ACTUATE SOFTWARE CORP - 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

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998

OR

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

Commission file number 0-24607

Actuate Software Corporation
(Exact name of registrant as specified in its charter)

Delaware 94-3193197
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification Number)
organization)

999 Baker Way, Suite 270
San Mateo, California 94404
(Address of principal executive offices)

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(650) 425-2300
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.001 par value
(Title of each class)

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

Based on the closing price as reported on the Nasdaq Stock Market, as of
February 26, 1999 the aggregate market value of the voting stock held by non-
affiliates of the registrant was approximately $144,493,431. Shares of common
stock held by each officer and director 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.

As of February 26, 1999 there were 13,841,955 shares of the Registrant's
common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The information called for by Part III is incorporated by reference to
specified portions of the registrant's definitive Proxy Statement to be issued
in conjunction with the Registrant's 1999 Annual Meeting of Stockholders, which
is expected to be filed not later than 120 days after the Registrant's fiscal
year ended December 31, 1998.

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ACTUATE SOFTWARE CORPORATION

ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1998

TABLE OF CONTENTS

Page
----

PART I.................................................................. 1
Item 1. Business............................................. 1
Item 2. Properties........................................... 18
Item 3. Legal Proceedings.................................... 18
Item 4. Submission of Matters to a Vote of the Security
Holders.............................................. 18

PART II................................................................. 19
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.................................. 19
Item 6. Selected Financial Data.............................. 20
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 21
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk................................................. 28
Item 8. Financial Statements and Supplementary Data.......... 28
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................. 28

PART III................................................................ 28
Item 10. Directors and Executive Officers of the Registrant... 28
Item 11. Executive Compensation............................... 28
Item 12. Security Ownership of Certain Beneficial Owners and
Management........................................... 28
Item 13. Certain Relationships and Related Transactions....... 28

PART IV................................................................. 29
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.......................................... 29

SIGNATURES.............................................................. 31

INDEX TO FINANCIAL STATEMENTS........................................... F-1

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements in this report on Form 10-K under "Business," "Risk
Factors That May Affect Future Results," "Management's Discussion and Analysis
of Financial Condition and Results of Operations," and elsewhere constitute
forward-looking statements within the meaning of Section 21E of the Securities
and Exchange Act of 1934. Forward-looking statements include statements
regarding the Company's expectations, beliefs, hopes, intentions or strategies
regarding the future. These statements involve known and unknown risks,
uncertainties, and other factors that may cause the Company's actual results,
levels of activity, performance, or achievement to be materially different
from any future results, levels of activity, performance, or achievements
expressed or implied by such forward-looking statements. Such factors include,
among other things, those listed under "Risk factors That May Affect Future
Results" and elsewhere in this Report on Form 10-K. Although the Company
believes that the expectations reflected in the forward-looking statements are
reasonable, the Company cannot guarantee future results, levels of activity,
performance, or achievements. Moreover, neither the Company nor any other
person assumes responsibility for the accuracy and completeness of such
statements. The Company is under no duty to update any of the forward-looking
statements contained in the "Letter to Stockholders" in the Annual Report or
in this Report on Form 10-K after the date hereof to conform such statements
to actual results.

PART I

ITEM 1. BUSINESS

Overview

Actuate Software Corporation is a leading provider of enterprise reporting
solutions that enable organizations to systematically extract, publish and
disseminate information across distributed computing environments. The Company
develops and markets software products that are designed to allow companies to
rapidly design, generate and distribute, via the Internet, corporate reports
throughout the enterprise, thereby increasing access to and the value of
corporate data. The Actuate Reporting System is a scalable, dynamic reporting
platform which is designed to allow organizations to replace traditional
paper-based and on-line reports with Actuate Live Report Documents.
Architected specifically to leverage the functionality of the Internet, the
Actuate Reporting System is designed to make reports accessible to an
organization's employees, customers and suppliers via corporate intranets and
the Internet. The Actuate Reporting System's server-centric architecture
provides the building blocks for an enterprise reporting environment of any
size. Actuate's open environment allows developers to create reports from
virtually any data source and in virtually any format required by end-users.
Actuate's products have been adopted in a wide variety of industries,
including financial services, telecommunications, technology, health care and
others. The Company sells its products through its direct sales force located
in the United States and Canada and worldwide through enterprise application
vendors and distributors.

Industry Background

To succeed in today's increasingly competitive markets, businesses must
accelerate the rate at which they identify and respond to changing business
conditions. An organization's success is, to a large extent, dependent upon
its ability to rapidly collect, organize and distribute information to make
effective business decisions. Reports are the primary means in virtually all
organizations by which critical business information is distributed and used
by employees, customers and suppliers. Examples of such reports include income
statements, budgets, sales forecasts, invoices, inventory listings, payroll
reports, portfolio statements and packing slips. Other products such as OLAP
and query tools generally serve as supplements to core reporting systems and
are only utilized by a small number of users for very distinct and specialized
data analysis.

Historically, most reports have been paper-based, designed using legacy
computer languages such as COBOL and typically delivered to users through
physical means such as hand carts, inter-office mail and the postal service.
However, over the past decade, there has been a dramatic migration of critical
corporate information from mainframe computer systems to distributed computing
environments. This shift has been driven

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largely by the widespread emergence and adoption of enterprise software
applications, data warehouses, corporate intranets and the Internet. As a
result, organizations have had to reconsider the way they generate and
distribute reports.

One of the most significant computing trends of the 1990's has been the
migration of enterprise applications from legacy mainframe systems to
distributed computing environments. IDC estimates that organizations will have
spent over $28 billion between 1995 and 1998 on the purchase of such
enterprise applications from vendors such as SAP, PeopleSoft, and Baan in
addition to corporate expenditures on the internal development and
implementation of specialized client/server applications. Also, the rapid
adoption of new applications for enterprise resource planning, sales force
automation and supply chain management is giving rise to new and valuable
types of enterprise data, and is enabling new classes of users, such as sales
and customer service representatives, to access such data. While many of these
purchased applications include basic reporting functionality, they generally
do not adequately satisfy an enterprise's reporting needs, causing the vendors
of these applications to develop or license new enterprise reporting
functionality. Additionally, internally developed applications require
organizations to either develop or purchase enterprise reporting
functionality.

Organizations are also increasingly extracting information from mainframe
and other data stores and moving the information into new, high performance
data warehouses and data marts in order to improve information access and
distribution. In order to capitalize on the collection of this information and
enable users to make better business decisions, enterprises require reporting
applications that draw from these new data stores and distribute the
information flexibly and efficiently to a large number of users.

The growth in the use of the Internet and corporate intranets is changing
the way organizations generate and distribute reports. Organizations can now
distribute information electronically to multiple end users both within and
outside an organization, thereby increasing efficiency and reducing the need
for paper-based reports. In order to accomplish this, many organizations are
creating entirely new reporting applications which enable distribution of
reports using the World Wide Web. In addition, the emergence of the Internet
and corporate intranets has given rise to a new information viewing paradigm
characterized by searchable, browsable, interactive content.

