license. A successful claim of product
infringement against us, and our failure to license the infringed or similar
technology, would harm our business. In addition, any infringement claims, with
or without merit, would be time-consuming and expensive to litigate or settle
and would divert management attention from administering our core business.

In March 1998, we entered into a license agreement with Sun Microsystems,
pursuant to which we granted Sun Microsystems rights to manufacture and sell, by
itself and not jointly with others, products under a number of our patents and
Sun Microsystems granted us rights to manufacture and sell, by ourselves and not

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jointly with others, products under a number of Sun Microsystems' patents. As a
result, Sun Microsystems may develop and sell competing products that would, in
the absence of this license agreement, infringe our patents. Under this
agreement, Sun Microsystems made a one-time payment to us. Neither Sun
Microsystems nor we can transfer the license without the consent of the other
party.

As discussed below in Item 3,"Legal Proceedings," in December 1999 we filed
suit against The Object People and Secant Technologies alleging their
infringement of our patents. We believe our patents are crucial in
differentiating our PowerTier product in the marketplace and establishing
ourselves as a technology leader, enabling innovative e-commerce development,
and more scalable, personalized web sites.

EMPLOYEES

As of December 31, 1999, we had 127 full-time employees, including 56 in
sales and marketing, 46 in research and development, 12 in professional services
and 13 in general and administrative functions. From time to time, we also
employ independent contractors to support our sales and marketing, research and
development, professional services and administrative organizations.

EXECUTIVE OFFICERS

The following table sets forth specific information regarding our executive
officers as of February 29, 2000:

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

Chairman of the Board of Directors and Chief Executive
Christopher T. Keene..... 39 Officer
Laurence R. Hootnick..... 58 President and Director
Lyn Anderson............. 59 Vice President of Human Resources
Vice President of Strategic Technology and Chief Technology
James H. Barton.......... 36 Officer
Alan Cohen............... 47 Senior Vice President of Sales and International Operations
Carol Curry.............. 42 Vice President Marketing
Barry Goss............... 53 Vice President of Strategic Marketing
Derek Henninger.......... 37 Vice President of Engineering
Randy Hietter............ 44 Vice President Product Management
Christine Russell........ 50 Chief Financial Officer and Secretary

Each executive officer serves at the sole discretion of the Board of Directors.

CHRISTOPHER T. KEENE co-founded Persistence and has served as Chief
Executive Officer and a director since June 1991 and as Chairman of the Board
since April 1999. From June 1991 to April 1999, Mr. Keene also served as
President. Before founding Persistence, Mr. Keene was a Manager at McKinsey &
Co., a management consulting firm, from July 1987 to June 1991. Mr. Keene holds
a B.S. degree in Mathematical Sciences with honors from Stanford University and
an M.B.A. degree from The Wharton School at the University of Pennsylvania.

LAURENCE R. HOOTNICK joined Persistence as President and director in April
1999. From June 1996 to April 1999, Mr. Hootnick served as President and Chief
Executive Officer of Consilium, Inc., a manufacturer of factory control software
for integrated circuits. From December 1995 to May 1996, Mr. Hootnick served as
Senior Vice President of Power Computing, a manufacturer of personal computers.
From June 1995 to November 1995, he worked as a private investor and consultant.
Previously, Mr. Hootnick was employed as Senior Vice President, Chief Operating
Officer and director of NetManage, Inc., a developer of networking software, as
President and Chief Executive Officer of Maxtor, a manufacturer of hard disk
drives and as Senior Vice President of Intel, a semiconductor manufacturer. Mr.
Hootnick holds a B.S. degree in Industrial Management from The Massachusetts
Institute of Technology and an M.B.A. degree from the University of Maryland.

LYN ANDERSON joined Persistence as Vice President of Human Resources in
February 2000. From September 1990 to February 2000, Ms. Anderson served in
various human resources management positions

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with Sun Microsystems' software division, most recently as Senior Human
Resources Manager from July 1994 to February 2000. She also served in human
resources positions with Cybeq Systems, a semiconductor capital equipment
manufacturer, and Unisys, a computer hardware, software and services company.
She holds a B.S. degree in Industrial Psychology and an M.S. degree in
Industrial Counseling from California State University, Hayward.

JAMES H. BARTON joined Persistence in October 1997 as a Senior Field
Engineer, a position he held until November 1999, when he was appointed Director
of Strategic Technology. In February 2000, he was appointed Vice President of
Strategic Technology and Chief Technology Officer. From June 1996 to October
1997, Mr. Barton was Director of Internet Products and Services for Applied
Reasoning Systems, an information technology company. From July 1994 to June
1996, he was a Senior Systems Engineer with ParcPlace Systems, a pioneering
company in distributed object technology. Previously, he held field engineering
positions at information technology companies Object Design, Rational Software,
and IBM. Mr. Barton holds a B.S. degree in Electrical Engineering from Tennessee
Technological University, an M.S. degree in Computer Engineering from Carnegie
Mellon University, and an M.B.A. degree from the University of Maryland.

ALAN COHEN joined Persistence as Vice President of Sales in December 1997
and was promoted to Senior Vice President of Sales and International Operations
in December 1998. From May 1996 to December 1997, Mr. Cohen served as Vice
President of Sales at Cygnus Solutions, a developer of open-source software.
From May 1994 to May 1996, he served as Vice President of Sales and Operations
at Information Handling Services, an information technology company. From 1990
to 1994, Mr. Cohen was Director of Sales and Marketing at International Business
Machines Corporation. Mr. Cohen holds B.S. and M.S. degrees in Biology from the
University of Connecticut.

CAROL CURRY joined Persistence as Vice President of Marketing in November
1999. Before joining Persistence, Ms. Curry was Vice President of Marketing for
POET Software, a data management software company, from July 1997 to November
1999. From June 1996 to July 1997, she served as Director of Database Marketing
for Informix, a database software company. Until June 1996, Ms. Curry was
Product Marketing Manager for eight years at Silicon Graphics, a 3D computer
graphics company. Ms. Curry holds B.S. degrees in Electrical Engineering and
Computer Science from Princeton University.

BARRY GOSS joined Persistence in December 1997 as Vice President of
Marketing, an office he held until October 1998, when he was appointed Vice
President of Strategic Marketing. From May 1994 to December 1997, Mr. Goss was
the founder and President of Congruent Concepts, a management consulting firm
serving emerging growth companies. From December 1988 to May 1994, Mr. Goss
served as Director of Marketing for Verity, Inc., a provider of content-based
search engine software. Mr. Goss holds a B.S. degree in Engineering Sciences
from the State University of New York at Stony Brook and an M.S. degree in
Mechanical Engineering and Ph.D. in Applied Mechanics from the University of
Connecticut.

DEREK HENNINGER co-founded Persistence and has served as Vice President of
Engineering since June 1991. Previously, Mr. Henninger worked as a senior
software engineer in the Data Interpretation Division of Metaphor Corporation, a
software and hardware company, from September 1990 to June 1991. Mr. Henninger
holds a B.A. degree in Economics and a B.S. degree in Computer Science and
Mathematics from the University of California at Davis.

RANDY HIETTER joined Persistence in January 1999 as Director of Product
Marketing, and was promoted to Vice President of Product Management in November
1999. Prior to joining Persistence, from November 1995 to November 1998, Mr.
Hietter served in various product marketing management positions, most recently
as Director of Product Marketing, at Inprise, an internet infrastructure and
application development tool software company. From September 1993 to October
1995, Mr. Hietter served as Senior Product Marketing Manager at Sybase, a
database software company. He holds a B.A. degree in Economics from Dartmouth
College and an M.B.A. from the Amos Tuck School at Dartmouth.

CHRISTINE RUSSELL joined Persistence in October 1997 and has served as
Chief Financial Officer and Secretary since December 1997. Previously, she
served as Chief Financial Officer for Cygnus Solutions, an

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open source platform software company, from October 1995 to October 1997. From
April 1992 to October 1995, Ms. Russell served as Chief Financial Officer of
Valence Technology, a developer of lithium polymer batteries. Previously, she
served as Chief Financial Officer at Covalent Technologies, Inc., a vertical
software company, as Vice President of Finance of Stellar Systems, Inc. a
security software and hardware company, and as Corporate Controller of Shugart
Corporation, a subsidiary of Xerox. She holds a B.A. degree in English
Literature and an M.B.A. degree from Santa Clara University.

ITEM 2. PROPERTIES.

We are headquartered in San Mateo, California, where we lease approximately
20,000 square feet of office space under a lease expiring on June 30, 2000, with
renewal options extending through June 30, 2002. We also maintain sales offices
in nine U.S. states, the United Kingdom, Germany, France, Hong Kong and
Shanghai. We believe that our existing facilities are adequate to meet our
current and foreseeable requirements or that suitable additional or substitute
space will be available as needed.

ITEM 3. LEGAL PROCEEDINGS.

On December 6, 1999, the Company filed a patent infringement action in the
United States District Court for the Northern District of California against The
Object People Inc. and The Object People (U.S.) Inc. (collectively, "TOP"),
Persistence Software, Inc. v The Object People Inc., et al., Case No. C 99-5182
MMC (N.D. Cal.). On December 14, 1999, the Company filed a similar action
against Secant Technologies, Inc. ("Secant"), Persistence Software, Inc. v.
Secant Technologies, Inc., Case No. C 00-20210 SW (N.D. Cal.). A motion is
pending to consolidate the two actions into one lawsuit. The Company alleges in
both cases that TOP and Secant's software products infringe three of the
Company's patents, and TOP and Secant have contributed to the infringement of,
and induced the infringement of, the Company's patents by third parties (i.e.,
their respective customers). The three patents owned by the Company that are at
issue in these actions are U.S. Patent No. 5,499,371, No. 5,615,362, and No.
5,706,506. The Company also has asserted claims against TOP and Secant for
unfair business practices under California Business and Professions Code
sec.sec. 17200 et seq. ("Section 17200").

On December 22, 1999, TOP filed its Answer to the Company's Complaint and
asserted counterclaims for declaratory relief that the Company's patents are
invalid and unenforceable, as well as counterclaims that allege that the
Company's filing of the lawsuit itself constitutes a violation of the Lanham Act
and unfair business practices under Section 17200. On January 31, 2000, Secant
filed its Answer to the Company's Complaint and asserted only counterclaims for
declaratory relief that the Company's patents are invalid and unenforceable.

Both suits are in the early stages, and discovery has not been completed.
While management believes that the Company's claims are valid, that the
counterclaims asserted by TOP and Secant are without merit, and that any
potential liability that the Company might incur to TOP or Secant is immaterial
as the only counterclaims alleging damages are TOP's claims under the Lanham Act
and Section 17200, it is not possible at this time to determine the ultimate
outcome of these actions.

Except as described above, the Company is not currently subject to any
material legal proceedings, though it may from time to time become a party to
various legal proceedings that arise in the ordinary course of business.

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

None.

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PART II

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

PRICE RANGE OF COMMON STOCK. Our Common Stock has been traded on the Nasdaq
National Market under the symbol PRSW since the effective date of our initial
public offering on June 24, 1999. Prior to the initial public offering, no
public market existed for our Common Stock. The price per share reflected in the
table below represents the range of low and high closing sale prices for our
Common Stock as reported in the Nasdaq National Market for the periods
indicated.

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

For The Year Ended December 31, 1999:
Second Quarter from June 24, 1999......................... $13.81 $11.00
Third Quarter............................................. $28.88 $12.63
Fourth Quarter............................................ $26.06 $ 8.25

We had 242 stockholders of record as of February 29, 2000, including
several holders who are nominees for an undetermined number of beneficial
owners.

DIVIDEND POLICY. We have never paid dividends on our common stock or
preferred stock. We currently intend to retain any future earnings to fund the
development of our business. Therefore, we do not currently anticipate declaring
or paying dividends in the foreseeable future. In addition, our line of credit
agreement prohibits us from paying dividends.

USE OF PROCEEDS FROM SALES OF REGISTERED SECURITIES. Our registration
statement on Form S-1, SEC File No. 333-76867, for our initial public offering
of common stock became effective on June 24, 1999. We registered and sold an
aggregate of 3,450,000 shares of common stock under the registration statement
at a per share price of $11.00. Our underwriters were BancBoston Robertson
Stephens, U.S. Bancorp Piper Jaffray, and Soundview Technology Group. Offering
proceeds, net of aggregate underwriting commissions and discounts of $2.7
million and other offering transaction expenses of $1.1 million, were $34.1
million. None of the underwriting commissions and discounts or other offering
transaction expenses were direct or indirect payments to our directors,
officers, or holders of 10% or more of our stock. From June 24, 1999 through
December 31, 1999, we have used the net offering proceeds as follows:

Working capital expenditures................................ $ 6.7 millio
Acquiring technologies...................................... 2.4 millio
-----
9.1 millio
Investing in short-term, investment grade, interest-bearing
securities................................................ 25.0 millio
-----
$34.1 millio
=====

Each of the above amounts represents our best estimate of our use of the
net proceeds. None of the net offering proceeds were paid directly or indirectly
to our directors, officers, or holders of 10% or more of our stock.