Due to this fundamental shift in the way corporations store and manage
data, IT departments are now faced with the challenge of providing users with
secure access to business information residing in a broad range of distributed
and fragmented systems. The Company believes traditional reporting methods
have not kept pace with the technological advancements in application software
and relational databases. As a result, it has been extremely difficult for
businesses to report information from these systems efficiently, uniformly and
securely across a single platform to users within and outside of the
organization.

To date, large organizations have generally used two types of reporting
solutions to meet their needs in a distributed computing environment:
production reporting and desktop reporting. Production reporting systems are
used to produce high-volume operational reports such as sales bookings,
inventory level analysis, invoices and financial information. These systems
typically produce static paper-based reports that are cumbersome and
inflexible in that they provide information to end users in a predetermined
format. Additionally, these production reporting systems are generally based
on programming languages that are outdated and difficult for developers to
work with. Desktop reporting products are used for the ad hoc creation of
individual reports such as sorted listings, simple graphs and summaries for
small workgroups of end users. These tools enable end users to analyze data
and produce certain customized reports, but are limited in their ability to
access the full breadth of an organization's operational information, are
unsuited to producing high-volume operational reports and require extensive
end user training. Furthermore, production and desktop reporting tools
generally lack administration capabilities such as scheduling and distribution
management, which forces corporate IT departments to use their limited
resources to create solutions for these needs.

Due to the shortcomings of traditional reporting methods, the Company
believes that there is a need for a reporting solution that allows
organizations to use a single reporting infrastructure to systematically
extract, publish and disseminate information from distributed computing
environments. IDC estimates the market for

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enterprise reporting solutions such as those offered by the Company will grow
to over $900 million by the year 2002.

The Actuate Solution

The Actuate Reporting System is a scalable, dynamic enterprise reporting
solution which is designed to allow organizations to effectively develop,
generate and distribute reports throughout the enterprise in both
client/server and Internet-enabled environments. The Company's products are
designed to be easily and rapidly implemented, to generate and distribute
thousands of reports to thousands of users via networks or the Internet, and
to enable the Company's customers to leverage their existing hardware and
software investments. The Company believes the Actuate Reporting System
provides the following key advantages:

Live Report Documents. The Actuate Reporting System enables organizations
to replace traditional paper-based and on-line reports with Live Report
Documents. Live Report Documents feature rich interactive capabilities
including: (i) hyperlinks, which permit the user to drill-down to detailed
information within the report or link to other reports, (ii) context-sensitive
help, which allows the user to access information about the report itself,
including field definitions and data sources, (iii) a dynamic, self-
documenting table of contents, which automatically reflects changes in the
document and enables one-click access to particular pages within large
reports, and (iv) a report query feature, which allows users to extract data
from the report and transfer it to other applications for further analysis or
formatting. The Actuate Reporting System also facilitates mobile, off-line
analysis of reports.

Adaptable Environment. The Actuate Reporting System is based on an object-
oriented architecture that is designed to give developers a complete visual
environment for structuring, compiling, viewing and debugging sophisticated
report designs. Actuate's open environment allows developers to create reports
from virtually any data source and in virtually any format required by users.
Actuate's component-based architecture enables developers to build reports by
dragging and dropping standard components that can be customized and stored in
libraries for reuse.

Scalable Environment. The Actuate Reporting System's server-centric
architecture provides the building blocks for an enterprise architecture of
any size. The Actuate Report Encyclopedia acts as a repository for reports and
report components. Actuate's Virtual Report Distribution technology reduces
the need to transmit large reports and data sets by storing reports on the
servers themselves and sending one or more pages to the client over a network
or the Internet as demanded. This distribution scheme is designed to minimize
the stress on an enterprise's computer network, while providing a responsive
viewing environment. The Actuate Reporting System is also scalable to meet
customers' enterprise reporting needs as their organizations and user
populations grow. The Actuate Report Server also enables administrators to
centrally control and schedule the distribution of both electronic and printed
reports and maintain security access privileges.

Internet Architecture. Architected specifically to leverage the
functionality of the Internet, the Actuate Reporting System is designed to
make reports accessible to an enterprise's employees, customers and suppliers
via corporate intranets and the Internet. Actuate's ReportCast technology can
be integrated with Internet or intranet web sites, making it easier for
enterprises to notify users via the World Wide Web when corporate information
becomes available. Using a Web browser, users can subscribe to ReportCast
channels that contain the specific categories of reports which are of interest
to them. Notices about new reports are pushed to the channel and customizable
headlines identify the subject matter of the report.

Strategy

The Company's strategy is to be the leading provider of enterprise
reporting solutions. Key elements of the Company's strategy include:

Expand Market Leadership Position through Strategic Relationships. The
Company believes that it has established a leading position in the emerging
market for enterprise reporting solutions. To accelerate the

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adoption of the Actuate Reporting System as the standard enterprise reporting
solution and to facilitate enterprise-wide acceptance of the Company's
products, the Company has established strategic relationships with enterprise
application vendors, consulting firms, systems integrators and development
partners. The Company's strategic technology and distribution partners include
Ascend Communications, Inc., Aspect Development, Inc., Cambridge Technology
Partners, Inc., Netscape Communications Corp., PeopleSoft, Inc., Siebel
Systems Corp. and The Vantive Corp. The Company believes that brand
recognition is significant to its business success, and virtually all of its
application partners and resellers use the Actuate brand name in conjunction
with their applications. The Company intends to further develop its existing
strategic relationships and enter into new partnerships to expand its market
presence and brand recognition.

Extend Technology Leadership. Since inception, the Company has focused its
research and development efforts on developing core technologies that address
the requirements of enterprise reporting, such as the ability to generate and
run thousands of reports containing large amounts of data. The Company's
products integrate a number of advanced technologies, including a patented
method of storing report objects, a multi-tier architecture and Web access and
delivery technology. In addition, the Company has in the past rapidly
incorporated new technology into its product offerings. The Company believes
it is a leader in enterprise reporting technology and intends to extend this
leadership position by continuing to devote significant resources to research
and development efforts, and by acquiring and integrating complementary
technologies.

Broaden Distribution Channels. To date, the Company has sold through its
direct sales force located in the United States and Canada and has sold
worldwide through enterprise application vendors, resellers and distributors.
The Company intends to expand its direct sales force and tele-sales
capability. In addition, the Company intends to continue to leverage and grow
its existing network of enterprise application vendors, resellers and
distributors and expand its indirect distribution channel worldwide.

Increase International Presence. While to date its international sales have
been limited, the Company plans to increase its international presence.
Outside the United States, the Company has established distributor
relationships in over twenty foreign countries. The Company intends to expand
its international sales capabilities by expanding its distribution channels in
Europe, Asia/Pacific and Latin America and by continuing the localization of
its products in selected markets.