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ITEM 6. SELECTED FINANCIAL DATA.

The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and Notes thereto and
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," which are included elsewhere in this report on Form 10-K. The
consolidated statements of operations data for the years ended December 31,
1999, 1998 and 1997, and the consolidated balance sheet data at December 31,
1999 and 1998, are derived from audited consolidated financial statements
included elsewhere in this report on Form 10-K. The consolidated statements of
operations data for the years ended December 31, 1996 and 1995, and the
consolidated balance sheet data as of December 31, 1997, 1996 and 1995 are
derived from audited financial statements not included in this report on Form
10-K.

YEARS ENDED DECEMBER 31,
---------------------------------------------------
1999 1998 1997 1996 1995
-------- ------- ------- ------- ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
Revenues:
License................................ $ 10,890 $ 7,478 $ 3,546 $ 2,603 $3,053
Service................................ 3,553 2,682 1,867 1,171 954
-------- ------- ------- ------- ------
Total revenues................. $ 14,443 $10,160 $ 5,413 $ 3,774 $4,007
-------- ------- ------- ------- ------
Loss from operations..................... (12,165) (4,090) (4,686) (3,345) (119)
Net loss................................. (11,306) (4,089) (4,674) (3,311) (118)
Basic and diluted net loss per
share(1)............................... $ (0.86) $ (0.59) $ (0.73) $ (0.54) $(0.02)
======== ======= ======= ======= ======
Shares used in basic and diluted net loss
per share calculation.................. 13,091 6,879 6,366 6,135 5,365
======== ======= ======= ======= ======
Pro forma basic and diluted net loss per
share(2)............................... $ (0.68) $ (0.31)
======== =======
Shares used in pro forma basic and
diluted net loss per share
calculation............................ 16,674 13,183
======== =======

AS OF DECEMBER 31,
-----------------------------------------------
1999 1998 1997 1996 1995
------- ------ ------ ------ ------
(IN THOUSANDS)

CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments................................ $29,652 $4,938 $2,610 $4,535 $ 370
Working capital.............................. 29,804 3,384 1,604 4,437 264
Total assets................................. 39,092 7,064 5,447 6,478 1,424
Long-term obligations........................ 354 714 419 528 121
Total stockholders' equity................... 32,018 3,422 2,057 4,697 592

- ---------------
(1) Basic net loss per common share excludes dilution and is computed by
dividing net loss by the weighted average number of common shares
outstanding for the period (excluding shares subject to repurchase). Diluted
net loss per common share was the same as basic net loss per common share
for all periods presented since the effect of any potentially dilutive
securities is excluded as they are anti-dilutive because of the Company's
net losses.

(2) Upon the initial public offering, all outstanding shares of convertible
preferred stock were converted into an equal number of shares of common
stock. The pro forma basic and diluted net loss per share calculation
includes the weighted average number of shares of outstanding convertible
preferred stock as if they were outstanding shares of common stock.

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

The following Management's Discussion and Analysis of Financial Condition
and Results of Operations should be read in conjunction with our consolidated
financial statements as of December 31, 1999 and 1998 and for each of the years
ended December 31, 1999, 1998, and 1997, included elsewhere in this annual
report on Form 10-K. In addition, this Management's Discussion and Analysis of
Financial Condition and Results of Operations and other parts of this annual
report on Form 10-K contain forward-looking statements that involve risks and
uncertainties. Words such as "anticipates," "believes, "plans," "expects,"
"future," "intends, and similar expressions identify forward-looking statements.
These statements are not guarantees of future performance and are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those expressed or forecasted. Factors that might cause such
differences include, but are not limited to, those discussed in the section
entitled "Additional Factors That May Affect Future Results" and those appearing
elsewhere in this annual report on Form 10-K. Readers are cautioned not to place
undue reliance on these forward-looking statements, which reflect management's
analysis only as of the date hereof. We assume no obligation to update these
forward-looking statements to reflect actual results or changes in factors or
assumptions affecting forward-looking statements.

OVERVIEW

We are a leading provider of transactional application server software
products that comprise the Internet software infrastructure for high volume,
high performance electronic commerce applications. We were incorporated and
began operations in 1991. Our first products incorporated patented
object-to-relational mapping and caching technologies, which have since become
the foundation for our PowerTier product family. From 1992 to 1996, we
introduced a variety of enhancements to these products, including a patented
data transformation technology for mapping objects to database tables, and
caching capabilities.

In 1996, we developed our PowerTier transactional application server, which
integrates all of the previously released Persistence products with new shared
transactional caching technologies, which enable multiple users to
simultaneously access the same cached data. We first shipped our PowerTier for
C++ transactional application server in 1997. Sales of PowerTier for C++
accounted for the majority of our revenues in 1997, 1998, and 1999, during which
years we added a professional services staff to enable our customers to
implement PowerTier more rapidly. We were one of the first companies to adopt
and implement the EJB specification. In 1998, we introduced PowerTier for
EJB,which customers have frequently purchased together with PowerTier for C++.
Our next version of PowerTier for EJB is currently in use by several major
customers and was commercially released in 1999. We currently plan to continue
to focus product development efforts on enhancements to both the PowerTier for
C++ and the PowerTier for EJB products.

Our revenues, which consist of software license revenues and service
revenues, totaled $5.4 million in 1997, $10.2 million in 1998, and $14.4 million
in 1999. License revenues consist of licenses of our software products, which
generally are priced based on the number of users or servers. Service revenues
consist of professional services consulting, customer support and training.
Because we only commenced selling application servers in 1997, we have a limited
operating history in the application server market. We expect that, as a
percentage of total revenues, sales of PowerTier for EJB transaction servers
will increase and sales of PowerTier for C++ will decrease in the future.

We market our software and services primarily through our direct sales
organizations in the United States, the United Kingdom, France, Germany, Hong
Kong and Shanghai. Revenues from PowerTier licenses and services to customers
outside the United States represented $639,000, or 12% of total revenues, in
1997, $2.9 million, or 29% of total revenues, in 1998, and $4.1 million, or 28%
of total revenues, in 1999. Our future success will depend, in part, on our
successful development of international markets for our products.

Historically, we have received a substantial portion of our revenues from
product sales to a limited number of customers. Sales of products to our top
five customers accounted for 15% of total revenues in 1997, 55% of total
revenues in 1998, and 35% of total revenues in 1999. In the future, it is
possible that a relatively few large customers could continue to account for a
relatively large proportion of our revenues.