Products and Technology

The Actuate Reporting System is a fully integrated, enterprise reporting
software system that provides an organization with a single reporting
infrastructure across distributed computing environments and the Internet. The
Actuate Reporting System is comprised of a suite of products that are licensed
by customers in a typical configuration consisting of a report server, web
agent, administrator desktop, developer workbench, viewer and live report
extension. In the case of direct sales to end user customers, the Company's
client products are typically priced on a per user basis, the report server is
priced on a per CPU basis and number of users basis and the web agent is
priced on a per server basis. Indirect sales are usually either fixed price,
unlimited usage arrangements or arrangements where royalties are paid to the
Company based on sell through to end-users. The Company's enterprise reporting
solution includes the following server, client and web products which allow
organizations to bring together all their business information into one
resource that can report such information to users across the enterprise.

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The following table sets forth the suite of products that comprise the
Actuate Reporting System:

Actuate Server
Products Product Description Platforms
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Actuate Report Server Highly scalable server application used Windows NT
for generating, distributing and Solaris
managing Live Report Documents HP-UX
AIX

Actuate Client
Products
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Actuate Developer Visual object-oriented development tool Windows NT
Workbench utilized by developers to provide an Windows 95, 98
open development environment for
designing, compiling, viewing and
debugging report designs

Actuate End User Client application which gives business Windows NT
Desktop users the ability to schedule, request, Windows 95, 98
generate, view and print Live Report
Documents

Actuate Administrator Client application which allows Windows NT
Desktop administrators to manage and control Windows 95, 98
one or more Actuate Report Servers

Actuate Viewer Client interface which allows users to Windows NT
view and print Live Report Documents on Windows 95, 98
LAN attached clients

Actuate Software A tool kit for developers which Windows NT
Development Kit contains Actuate Viewer Active X Windows 95, 98
Control and the Actuate End User
Desktop Active X controls as well as
various Actuate API's for use with
programming environments such as Visual
Basic and C++ applications

Actuate Web Products
--------------------

Actuate Web Agent Server software which enables the Windows NT
Actuate Report Server to provide secure Solaris
web access to Live Report Documents and HP-UX
integrate with other web sites AIX

Actuate Live Report Browser extension which allows users to Windows NT
Extension view and print Live Report Documents Windows 95, 98
through Netscape Navigator and
Microsoft Internet Explorer

The Company's products provide native and ODBC connectivity to a number of
data sources, including relational database management systems from Oracle,
IBM, Microsoft, Sybase, Informix and Progress.

Sales, Customers, Marketing and Services

The Company sells software products through two primary means: (i) directly
to end user customers through its direct sales force and (ii) through indirect
channel partners such as enterprise application vendors, resellers and
distributors. Actuate's products are used by customers in a wide variety of
industries, including financial services, telecommunications, technology,
health care and others.

The direct sales process involves the generation of sales leads through
direct mail, seminars and telemarketing. The Company's field sales force
typically conducts demonstrations and presentations of the Company's products
to developers and management at customer sites as part of the direct sales
effort.

The Company has a separate sales force which addresses the enterprise
application vendor market including such vendors as PeopleSoft, Siebel and
Vantive. These vendors integrate the Company's products with their
applications and either embed them into their standard products or resell them
to their customers. The enterprise application vendor's end user customer is
licensed to use the Company's products solely in conjunction with the

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vendor's application with which the Actuate Reporting System is integrated.
The Company offers an upgrade license to end user customers, which permits
them to create reports outside the scope of the particular vendor application.
Enterprise application vendors provide the first level of post-sales support
to customers. The Company has also utilized a limited number of resellers
which re-market the Company's products to their customer base. Resellers are
offered discounts on the Company's products and sell a full use license of the
product. The Company's resellers do not provide post-sales support. The
Company's ability to achieve revenue growth in the future will depend in large
part on its success in expanding its direct sales force and in further
establishing and maintaining relationships with enterprise application
vendors, resellers and distributors.

The Company also sells its products world-wide through distributors located
in over twenty foreign countries. The Company's distributors perform some or
all of the following functions: sales and marketing, systems integration,
software development, and ongoing consulting training and customer support. In
exchange for providing such services, the Company offers its distributors
discounts on products. The Company has an agreement with the parent company of
its international distributors located in France, Germany and the United
Kingdom that could result in the Company acquiring such distributors. Under
the terms of the agreement, the Company has the right of first refusal with
respect to the proposed sale of the capital stock of such distributors. In the
event the Company does not exercise its right of first refusal the
distributors would obtain, in addition to other rights, an exclusive, royalty
free license to sell the Company's products in their respective territories.
Also under the terms of the agreement, the Company has the right to increase
the royalty it receives for Actuate product sales from these European
distributors to 100%. In such event, the distributors' parent company would
have the right to sell its capital stock to the Company. Under either
scenario, the price the Company would be required to pay for such capital
stock is set forth in the agreement. In addition, the Company also has an
agreement with its Japanese distributor that could result in the Company
acquiring such distributor. Under the terms of this agreement, the Company has
the right to acquire from the stockholders of the Japanese distributor and
such stockholders have the right to have the Company acquire from them, the
outstanding capital stock of the Japanese distributor. The price to be paid by
the Company for such stock is set forth in the agreement. In the event the
Company acquires any of the distributors upon the conditions described above,
there can be no assurance that such acquisition will be successful. If such
acquisition is not successful, the Company's business, operating results and
financial condition could be materially adversely affected. There are certain
risks associated with international sales, including, but not limited to,
costs of localizing products for foreign countries, trade laws and business
practices favoring local competition, dependence on local vendors, compliance
with multiple, conflicting and changing government laws and regulations,
longer sales and payment cycles, import and export restrictions and tariffs,
difficulties in staffing and managing foreign operations, greater difficulty
or delay in accounts receivable collection, foreign currency exchange rate
fluctuations, multiple and conflicting tax laws and regulations and political
and economic instability, including recent economic conditions in Asia. There
are also certain risks associated with the Company's potential acquisition of
certain distributors, including diversion of management attention, integration
costs, the coordination of sales and marketing efforts, regulation by foreign
government and adverse accounting treatment of such acquisitions.

Sales cycles for direct sales of the Company's software products to end-
user customers have historically been between three and six months. Large-
scale deployment of the Company's products generally extends for six to nine
months following the successful completion of an initial implementation. Sales
cycles for sales of the Company's products to enterprise application vendors
range from 6 to 24 months or more (not including the sales and implementation
cycles of such vendors' own products, which cycles may be significantly longer
than the Company's sales and implementation cycles). There can be no assurance
the Company or its indirect channel partners will not experience longer sales
cycles in the future.