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To date, we have sold our products primarily through our direct sales
force, and we will need to continue to hire many more sales people in order to
meet our sales goals. In addition, our ability to achieve significant revenue
growth will depend in large part on our success in establishing and leveraging
relationships with systems integrators and other third parties.

For 1997 and prior years, we recognized revenues in accordance with the
American Institute of Certified Public Accountants Statement of Position 91-1.
Commencing in 1998, we began recognizing revenues in accordance with the
American Institute of Certified Public Accountants Statement of Position 97-2,
"Software Revenue Recognition," as amended by Statements of Position 98-4 and
98-9. Our adoption of these new standards has not to date had a material effect
on our revenue recognition. Future implementation guidance relating to these
standards may result in unanticipated changes in our revenue recognition
practices, and these changes could affect our future revenues and earnings.

We recognize license revenues upon shipment of the software if collection
of the resulting receivable is probable, an executed agreement has been signed,
the fee is fixed or determinable and vendor-specific objective evidence exists
to allocate a portion of the total fee to any undelivered elements of the
arrangement. Undelivered elements in these arrangements typically consist of
services. For sales made through distributors, revenue is recognized upon
shipment. Distributors have no right of return. We recognize revenues from
customer training, support and consulting services as the services are
performed. We generally recognize support revenues ratably over the term of the
support contract. If support or professional services are included in an
arrangement that includes a license agreement, amounts related to support or
professional services are allocated based on vendor-specific objective evidence.
Vendor-specific objective evidence for support and professional services is
based on the price when such elements are sold separately, or, when not sold
separately, the price established by management having the relevant authority.
Arrangements which require significant modification or customization of software
are recognized under the percentage of completion method.

Since inception, we have incurred substantial research and development
costs and have invested heavily in the expansion of our sales, marketing and
professional services organizations to build an infrastructure to support our
long-term growth strategy. The number of our employees increased from 77 as of
December 31, 1998 to 127 as of December 31, 1999, representing an increase of
65%. As a result of investments in our infrastructure, we have incurred net
losses in each fiscal quarter since 1996 and, as of December 31, 1999, had an
accumulated deficit of $24.1 million. We anticipate that our operating expenses
will increase substantially for the foreseeable future as we expand our product
development, sales and marketing and other staff. In addition, we expect to
incur substantial expenses associated with sales personnel, referral fees,
marketing programs and increased administrative expenses associated with being a
public company. Accordingly, we expect to incur net losses for the foreseeable
future.

We believe that period-to-period comparisons of our operating results are
not meaningful and should not be relied upon as indicative of future
performance. Our prospects must be considered in light of the risks, expenses
and difficulties frequently encountered by companies in early stages of
development, particularly companies in new and rapidly evolving markets. We may
not achieve or maintain profitability in the future. Our success depends
significantly upon broad market acceptance of our PowerTier for EJB application
server. Because Sun Microsystems controls the EJB standard, we need to maintain
a good working relationship with them to develop future versions of PowerTier
for EJB, as well as additional products using the EJB standard. Our performance
will also depend on the growth and widespread adoption of the market for
business-to-business electronic commerce over the Internet.

RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 1998 AND 1999

Revenues

Our revenues were $10.2 million for 1998 and $14.4 million for 1999,
representing an increase of 42%. International revenues were $2.9 million for
1998 and $4.1 million for 1999. In 1998, sales of software licenses

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20

to Cisco accounted for 14% of total revenues, and sales of software licenses to
Instinet accounted for 17% of total revenues. In 1999, sales of products to
Cisco accounted for 13% of total revenues.

License Revenues. License revenues were $7.5 million for 1998 and $10.9
million for 1999, representing an increase of 46%. License revenues represented
74% of total revenues for 1998 and 75% of total revenues for the 1999. The
increase in software license revenues was primarily due to sales of our new
PowerTier for EJB application server and the increased size and productivity of
our sales team.

Service Revenues. Our service revenues were $2.7 million for 1998 and $3.6
million for 1999, representing an increase of 33%. The increase in service
revenues was primarily due to an increase in customer support fees related to
increased sales of our PowerTier platform. Service revenues represented 26% of
total revenues 1998 and 25% of total revenues for 1999.

Cost of Revenues

Cost of License Revenues. Cost of license revenues consists of packaging,
documentation and associated shipping costs. Our cost of license revenues was
$239,000 for 1998 and $170,000 for 1999. As a percentage of license revenues,
cost of license revenues were 3% for 1998 and 2% for 1999. This decrease was
primarily attributable to lower packaging and document distribution costs as a
result of a change to electronic distribution of these materials.

Cost of Service Revenues. Cost of service revenues consists of personnel
and other costs related to professional services, technical support and
training. Our cost of service revenues was $1.4 million for 1998 and $2.6
million for 1999, representing an increase of 92%. This increase was primarily
due to increased staffing in our support organization to support a greater
installed base of customers. As a percentage of service revenues, cost of
service revenues were 51% for 1998 and 74% for 1999. In particular, cost of
service revenues as a percentage of service revenues may vary between periods
due to our use of third party professional services.

Operating Expenses

Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses earned by sales and marketing personnel,
travel and entertainment, and promotional expenses. Our sales and marketing
expenses were $7.2 million for 1998 and $14.1 million for 1999, representing an
increase of 96%. This increase was primarily due to our investment in our sales
and marketing infrastructure, which included significant personnel-related costs
to recruit and hire sales people and sales engineers, their compensation,
including sales commissions, advertising and travel expenses, additional sales
office costs, professional services and trade show expenses. Sales and marketing
expenses represented 70% of total revenues for 1998 and 97% of total revenues
for 1999. We believe that a significant increase in our sales and marketing
efforts is essential for us to maintain our market position and further increase
acceptance of our products. Accordingly, we anticipate we will continue to
invest significantly in sales and marketing for the foreseeable future, and
sales and marketing expenses will increase in future periods.

Research and Development. Research and development expenses consist
primarily of salaries and benefits for software developers, product managers and
quality assurance personnel and payments to outside software developers. Our
research and development expenses were $4.2 million for 1998 and $6.4 million
for 1999, representing an increase of 52%. This increase was primarily related
to an increase in employee and consultant software developers and program
management and documentation personnel hired to support product development.
Research and development expenses for 1999 also include a one-time $303,000
compensation charge associated with the issuance of common stock to an investor
at a price which was less than the deemed fair value for accounting purposes.
Research and development expenses represented 42% of total revenues for 1998 and
45% of total revenues for 1999. We believe that a significant increase in our
research and development investment is essential for us to maintain our market
position, to continue to expand our product line and to enhance our technology.
Accordingly, we anticipate that we will continue to invest significantly in
product research and development for the foreseeable future, and research and
development expenses are likely to increase in future periods.
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General and Administrative. General and administrative expenses consist
primarily of salaries, benefits and related costs for our finance,
administrative and general management personnel. Our general and administrative
expenses were $1.2 million for 1998 and $2.8 million for 1999, representing an
increase of 123%. This increase was primarily the result of the hiring of
additional finance and administrative personnel, additional professional
services and insurance costs associated with being a public company, and
bad-debt write-off of $467,000. General and administrative expenses represented
12% of total revenues for 1998 and 20% of total revenues for 1999 (16% without
the bad-debt write off). We believe that our general and administrative expenses
will continue to increase as a result of the expenses associated with being a
public company, including annual and other public reporting costs, directors'
and officers' liability insurance, investor relations programs and accounting
and legal expenses.

Net Interest Income. Net interest income consists primarily of earnings on
our cash cash equivalent and short-term investment balances, offset by interest
expense related to obligations under capital leases and other borrowings. Net
interest income was $1,000 for 1998 and $859,000 for 1999, representing an
increase of $858,000. This increase was earned on the net proceeds received from
our initial public offering of common stock on June 24, 1999. We expect that net
interest income will decrease as we continue to use our net proceeds from our
initial public offering.

Stock-Based Compensation. Some options granted and common stock issued
during the years ended December 31, 1997 and 1998 and during 1999 have been
considered to be compensatory, as the estimated fair value for accounting
purposes was greater than the stock price as determined by the board of
directors on the date of grant or issuance. Total deferred stock compensation
associated with equity transactions as of December 31, 1999 was $1.2 million,
net of amortization. Deferred stock compensation is being amortized ratably over
the vesting periods of these securities. Amortization expense was $331,000 in
1998 and $971,000 in 1999. We expect to record amortization expense related to
these securities of approximately $411,000 in 2000 and $320,000 in 2001.

Provision for Income Taxes. Since inception, we have incurred net operating
losses for federal and state tax purposes and have not recognized any tax
provision or benefit. As of December 31, 1999, we had $20.6 million of federal
and $8.2 million of state net operating loss carryforwards available to offset
future taxable income. The federal net operating loss carryforwards expire
through 2019, while the state net operating loss carryforwards expire through
2004. The net operating loss carryforwards for state tax purposes are
substantially less than for federal tax purposes, primarily because only 50% of
state net operating loss carryforwards can be utilized to offset future state
taxable income. The Tax Reform Act of 1986 limits the use of net operating loss
carryforwards in situations where changes occur in the stock ownership of a
company. If we should be acquired or otherwise have an ownership change, as
defined in the Tax Reform Act of 1986, our utilization of these carryforwards
could be restricted.

As of December 31, 1999, the Company also had research and development tax
credit carryforwards of $968,000 and $529,000 available to offset future federal
and state income taxes, respectively. The federal credit carryforward expires in
2019, while the state credit carryforward has no expiration.

We have placed a full valuation allowance against our net deferred tax
assets due to the uncertainty surrounding the realization of these assets. We
evaluate on a quarterly basis the recoverability of the net deferred tax assets
and the level of the valuation allowance. If and when we determine that it is
more likely than not that the deferred tax assets are realizable, the valuation
allowance will be reduced.

YEARS ENDED DECEMBER 31, 1997 AND 1998

Revenues

Our revenues were $5.4 million in 1997 and $10.2 million in 1998,
representing an increase of 88%. Revenues derived from international operations
were $639,000 in 1997 and $2.9 million in 1998. In 1997, sales of products to
Lucent accounted for 11% of total revenues. In 1998, sales of software licenses
to Cisco accounted for 14% of total revenues, and sales of software licenses to
Instinet accounted for 17% of total revenues.

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License Revenues. Our license revenues were $3.5 million in 1997 and $7.5
million in 1998, representing an increase of 111% . License revenues represented
66% of total revenues in 1997 and 74% of total revenues for 1998. The increase
in license revenues was attributable primarily to an increase in the size and
productivity of our sales force, including the introduction of our direct sales
team in Europe, and the release of our PowerTier for EJB product

Service Revenues. Our service revenues were $1.9 million in 1997 and $2.7
million in 1998, representing an increase of 44%. Service revenues represented
34% of total revenues in 1997 and 26% of total revenues in 1998. The increase in
service revenues was primarily due to an increase in customer support fees
related to an increase in our installed base of PowerTier customers, and, to a
lesser extent, an increase in professional services fees.

Cost of Revenues

Cost of License Revenues. Cost of license revenues was $342,000 in 1997 and
$239,000 in 1998, representing a decrease of 30%. Cost of license revenues as a
percentage of license revenues was 10% for 1997 and 3% for 1998. The decrease in
cost of license revenues was attributable primarily due to lower packaging and
document distribution costs.

Cost of Service Revenues. Cost of service revenues was $729,000 in 1997 and
$1.4 million in 1998, representing an increase of 88%. Cost of service revenues
as a percentage of service revenues was 39% in 1997 and 51% for 1998. The
increase was due to increased staffing in our professional services and support
organizations.

Operating Expenses

Sales and Marketing. Sales and marketing expenses were $4.7 million in 1997
and $7.2 million in 1998, representing an increase of 52%. Sales and marketing
expenses were 87% of total revenues in 1997 and 71% of total revenues for 1998.
The dollar increase primarily reflected our investment in our sales and
marketing infrastructure, which included significant personnel-related expenses
such as salaries, benefits and commissions, and, to a lesser extent, travel and
entertainment expenses, trade shows and other marketing expenses.

Research and Development. Research and development expenses were $3.0
million in 1997 and $4.2 million in 1998, representing an increase of 43%.
Research and development expenses represented 55% of total revenues in 1997 and
42% of total revenues in 1998. This dollar increase was primarily related to the
increase in headcount to support product development and, to a lesser extent, an
increase in average compensation.

General and Administrative. General and administrative expenses were $1.4
million in 1997 and $1.2 million in 1998, representing a decrease of 9%. General
and administrative expenses represented 25% of total revenues in 1997 and 12% of
total revenues in 1998. The dollar decrease in general and administrative
expenses was attributable primarily to a decrease in consulting fees, offset in
part by an increase in headcount and average compensation.

Net Interest Income. Net interest income was $12,000 in 1997 and $1,000 in
1998. This decrease in net interest income was due to an increase in interest
expense related to obligations under capital leases and an equipment loan.