The Company is focused on building market awareness and acceptance of the
Company and its products as well as on developing strategic marketing and
distribution relationships. The Company has a comprehensive marketing strategy
with several key components: image and awareness building, direct marketing to
both prospective and existing customers, a strong Web presence, as well as
broad-scale marketing programs in conjunction with key partners. The Company's
corporate marketing strategy includes extensive public relations

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activities, trade shows and user group meetings, as well as programs to work
closely with analysts and other influential third parties. The Company's
direct marketing activities include participation in selected trade shows and
conferences and targeted ongoing direct mail efforts to existing and
prospective customers. The Company also offers seminars to educate prospective
customers about the Company's enterprise reporting solution. The Company also
uses web-based marketing to generate new leads for the Company's direct sales
force. Finally, the Company has invested in building a partner and channel
marketing function to conduct cooperative marketing programs with the
Company's technology partners.

The Company actively recruits and trains third party consulting firms to
provide training and implementation services for the Company's products. The
Company's internal expert services group provides high value "technology
transfer" consulting services to customers developing and deploying an
enterprise reporting solution with the Company's products. These services
include methodology, training, application integration and performance
evaluation. Due to the critical nature of enterprise reporting, the Company
believes that its expert services group and relationships with its consulting
partners play a key role in facilitating initial license sales and enabling
customers to successfully develop and deploy the Actuate Reporting System.

Customer and Technical Support

The Company believes that providing superior customer service is critical
to the successful sale and marketing of its products. Maintenance and support
contracts, which are typically for 12 months, are offered with the initial
license, may be renewed annually and are typically set at a percentage of the
total license fees. Substantially all of the Company's direct sales to
customers have maintenance and support contracts that entitle the customer to
software patches, updates and upgrades at no additional cost and technical
phone support when available. Customers purchasing maintenance are able to
access support, via email and telephone during normal business hours. The
Company supplements its telephone support with Web-based support services,
including access to FAQs, on line web forums and a software patch download
area. To improve access to its explanatory materials, the Company provides on-
line documentation with all of its products. In addition, the Company offers,
primarily through certified training partners, classes and training programs
for its products.

Research and Development

The Company's research and development organization is divided into teams
consisting of development engineers, product managers, quality assurance
engineers and technical writers. The research and development organization
uses a phase-oriented development process which includes monitoring of
quality, schedule and functionality. Product development is based on a
consolidation of the requirements from existing customers, technical support
and product managers. The development group infrastructure provides a full
suite of documentation, quality assurance, delivery and support capabilities
(in addition to its design and implementation functions) for the Company's
products. Research and development expenses were $7.4 million, $6.2 million
and $2.7 million for the year ended December 31, 1998, 1997 and 1996,
respectively. The Company intends to continue to make substantial investments
in research and development and related activities to maintain and enhance its
product lines. The Company believes that its future success will depend in
large part on its ability to support current and future releases of popular
operating systems, databases and enterprise software applications, to maintain
and improve its current product line and to timely develop new products that
achieve market acceptance. Any failure by the Company to do so would have a
material adverse effect on the Company's business, operating results and
financial condition.

Competition

The market in which the Company competes is intensely competitive and
characterized by rapidly changing technology and evolving standards.
Competition for the Company's products comes in four principal forms: (i)
direct competition from current or future vendors of reporting solutions such
as Seagate Software, Inc. (a division of Seagate Technology, Inc.) and SQRIBE
Technologies, Inc.; (ii) indirect competition from vendors of OLAP and query
tools such as Arbor Software Corp., Business Objects S.A., Cognos, Inc. and
Microsoft that integrate

7

reporting functionality with such tools; (iii) indirect competition from
enterprise application vendors such as SAP and Oracle, to the extent they
include reporting functionality in their applications, and (iv) competition
from the information systems departments of current or potential customers
that may develop reporting solutions internally which may be cheaper and more
customized. Many of the Company's current and potential competitors have
significantly greater financial, technical, marketing and other resources than
the Company. Such competitors may be able to respond more quickly to new or
emerging technologies and changes in customer requirements or devote greater
resources to the development, promotion and sales of their products than the
Company. Also, most current and potential competitors, including companies
such as Oracle and Microsoft, have greater name recognition and the ability to
leverage significant installed customer bases. These companies could integrate
competing enterprise reporting software with their widely accepted products
which would result in a loss of market share for the Company. The Company
expects additional competition as other established and emerging companies
enter into the enterprise reporting software market and new products and
technologies are introduced. Increased competition could result in price
reductions, fewer customer orders, reduced gross margins, longer sales cycles
and loss of market share, any of which would materially adversely affect the
Company's business, operating results and financial condition.

Current and potential competitors may make strategic acquisitions or
establish cooperative relationships among themselves or with third parties,
thereby increasing their ability to address the needs of the Company's
prospective customers. The Company's current or future enterprise application
vendors and other indirect channel partners have in the past, or may in the
future, establish cooperative relationships with current or potential
competitors of the Company, thereby limiting the Company's ability to sell its
products through particular distribution channels. Accordingly, it is possible
that new competitors or alliances among current and new competitors may emerge
and rapidly gain significant market share. Such competition could materially
adversely affect the Company's ability to obtain revenues from license fees
from new or existing customers, and service revenues from existing customers
on terms favorable to the Company. Further, competitive pressures may require
the Company to reduce the price of its software. In either case, the Company's
business, financial condition, and operating results would be materially
adversely affected. There can be no assurance that the Company will be able to
compete successfully against current and future competitors, and the failure
to do so would have a material adverse effect upon the Company's business,
operating results and financial condition.

Intellectual Property Rights

The Company has one issued U.S. patent and one U.S. patent pending and
relies primarily on a combination of copyright and trademark laws, trade
secrets, confidentiality procedures and contractual provisions to protect its
proprietary technology. For example, the Company licenses its software
pursuant to shrinkwrap or signed license agreements, which impose certain
restrictions on licensees' ability to utilize the software. In addition, the
Company seeks to avoid disclosure of its intellectual property, including
requiring those persons with access to the Company's proprietary information
to execute confidentiality agreements with the Company and restricting access
to the Company's source code. The Company seeks to protect its software,
documentation and other written materials under trade secret and copyright
laws, which afford only limited protection.

Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or
to obtain and use information that the Company regards as proprietary.
Policing unauthorized use of the Company's products is difficult, and while
the Company is unable to determine the extent to which piracy of its software
products exists, software piracy can be expected to be a persistent problem.
In addition, the laws of many countries do not protect the Company's
proprietary rights to as great an extent as do the laws of the United States.
There can be no assurance that the Company's means of protecting its
proprietary rights will be adequate or that the Company's competitors will not
independently develop similar technology. Any failure by the Company to
meaningfully protect its intellectual property could have a material adverse
effect on the Company's business, operating results and financial condition.

To date, the Company has not been notified that its products infringe the
proprietary rights of third parties, but there can be no assurance that third
parties will not claim infringement by the Company with respect to

8

current or future products. The Company expects enterprise reporting software
product developers will increasingly be subject to infringement claims as the
number of products and competitors in the Company's industry segment grows and
the functionality of products in different industry segments overlaps. Any
such claims, with or without merit, could be time-consuming to defend, result
in costly litigation, divert management's attention and resources, cause
product shipment delays or require the Company to enter into royalty or
licensing agreements. Such royalty or licensing agreements, if required, may
not be available on terms acceptable to the Company or at all. A successful
claim of product infringement against the Company and the failure or inability
of the Company to license the infringed or similar technology could have a
material adverse effect upon the Company's business, operating results and
financial condition.