Stock-Based Compensation. We recorded no stock-based compensation expense
for 1997. As of December 31, 1998, total deferred stock compensation associated
with equity transactions amounted to $2.2 million, net of amortization.
Amortization expense was $331,000 in 1998.

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QUARTERLY RESULTS OF OPERATIONS

The following table sets forth unaudited consolidated statement of
operations data for the each of the twelve quarters in the three-year period
ended December 31, 1999, as well as this data expressed as a percentage of our
total revenues for the periods indicated. This data has been derived from our
unaudited consolidated financial statements, which have been prepared on the
same basis as the audited consolidated financial statements and, in the opinion
of our management, include all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the information when read in
conjunction with the consolidated financial statements and notes thereto. Our
quarterly results have been in the past and may in the future be subject to
significant fluctuations. As a result, we believe that results of operations for
interim periods should not be relied upon as any indication of the results to be
expected in any future period.

QUARTER ENDED
--------------------------------------------------------------------------------------
MAR. 31, JUN. 30, SEP. 30,, DEC. 31, MAR. 31, JUN. 30, SEP. 30, DEC. 31,
1997 1997 1997 1997 1998 1998 1998 1998
-------- -------- --------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)

CONSOLIDATED STATEMENT OF
OPERATIONS DATA
Revenues:
License...................... $ 659 $ 1,044 $ 696 $ 1,147 $ 1,004 $ 1,447 $2,250 $2,777
Service...................... 271 315 414 867 706 604 643 729
------- ------- ------- ------- ------- ------- ------ ------
Total revenues......... 930 1,359 1,110 2,014 1,710 2,051 2,893 3,506
------- ------- ------- ------- ------- ------- ------ ------
Cost of revenues:
License...................... 39 67 120 116 56 63 93 27
Service...................... 59 123 164 383 326 345 334 367
------- ------- ------- ------- ------- ------- ------ ------
Total cost of
revenues............. 98 190 284 499 382 408 427 394
------- ------- ------- ------- ------- ------- ------ ------
Gross profit................... 832 1,169 826 1,515 1,328 1,643 2,466 3,112
------- ------- ------- ------- ------- ------- ------ ------
Operating expenses:
Sales and marketing.......... 1,069 1,257 1,116 1,270 1,687 1,449 1,885 2,147
Research and development..... 558 724 722 950 1,038 1,072 1,032 1,092
General and administrative... 257 336 306 463 311 272 290 364
Amortization of purchased
intangibles................ -- -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------ ------
Total operating
expenses............. 1,884 2,317 2,144 2,683 3,036 2,793 3,207 3,603
------- ------- ------- ------- ------- ------- ------ ------
Loss from operations........... (1,052) (1,148) (1,318) (1,168) (1,708) (1,150) (741) (491)
Interest income (expense),
net.......................... 9 6 -- (3) 4 (20) (20) 37
------- ------- ------- ------- ------- ------- ------ ------
Net loss....................... $(1,043) $(1,142) $(1,318) $(1,171) $(1,704) $(1,170) $ (761) $ (454)
======= ======= ======= ======= ======= ======= ====== ======
AS A PERCENTAGE OF TOTAL
REVENUES:
Revenues:
License...................... 70.9% 76.8% 62.7% 57.0% 58.7% 70.6% 77.8% 79.2%
Service...................... 29.1 23.2 37.3 43.0 41.3 29.4 22.2 20.8
------- ------- ------- ------- ------- ------- ------ ------
Total revenues......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
------- ------- ------- ------- ------- ------- ------ ------
Cost of revenues:
License...................... 4.2 4.9 10.8 5.8 3.3 3.1 3.2 0.8
Service...................... 6.3 9.1 14.8 19.0 19.0 16.8 11.5 10.4
------- ------- ------- ------- ------- ------- ------ ------
Total cost of
revenues............. 10.5 14.0 25.6 24.8 22.3 19.9 14.7 11.2
------- ------- ------- ------- ------- ------- ------ ------
Gross margin................... 89.5 86.0 74.4 75.2 77.7 80.1 85.3 88.8
------- ------- ------- ------- ------- ------- ------ ------
Operating expenses:
Sales and marketing.......... 114.9 92.5 100.5 63.1 98.7 70.6 65.2 61.2
Research and development..... 60.1 53.3 65.0 47.2 60.7 52.3 35.7 31.1
General and administrative... 27.6 24.7 27.6 22.9 18.1 13.3 10.0 10.5
Amortization of purchased
intangibles................ -- -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------ ------
Total operating
expenses............. 202.6 170.5 193.1 133.2 177.5 136.2 110.9 102.8
------- ------- ------- ------- ------- ------- ------ ------
Loss from operations........... (113.1) (84.5) (118.7) (58.0) (99.8) (56.1) (25.6) (14.0)
Interest income (expense),
net.......................... 0.9 0.5 -- (0.1) 0.2 (0.9) (0.7) 1.1
------- ------- ------- ------- ------- ------- ------ ------
Net loss....................... (112.2)% (84.0)% (118.7)% (58.1)% (99.6)% (57.0)% (26.3)% (12.9)%
======= ======= ======= ======= ======= ======= ====== ======

QUARTER ENDED
-----------------------------------------
MAR. 31, JUN. 30, SEP. 30, DEC. 31,
1999 1999 1999 1999
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)

CONSOLIDATED STATEMENT OF
OPERATIONS DATA
Revenues:
License...................... $ 2,116 $ 3,463 $ 1,747 $ 3,564
Service...................... 747 784 878 1,144
------- ------- ------- -------
Total revenues......... 2,863 4,247 2,625 4,708
------- ------- ------- -------
Cost of revenues:
License...................... 42 56 19 53
Service...................... 580 695 490 868
------- ------- ------- -------
Total cost of
revenues............. 622 751 509 921
------- ------- ------- -------
Gross profit................... 2,241 3,496 2,116 3,787
------- ------- ------- -------
Operating expenses:
Sales and marketing.......... 2,015 2,965 4,057 5,024
Research and development..... 1,806 1,305 1,533 1,713
General and administrative... 383 538 1,146 753
Amortization of purchased
intangibles................ -- 63 188 325
------- ------- ------- -------
Total operating
expenses............. 4,204 4,862 6,924 7,815
------- ------- ------- -------
Loss from operations........... (1,963) (1,366) (4,808) (4,028)
Interest income (expense),
net.......................... 48 42 410 358
------- ------- ------- -------
Net loss....................... $(1,915) $(1,324) $(4,398) $(3,670)
======= ======= ======= =======
AS A PERCENTAGE OF TOTAL
REVENUES:
Revenues:
License...................... 73.9% 81.5% 66.6 75.7
Service...................... 26.1 18.5 33.4 24.3
------- ------- ------- -------
Total revenues......... 100.0 100.0 100.0 100.0
------- ------- ------- -------
Cost of revenues:
License...................... 1.5 1.3 0.7 1.1
Service...................... 20.2 16.4 18.7 18.4
------- ------- ------- -------
Total cost of
revenues............. 21.7 17.7 19.4 19.6
------- ------- ------- -------
Gross margin................... 78.3 82.3 80.6 80.4
------- ------- ------- -------
Operating expenses:
Sales and marketing.......... 70.4 69.6 154.6 106.7
Research and development..... 63.1 30.7 58.4 38.0
General and administrative... 13.4 12.7 43.7 16.0
Amortization of purchased
intangibles................ -- 1.5 7.1 5.3
------- ------- ------- -------
Total operating
expenses............. 146.9 114.5 263.8 166.0
------- ------- ------- -------
Loss from operations........... (68.6) (32.2) (183.2) (85.6)
Interest income (expense),
net.......................... 1.7 1.0 15.7 7.6
------- ------- ------- -------
Net loss....................... (66.9)% (31.2)% (167.5)% (78.0)%
======= ======= ======= =======

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Our quarterly operating results have fluctuated significantly in the past,
and may continue to fluctuate in the future, as a result of a number of factors,
many of which are outside our control. These factors include:

- our ability to close relatively large sales on schedule;

- delays or deferrals of customer orders or deployments;

- delays in shipment of scheduled software releases;

- demand for and market acceptance of our PowerTier for C++ and PowerTier
for EJB products;

- the possible loss of sales people;

- introduction of new products or services by us or our competitors;

- annual or quarterly budget cycles of our customers;

- the level of product and price competition in the application server
market;

- our lengthy sales cycle;

- our success in expanding our direct sales force and indirect distribution
channels;

- the mix of direct sales versus indirect distribution channel sales;

- the mix of products and services licensed or sold;

- the mix of domestic and international sales; and

- our success in penetrating international markets and general economic
conditions in these markets.

The typical sales cycle of our products is long and unpredictable, and is
affected by seasonal fluctuations as a result of our customers' fiscal year
budgeting cycles and slow summer purchasing patterns in Europe. We typically
receive a substantial portion of our orders in the last two weeks of each
quarter because our customers often delay purchases of our products to the end
of the quarter to gain price concessions. Because a substantial portion of our
costs are relatively fixed and based on anticipated revenues, a failure to book
an expected order in a given quarter would not be offset by a corresponding
reduction in costs and could adversely affect our operating results.

Our license revenues in the first quarter of 1998 were lower than those in
the fourth quarter of 1997 and our license revenues in the first quarter of 1999
were lower than those in the fourth quarter of 1998. In the future, we expect
this trend to continue, with the fourth quarter of each year accounting for the
greatest percentage of total revenues for the year and with an absolute decline
in revenues from the fourth quarter to the first quarter of the next year.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have financed our business primarily through our
initial public offering of common stock in June 1999, which totaled $34.1
million in aggregate net proceeds, and private sales of convertible preferred
stock, which totaled $19.9 million in aggregate net proceeds, through December
31, 1999. We have also financed our business through a loan in the principal
amount of $800,000 and capitalized leases. As of December 31, 1999, we had $29.7
million of cash, cash equivalents and short-term investments and $29.8 million
of working capital.

Net cash used for operating activities was $3.1 million in 1997, $3.0
million in 1998, and $10.9 million for 1999. For each of 1997, 1998, and 1999,
cash used for operating activities was attributable primarily to net losses,
increases in accounts receivable.

Those increases were primarily offset by depreciation and amortization,
amortization of deferred stock compensation and deferred revenues.

Net cash used for investing activities was $589,000 for 1997, $436,000 for
1998, and $10.0 million for 1999. For each of the periods, cash used in
investing activities primarily reflected investments in property and

24
25

equipment and deposits. For 1999, cash used in investing activities also
primarily consisted of purchases of short-term investments and purchased
intangibles.

Net cash provided by financing activities was $1.8 million for 1997, $5.7
million for 1998, and $38.2 million for 1999. Cash provided by financing
activities during these periods was primarily attributable to proceeds from the
issuance of preferred and common stock and, in 1998, borrowings under a term
loan of $800,000, primarily offset by repayments of a capital lease obligations.

In November 1999, we renewed our credit facilities with Comerica Bank.
Under those credit facilities, the Company has a $5.0 million revolving line of
credit facility available through August 15, 2000 and a second equipment
financing facility for an amount up to $1,000,000 under which drawdowns are
available through July 15, 2000. As of December 31, 1999 we had no borrowings
outstanding under the revolving line of credit facility or the second equipment
financing facility. As of December 31, 1999, we had a promissory note in favor
of Comerica, under which $600,000 out of an original $800,000 was outstanding.
We are required to make principal payments of $22,222 per month plus interest of
7.75% per annum on the unpaid principal balance, payable in 27 monthly
installments. The credit facilities with Comerica Bank are collateralized by
substantially all of our assets, including our patents and intellectual
property.

Although we have no material commitments for capital expenditures, we
anticipate a substantial increase in capital expenditures and lease commitments
consistent with our anticipated growth in operations, infrastructure and
personnel. We also may increase our capital expenditures as we expand into
additional international markets.

We believe that the our current cash, cash equivalents and short-term
investments, will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures for at least the next year. If cash generated
from operations is insufficient to satisfy our liquidity requirements, we may
seek to sell additional equity or debt securities or to obtain a credit
facility. If additional funds are raised through the issuance of debt
securities, these securities could have rights, preferences and privileges
senior to holders of common stock, and the term of this debt could impose
restrictions on our operations. The sale of additional equity or convertible
debt securities could result in additional dilution to our stockholders, and we
may not be able to obtain additional financing on acceptable terms, if at all.
If we are unable to obtain this additional financing, we may be required to
reduce the scope of our planned product development and marketing efforts, which
could harm our business.

RECENTLY ISSUED ACCOUNTING STANDARDS

In June 1998, the Financial Accounting Standards Board issued accounting
statement No. 133, Accounting for Derivative Instruments and Hedging Activities.
This statement requires companies to record derivatives on the balance sheet as
assets or liabilities measured at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the use of the derivative and whether it qualifies for hedge accounting. SFAS
No. 133 will be effective for us beginning in 2001. We are currently evaluating
the impact of SFAS No. 133 on our financial statements and related disclosures.