Employees

As of December 31, 1998, the Company had 149 full-time employees, including
61 in sales and marketing, 51 in research and development, 22 in services and
support, and 15 in general and administrative functions. None of the Company's
employees are represented by a collective bargaining agreement, nor has the
Company experienced a work stoppage. The Company believes its employee
relations are good. The Company believes that its future success will depend
in large part upon its continuing ability to attract and retain highly skilled
managerial, sales, marketing, customer support and research and development
personnel and, in particular, its executive officers.

RISK FACTORS THAT MAY AFFECT FUTURE RESULTS

Investors should carefully consider the following risk factors and warnings
before making an investment decision. The risks described below are not the
only ones facing the Company. Additional risks that the Company does not yet
know of or that it currently thinks are immaterial may also impair its
business operations. If any of the following risks actually occur, the
Company's business, operating results or financial condition could be
materially adversely affected. In such case, the trading price of the
Company's common stock could decline. Investors should also refer to the other
information set forth in this Report on Form 10-K, including the financial
statements and the notes thereto.

Limited Operating History; Lack of Profitability

The Company incurred net losses of $3.2 million, $7.2 million and $6.1
million in fiscal 1998, 1997 and 1996, respectively. As of December 31, 1998,
the Company had an accumulated deficit of approximately $20.1 million. Given
the Company's history of losses, there can be no assurance of revenue growth
or profitability on a quarterly or annual basis in the future. While the
Company achieved significant quarter-to-quarter revenue growth in fiscal 1997
and 1998, there can be no assurance that the Company's revenues will increase
in future periods. In addition, the Company intends to increase its operating
expenses significantly in future periods; therefore, the Company's operating
results in the future will be adversely affected if revenues do not increase.
Future operating results will depend on many factors, including, among others,
demand for and acceptance of the Company's products and services, including
ongoing acceptance of maintenance and other services purchased by existing
customers, continued successful relationships and the establishment of new
relationships with enterprise application vendors, the level of product and
price competition from existing and new competitors, the ability of the
Company to control costs and to develop, market and deploy new products, the
ability of the Company to expand its direct sales force and indirect
distribution channels both domestically and internationally, the Company's
success in attracting and retaining key personnel, the growth of the market
for enterprise reporting and the ability of the Company to successfully
integrate technologies and businesses it may acquire in the future. The
Company was founded in November 1993 and began shipping its Actuate Reporting
System in January 1996. Accordingly, the Company has a limited operating
history on which to base an evaluation of its business and prospects. The
Company's prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in their early stage of
development, particularly companies in rapidly evolving markets. There can be
no assurance that the Company will be successful in addressing such

9

risks, and the failure to do so would have a material adverse effect on the
Company's business, operating results and financial condition.

Fluctuations in Quarterly Operating Results

The Company's limited operating history and the susceptibility of the
Company's operating results to significant fluctuations makes any prediction
of future operating results unreliable. In addition, the Company believes that
period-to-period comparisons of its operating results are not necessarily
meaningful and should not be relied upon as indications of future performance.
The Company's operating results have in the past, and may in the future, vary
significantly due to factors such as demand for the Company's products, the
size and timing of significant orders and their fulfillment, sales cycles of
the Company's indirect channel partners, product life cycles, changes in
pricing policies by the Company or its competitors, changes in the Company's
level of operating expenses and its ability to control costs, budgeting cycles
of its customers, software defects and other product quality problems, hiring
needs and personnel changes, the pace of international expansion, changes in
the Company's sales incentive plans, continued successful relationships and
the establishment of new relationships with enterprise application vendors,
the impact of consolidation by competitors and indirect channel partners, and
general domestic and international economic and political conditions. In
addition, the Company may, in the future, experience fluctuations in its gross
and operating margins due to changes in the mix of domestic and international
revenues and changes in the mix of direct sales and indirect sales, as well as
changes in the mix among the indirect channels through which the Company's
products are offered.

A significant portion of the Company's total revenues in any given quarter
is derived from existing customers. The Company's ability to achieve future
revenue growth, if any, will be substantially dependent upon the Company's
ability to increase revenues from license fees and services from existing
customers, to expand its sales force, to increase the quotas of its sales
employees, to have such employees achieve or exceed such quotas and to
increase the average size of its orders. To the extent that such increases do
not occur in a timely manner, the Company's business, operating results and
financial condition would be materially adversely affected. Because its
software products are typically shipped shortly after orders are received,
revenues in any quarter are substantially dependent on orders booked and
shipped throughout that quarter. Accordingly, revenues for any future quarter
are difficult to predict. Revenues from license fees are also difficult to
forecast because the market for enterprise reporting is rapidly evolving, and
because the sales cycle for the Company's products varies substantially from
customer to customer and by distribution channel and may increase in the
future. The Company's expense levels and plans for expansion, including its
plans to significantly increase its sales and marketing and research and
development efforts, are based in significant part on the Company's
expectations of future revenues and are relatively fixed in the short-term.
The Company may be unable to adjust spending in a timely manner to compensate
for any unexpected revenue shortfall. Consequently, if total revenue levels
are below expectations, the Company's business, operating results and
financial condition are likely to be adversely and disproportionately
affected.

Based upon all of the factors described above, the Company has limited
ability to forecast future revenues and expenses, and it is likely that in
some future quarter the Company's operating results will be below the
expectations of public market analysts and investors. In the event that
operating results are below expectations, or in the event that adverse
conditions prevail or are perceived to prevail generally or with respect to
the Company's business, the price of the Company's common stock would be
materially adversely affected.

Expanding Distribution Channels and Reliance on Third Parties

To date, the Company has sold its products principally through its direct
sales force, as well as through indirect sales channels, such as enterprise
application vendors, resellers and distributors. Of the Company's revenues
from license fees in fiscal 1998 and 1997, approximately 41% and 38%,
respectively, resulted from sales through indirect channel partners. The
Company's ability to achieve significant revenue growth in the future will
depend in large part on its success in expanding its direct sales force and in
further establishing and maintaining relationships with enterprise application
vendors, resellers and distributors. In particular, a significant

10

element of the Company's strategy is to embed its technology in products
offered by enterprise application vendors for resale to such vendors'
customers and end users. The Company intends to seek additional distribution
arrangements with other enterprise application vendors to embed the Company's
technology in their products and expects that these arrangements will continue
to account for a significant portion of the Company's revenues in future
periods. The Company's future success will depend on the ability of its
indirect channel partners to sell and support the Company's products. To the
extent that the sales and implementation cycles of the Company's indirect
channel partners are lengthy or variable in nature, that the Company's
enterprise application vendors experience difficulties embedding the Company's
technology into their products or that the Company fails to train the sales
and customer support personnel of such indirect channel partners in a timely
fashion, the Company's business, operating results and financial condition
could be materially adversely affected.