YEAR 2000 COMPLIANCE

We have not experienced a year 2000 error in our software. We believe all
current versions of our products to be "year 2000 compliant," as defined below,
when configured and used in accordance with the related documentation, and
provided that the underlying operating system of the host machine and any other
software used with or in the host machine or with our products are also year
2000 compliant. We have not tested our products on all platforms or all versions
of operating systems that we currently support.

We have defined "year 2000 compliant" as the ability to:

- correctly handle date information needed for the December 31, 1999 to
January 1, 2000 date change;

- function according to the product documentation provided for this date
change, without changes in operation resulting from the advent of a new
century, assuming correct configuration;

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26

- if the date elements in interfaces and data storage specify the century,
store and provide output of date information in ways that are unambiguous
as to century; and

- recognize the year 2000 as a leap year.

We have tested software obtained from third parties, including licensed
software, shareware and freeware, that is incorporated into our products, and we
sought assurances from our vendors that licensed software is year 2000
compliant. Through December 31, 1999, we incurred nominal expenses relating to
our year 2000 compliance activities and do not currently expect to incur any
additional expenses in this regard. We have not experienced a year 2000 error in
any software incorporated into our products. Despite testing and assurances, our
products may contain undetected errors or defects associated with year 2000 date
functions. Any errors or defects in our products could result in the delay or
loss of revenue, increased service costs and damage to our reputation. We are
aware of lawsuits against software vendors involving year 2000 claims, and,
despite testing our products, we may be sued by a customer on a year 2000 claim.

ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS

You should carefully consider the following risks in addition to the other
information contained in this annual report on Form 10-K. The risks and
uncertainties described below are intended to be the ones that are specific to
our company or industry and that we deem to be material, but are not the only
ones that we face.

We Have A Limited Operating History In The Application Server Market.

Because we only commenced selling application servers in 1997, we have a
limited operating history in the application server market. We thus face the
risks, expenses and difficulties frequently encountered by companies in early
stages of development, particularly companies in the rapidly changing software
industry. These risks include:

- our substantial dependence for revenue from our PowerTier for C++
product, which was first introduced in 1997 and has achieved only limited
market acceptance;

- our substantial dependence for revenue from our PowerTier for EJB
product, which was first introduced in 1998 and has achieved only limited
market acceptance;

- our need to expand our distribution capability through both a direct
sales organization and third party distributors and systems integrators;

- our unproven ability to anticipate and respond to technological and
competitive developments in the rapidly changing market for application
servers;

- our unproven ability to compete in a highly competitive market;

- uncertainty as to the growth rate in the electronic commerce market and,
in particular, the business-to-business electronic commerce market;

- our dependence on Enterprise JavaBeans, commonly known as EJB, becoming a
widely accepted standard in the transactional application server market;
and

- our dependence upon key personnel.

Because We Have A History Of Losses And Negative Cash Flow, We May Never
Become Or Remain Profitable.

Our revenues may not continue to grow and we may not be able to achieve or
maintain profitability in the future. We have incurred net losses each year
since 1996. In particular, we incurred losses of $4.7 million in 1997, $4.1
million in 1998 and $11.3 million in 1999. As of December 31, 1999, we had an
accumulated deficit of approximately $24.1 million. In addition, while we are
unable to predict accurately our future operating expenses, we currently expect
these expenses to increase substantially, as we expand our product development
and sales and marketing efforts and assume the increased administrative duties
associated with our public

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27

company status. Thus, we will need to increase our revenues to become
profitable. Because our product market is new and evolving, we cannot accurately
predict either the future growth rate, if any, or the ultimate size of the
market for our products.

We Have Financed Our Business Through The Sale Of Stock And Not Through Cash
Generated By Our Operations.

Since inception, we have generally had negative cash flow from operations.
To date, we have financed our business primarily through sales of common stock
and convertible preferred stock and not through cash generated by our
operations. We expect to continue to have negative cash flow from operations.

We May Need To Raise Additional Capital In The Future.

Although we believe that our current cash, cash equivalents and short-term
investment balances will be sufficient to meet our anticipated operating cash
needs for the next 12 months, we may need to raise additional funds prior to
that time. We face several risks in connection with this possible need to raise
additional capital:

- the issuance of additional securities could result in:

- debt securities with rights senior to the common stock;

- dilution to existing stockholders as a result of issuing additional
equity or convertible debt securities;

- debt securities with restrictive covenants that could restrict our
ability to run our business as desired; or

- securities issued on disadvantageous financial terms.

- the failure to procure needed funding could result in:

- a reduction in scope in our planned product development or marketing
efforts; or

- an inability to respond to competitive pressures or take advantage of
market opportunities, which could adversely affect our ability to achieve
profitability or positive cash flow.

The Unpredictability Of Our Quarterly Results May Adversely Affect The Price
Of Our Common Stock.

Our operating results have fluctuated significantly in the past and may
fluctuate significantly in the future as a result of a variety of factors, many
of which are outside our control. In particular, the fourth quarter of each year
has in the past tended to account for the greatest percentage of total revenues
for the year, and we have often experienced an absolute decline in revenues from
the fourth quarter to the first quarter of the next year. If our future
quarterly operating results are below the expectations of securities analysts or
investors, the price of our common stock would likely decline. The factors that
may cause fluctuations of our operating results include the following:

- our ability to close relatively large sales on schedule;

- delays or deferrals of customer orders or deployments;

- delays in shipment of scheduled software releases;

- demand for and market acceptance of our PowerTier for C++ and PowerTier
for EJB products;

- the possible loss of sales people;

- introduction of new products or services by us or our competitors;

- annual or quarterly budget cycles of our customers;

- the level of product and price competition in the application server
market;

- our lengthy sales cycle;

- our success in expanding our direct sales force and indirect distribution
channels;

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28

- the mix of direct sales versus indirect distribution channel sales;

- the mix of products and services licensed or sold;

- the mix of domestic and international sales; and

- our success in penetrating international markets and general economic
conditions in these markets.

We typically receive a substantial portion of our orders in the last two
weeks of each fiscal quarter because our customers often delay purchases of our
products to the end of the quarter to gain price concessions. Because a
substantial portion of our costs are relatively fixed and based on anticipated
revenues, a failure to book an expected order in a given quarter would not be
offset by a corresponding reduction in costs and could adversely affect our
operating results.

Our Sales Cycle Is Long, Unpredictable And Subject To Seasonal Fluctuations,
So It Is Difficult To Forecast Our Revenues.

Any delay in sales of our products or services could cause our quarterly
revenues and operating results to fluctuate. The typical sales cycle of our
products is long and unpredictable and requires both a significant capital
investment decision by our customers and our education of potential customers
regarding the use and benefits of our products. Our sales cycle is generally
between thre