Although the Company is currently investing, and plans to continue to
invest, significant resources to expand its direct sales force and to develop
relationships with enterprise application vendors, resellers and distributors,
the Company has at times experienced and continues to experience difficulty in
recruiting qualified sales personnel and in establishing necessary third-party
relationships. There can be no assurance that the Company will be able to
successfully expand its direct sales force or other distribution channels,
secure license agreements with additional enterprise application vendors on
commercially reasonable terms or at all, or extend existing license agreements
with existing enterprise application vendors, resellers and distributors on
commercially reasonable terms or at all, or that any such expansion,
additional license agreements or extension of license agreements would result
in an increase in revenues. Any inability by the Company to maintain existing
or establish new relationships with indirect channel partners or, if such
efforts are successful, a failure of the Company's revenues to increase
correspondingly with expenses incurred in pursuing such relationships, would
materially and adversely affect the Company's business, operating results and
financial condition.

Dependence on Growth of Market for Enterprise Reporting; Risks Associated with
the Software Industry

The market for enterprise reporting software products is still emerging and
there can be no assurance that it will continue to grow or that, even if the
market does grow, businesses will adopt the Company's products. To date, all
of the Company's revenues have been derived from licenses for its enterprise
reporting software and related products and services, and the Company expects
this to continue for the foreseeable future. The Company has spent, and
intends to continue spending, considerable resources educating potential
customers and indirect channel partners about enterprise reporting and the
Company's products. However, there can be no assurance that such expenditures
will enable the Company's products to achieve any significant degree of market
acceptance, and if the market for enterprise reporting products fails to grow
or grows more slowly than the Company currently anticipates, the Company's
business, operating results and financial condition would be materially
adversely affected.

In addition, the software industry has historically experienced significant
periodic downturns, often in connection with, or in anticipation of, declines
in general economic conditions during which management information systems
budgets often decrease. Such a change in economic conditions could result in a
slow down of the purchase of enterprise reporting products. As a result, the
Company's business, operating results and financial condition may in the
future reflect substantial fluctuations from period to period as a consequence
of buying patterns and general economic conditions in the software industry.

Competition

The market in which the Company competes is intensely competitive and
characterized by rapidly changing technology and evolving standards.
Competition for the Company's products comes in four principal forms: (i)
direct competition from current or future vendors of reporting solutions such
as Seagate Software, Inc. (a division of Seagate Technology, Inc.) and SQRIBE
Technologies, Inc.; (ii) indirect competition from vendors of OLAP and query
tools such as Arbor Software Corp., Business Objects S.A., Cognos, Inc. and
Microsoft that integrate reporting functionality with such tools; (iii)
indirect competition from enterprise application vendors such as SAP

11

and Oracle, to the extent they include reporting functionality in their
applications, and (iv) competition from the information systems departments of
current or potential customers that may develop reporting solutions internally
which may be cheaper and more customized than the Company's products. Many of
the Company's current and potential competitors have significantly greater
financial, technical, marketing and other resources than the Company. Such
competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements or devote greater resources
to the development, promotion and sales of their products than the Company.
Also, most current and potential competitors, including companies such as
Oracle and Microsoft, have greater name recognition and the ability to
leverage significant installed customer bases. These companies could integrate
competing enterprise reporting software with their products, resulting in a
loss of market share for the Company. The Company expects additional
competition as other established and emerging companies enter the enterprise
reporting software market and new products and technologies are introduced.
Increased competition could result in price reductions, fewer customer orders,
reduced gross margins, longer sales cycles and loss of market share, any of
which would materially adversely affect the Company's business, operating
results and financial condition.

Current and potential competitors may make strategic acquisitions or
establish cooperative relationships among themselves or with third parties,
thereby increasing their ability to address the enterprise reporting needs of
the Company's prospective customers. The Company's current or future
enterprise application vendors and other indirect channel partners have in the
past, or may in the future, establish cooperative relationships with current
or potential competitors of the Company, thereby limiting the Company's
ability to sell its products through particular distribution channels.
Accordingly, it is possible that new competitors or alliances among current
and new competitors may emerge and rapidly gain significant market share. Such
competition could materially adversely affect the Company's ability to obtain
revenues from license fees from new or existing customers, and service
revenues from existing customers on terms favorable to the Company. Further,
competitive pressures may require the Company to reduce the price of its
software. In either case, the Company's business, financial condition, and
operating results would be materially adversely affected. There can be no
assurance that the Company will be able to compete successfully against
current and future competitors, and the failure to do so would have a material
adverse effect upon the Company's business, operating results and financial
condition.

Risks Associated with Potential Acquisitions of Certain International
Distributors

The Company is a party to agreements with its Japanese distributor and the
parent company of its French, German and United Kingdom distributors (the
"International Distributors"), under which the Company is likely to (and under
certain circumstances, would bear substantial financial penalties if it did
not) acquire such International Distributors at some point in the future. Such
an acquisition could be triggered by the parent company of the European
distributors at its discretion, and by the Japanese distributor at its
discretion beginning in April 1999. In connection with any such acquisition,
the Company would be required to pay a purchase price (equal to at least such
distributor's last twelve months' revenues as of the date of such acquisition)
in registered shares of the Company's common stock or in cash, which may have
the effect of diluting existing stockholders, adversely affecting the price of
the Company's common stock or reducing the available cash for working capital
and other purposes. At present, the Company is unable to predict the
accounting treatment of any such acquisitions, in part because it is unclear
what accounting regulations, conventions or interpretations may prevail in the
future. If any such acquisition is accounted for by the Company as a
"purchase" transaction (as opposed to a pooling of interests), it could cause
the Company to recognize substantial goodwill and other intangible asset
amortization charges in the quarters and fiscal years immediately following
the date on which such an acquisition is effected, depending upon the purchase
price paid by the Company for such acquisition. As a result, if the
acquisition is accounted for as a "purchase" transaction, it could have a
material adverse effect on reported earnings per share during these periods in
which the Company records the amortization of intangible assets acquired.
Finally, any such acquisition would require substantial management attention,
impose costs on the Company associated with integrating the acquired entities,
require the Company to coordinate sales and marketing efforts with the
acquired companies and subject the Company to additional, and potentially
substantial,

12

regulation as an owner of foreign subsidiaries, any of which could have a
material adverse effect on the business, operating results and financial
condition of the Company.

Rapid Technological Change and Dependence on Product Development

The market for the Company's products is characterized by rapid
technological change, frequent new product introductions and enhancements,
uncertain product life cycles, changing customer demands and evolving industry
standards, any of which can render existing products obsolete and
unmarketable. The Company believes that its future success will depend in
large part on its ability to support current and future releases of popular
operating systems, databases and enterprise software applications, to maintain
and improve its current product line, to timely develop new products that
achieve market acceptance, to maintain technological competitiveness and to
meet an expanding range of customer requirements. There can be no assurance
that the announcement or introduction of new products by the Company or its
competitors or any change in industry standards will not cause customers to
defer or cancel purchases of existing products, which could have a material
adverse effect on the Company's business, operating results and financial
condition. As a result of the complexities inherent in enterprise reporting,
major new products and product enhancements can require long development and
testing periods. In addition, customers may delay their purchasing decisions
in anticipation of the general availability of new or enhanced versions of the
Company's products. As a result, significant delays in the general
availability of such new releases or significant problems in the installation
or implementation of such new releases could have a material adverse effect on
the Company's business, operating results and financial condition. Any failure
by the Company to successfully develop, on a timely and cost effective basis,
product enhancements or new products that respond to technological change,
evolving industry standards or customer requirements or of such new products
and product enhancements to achieve market acceptance would have a material
adverse effect upon the Company's business, operating results and financial
condition.

Lengthy and Variable Sales Cycles

The purchase of the Company's products by its end user customers for
deployment within a customer's organization typically involves a significant
commitment of capital and other resources, and is therefore subject to delays
that are beyond the Company's control, such as the customers' internal
procedures to approve large capital expenditures, budgetary constraints and
the testing and acceptance of new technologies that affect key operations.
While the sales cycle for an initial order of the Company's products is
typically 3 to 6 months and the sales cycle associated with a follow-on large
scale deployment of the Company's products typically extends for another 6 to
9 months or longer, there can be no assurance that the Company will not
experience longer sales cycles in the future. Additionally, sales cycles for
sales of the Company's software products to enterprise application vendors
tend to be longer, ranging from 6 to 24 months or more (not including the
sales and implementation cycles of such vendors' own products, which are
typically significantly longer than the Company's sales and implementation
cycles) and involve convincing the vendor's entire organization that the
Company's products are the appropriate reporting solution for the application.
Certain of the Company's customers have in the past, or may in the future,
experience difficulty completing the initial implementation of the Company's
products. Any difficulties or delays in the initial implementation at the
Company's customer sites or those of its indirect channel partners, could
cause such customers to reject the Company's software or lead to the delay or
non-receipt of future orders for the large-scale deployment of the Company's
products, any of which could have a material adverse effect on the Company's
business, operating results and financial condition.

Management of Growth; Dependence on and Need for Additional Qualified
Personnel

The Company has recently experienced a significant expansion in the number
of its employees, the scope of its operating and financial systems and the
geographic area of its operations. From January 1997 through December 1998,
the Company increased its headcount from 38 to 149 full-time employees.
Furthermore, significant increases in the number of employees are anticipated
during 1999. In particular, the Company currently plans to significantly
expand the number of employees in customer support and sales and marketing.

13

This growth has resulted, and will continue to result, in new and increased
responsibilities for management personnel and may place a strain upon the
Company's management, operating and financial systems and resources. The
Company expects that an expansion of its international operations will lead to
increased financial and administrative demands associated with managing an
increasing number of relationships with foreign partners and customers and
expanded treasury functions to manage foreign currency risks. The Company's
future operating results will also depend on its ability to further develop
indirect channels and expand its support organization to accommodate growth in
the Company's installed base. The failure of the Company to manage its
expansion effectively could have a material adverse effect on the Company's
business, operating results and financial condition.

The Company's success depends to a significant degree upon the efforts of
certain key management, marketing, customer support and research and
development personnel. The Company believes that its future success will
depend in large part upon its continuing ability to attract and retain highly
skilled managerial, sales, marketing, customer support and research and
development personnel. Like other software companies, the Company faces
intense competition for such personnel, and the Company has experienced and
will continue to experience difficulty in recruiting qualified personnel,
particularly in the San Francisco Bay Area, where the employment market for
qualified sales, marketing and engineering personnel is extremely competitive.
There can be no assurance that the Company will be successful in attracting,
assimilating or retaining qualified personnel in the future. The loss of the
services of one or more of the Company's key personnel, particularly the
Company's executive officers, or the failure to attract and retain additional
qualified personnel, could have a material and adverse effect on the Company's
business, operating results and financial condition. The Company has
purchased, and is the beneficiary of, a key man life insurance policy on its
Chief Executive Officer in the amount of $2,000,000.

Failure to Expand and Risks Associated with International Sales and Operations

During 1998, 1997 and 1996, the Company derived 6%, 2% and 6% of its total
revenues, respectively, from sales outside the United States. The Company's
ability to achieve revenue growth in the future will depend in large part on
its success in increasing revenues from international sales. Although the
Company intends to continue to invest significant resources to expand its
sales and support operations outside the United States and to enter additional
international markets, there can be no assurance that such efforts will be
successful. In order to successfully expand international sales, the Company
must establish additional foreign operations, expand its international channel
management and support organizations, hire additional personnel, recruit
additional international distributors and increase the productivity of
existing international distributors. To the extent that the Company is unable
to do so in a timely and cost-effective manner, the Company's business,
operating results and financial condition could be materially adversely
affected.

The Company's international operations are generally subject to a number of
risks, including costs of localizing products for foreign countries, trade
laws and business practices favoring local competition, dependence on local
vendors, compliance with multiple, conflicting and changing government laws
and regulations, longer sales and payment cycles, import and export
restrictions and tariffs, difficulties in staffing and managing foreign
operations, greater difficulty or delay in accounts receivable collection,
foreign currency exchange rate fluctuations, multiple and conflicting tax laws
and regulations and political and economic instability, including recent
economic conditions in Asia. Because substantially all of the Company's
international revenues and costs, with the exception of sales in Japan, have
been denominated to date in U.S. dollars, increases in the value of the United
States dollar could increase the price of the Company's products so that they
become relatively more expensive to customers in the local currency of a
particular country, and result in a reduction in sales and profitability in
that country. The Company believes that an increasing portion of the Company's
revenues and costs will be denominated in foreign currencies. To the extent
such denomination in foreign currencies does occur, gains and losses on the
conversion to U.S. dollars of accounts receivable, accounts payable and other
monetary assets and liabilities arising from international operations may
contribute to fluctuations in the Company's results of operations. Any of the
foregoing factors could have a material adverse

14

effect on the Company's business, operating results and financial condition.
Although the Company may from time to time undertake foreign exchange hedging
transactions to cover a portion of its foreign currency transaction exposure,
the Company does not currently attempt to cover any foreign currency exposure,
and there can be no assurance that the Company will be successful in any
future foreign exchange hedging transactions or that such transactions, if
any, will not have a material adverse effect on the Company's business,
operating results and financial condition.

Year 2000 Readiness

Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit entries in order
to distinguish 21st century dates from 20th century dates. As a result, in
less than a year, computer systems and/or software used by many companies will
need to be upgraded to comply with "Year 2000" requirements. Significant
uncertainty exists in the software industry concerning the potential effects
associated with such issues.

The Company is currently taking steps to address Year 2000 issues in three
areas: (i) the Company's products; (ii); the Company's internal systems
(including information technology systems such as financial systems and non-
information technology systems such as the phone system) and (iii) third party
vendors with whom the Company has a business relationship.

The Company's Year 2000 readiness plan consists of four phases. Phase One
(inventory) consists of identifying all of the Company's systems, products and
relationships that may be impacted by Year 2000. Phase Two (assessment)
involves determining the Company's current state of Year 2000 readiness for
those areas identified in the inventory phase and prioritizing the areas that
need to be fixed based on the importance to the Company's operations. Phase
Three (remediation) will consist of developing a plan to make those areas
identified in the assessment phase Year 2000 ready and implementing such plan.
Phase Four (testing) will consist of testing and validation of Year 2000
readiness for certain mission critical areas as determined by the Company. The
Company is currently in the testing phase with respect to its products and
will continue Year 2000 testing of its products during 1999. The Company is
currently either in the inventory and assessment phase for its internal
systems and third party vendors. The Company currently plans on completing
remediation for these two areas by September 30, 1999. The Company currently
does not have a Year 2000 contingency plan for any area.

While Year 2000 costs incurred to date have not been material, the Company
believes it will continue to incur costs related to Year 2000 readiness.
Furthermore, the Company is currently unable to determine whether or not
future costs associated with achieving Year 2000 readiness will be material.
Additional costs incurred may include but are not limited to, the cost of
manufacturing and distributing free upgrades to products that are not Year
2000 ready, the administrative costs in completing the Year 2000 project and
the cost of fixing any of the Company's internal systems. Costs related to
Year 2000 readiness are expensed as incurred.

Although the Company is dedicating resources toward attaining Year 2000
readiness there can be no assurance that the Company will be successful in its
effort to achieve Year 2000 readiness. For example, the Company, through
ongoing testing of its products to validate Year 2000 readiness, has
discovered Year 2000 related errors in certain products, which have not
compromised the usability or basic functionality of the products, and there
can be no assurance that additional Year 2000 errors or defects will not be
discovered in the Company's current and future products. Any failure by the
Company to make its products Year 2000 ready could result in a decrease in
sales of the Company's products, an increase in the allocation of resources to
address Year 2000 problems of the Company's customers without additional
revenue commensurate with such dedication of resources, or an increase in
litigation costs relating to losses suffered by the Company's customers due to
such Year 2000 problems. In addition, the failure of the Company's internal
systems or third party vendors to be Year 2000 ready could prevent the company
from manufacturing or shipping products, providing customer support and
completing transactions, all of which could have a material adverse affect on
the Company's business, operating results and financial condition

15

Furthermore, the Company believes that the purchasing patterns of customers
and potential customers may be impacted by Year 2000 issues. Many companies
are expending significant resources to correct or patch their current software
systems to make such systems Year 2000 ready. These expenditures may result in
reduced funds available to purchase software products such as those offered by
the Company. The occurrence of any of such events could have a material
adverse effect on the Company's business, results of operations and financial
condition. Additionally, to the extent the Company's products are embedded or
bundled with other companies' products that are not Year 2000 ready, the
Company could be exposed to litigation from such companies' customers, and the
Company's reputation in the marketplace and indirect sales of its products by
the Company's indirect channel partners could be adversely affected, all of
which could result in a material adverse effect on the Company's business,
operating results and financial condition. The Company currently has no plans
to assess the Year 2000 readiness of the products of these companies.

Risk of Software Defects; Product Liability

Software products as complex as those offered by the Company often contain
errors or defects, particularly when first introduced, when new versions or
enhancements are released and when configured to individual customer computing
systems. The Company currently has known errors and defects in its products.
There can be no assurance that, despite testing by the Company, additional
defects and errors, including Year 2000 errors, will not be found in current
versions, new versions or enhancements of its products after commencement of
commercial shipments, any of which could result in the loss of revenues or a
delay in market acceptance and thereby have a material adverse effect on the
Company's business, operating results and financial condition. Furthermore,
there can be no assurance that when the Company's products are deployed
enterprise-wide by customers, the Company's products will meet all of the
expectations and demands of its customers.

Although the Company's license agreements with its customers typically
contain provisions designed to limit the Company's exposure to potential
product liability claims, it is possible that such limitation of liability
provisions may not be effective as a result of existing or future laws or
unfavorable judicial decisions. The Company has not experienced any product
liability claims to date. However, the sale and support of the Company's
products may entail the risks of such claims, which are likely to be
substantial in light of the use of the Company's products in business-critical
applications. A product liability claim brought against the Company could have
a material adverse effect on the Company's business, operating results and
financial condition.

Limited Protection of Proprietary Technology; Risks of Infringement

The Company has one issued U.S. patent and one U.S. patent pending and
relies primarily on a combination of copyright and trademark laws, trade
secrets, confidentiality procedures and contractual provisions to protect its
proprietary technology. For example, the Company licenses its software
pursuant to shrinkwrap or signed license agreements, which impose certain
restrictions on licensees' ability to utilize the software. In addition, the
Company seeks to avoid disclosure of its intellectual property, including
requiring those persons with access to the Company's proprietary information
to execute confidentiality agreements with the Company and restricting access
to the Company's source code. The Company seeks to protect its software,
documentation and other written materials under trade secret and copyright
laws, which afford only limited protection.

Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or
to obtain and use information that the Company regards as proprietary.
Policing unauthorized use of the Company's products is difficult, and while
the Company is unable to determine the extent to which piracy of its software
products exists, software piracy can be expected to be a persistent problem.
In addition, the laws of many countries do not protect the Company's
proprietary rights to as great an extent as do the laws of the United States.
There can be no assurance that the Company's means of protecting its
proprietary rights will be adequate or that the Company's competitors will not
independently develop similar technology. Any failure by the Company to
meaningfully protect its intellectual property could have a material adverse
effect on the Company's business, operating results and financial condition.

16

To date, the Company has not been notified that its products infringe the
proprietary rights of third parties, but there can be no assurance that third
parties will not claim infringement by the Company with respect to current or
future products. The Company expects enterprise reporting software product
developers will increasingly be subject to infringement claims as the number
of products and competitors in the Company's industry segment grows and the
functionality of products in different industry segments overlaps. Any such
claims, with or without merit, could be time-consuming to defend, result in
costly litigation, divert management's attention and resources, cause product
shipment delays or require the Company to enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to the Company or at all. A successful claim of
product infringement against the Company and the failure or inability of the
Company to license the infringed or similar technology could have a material
adverse effect upon the Company's business, operating results and financial
condition.

Risk of Changes in Accounting Standards

Statement of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition" was
issued in October 1997 by the American Institute of Certified Public
Accountants ("AICPA") and amended by Statement of Position 98-4 ("SOP 98-4").
In December 1998, AICPA issued Statement of Position 98-9 ("SOP 98-9") which
amended SOP 98-4. The Company adopted SOP 97-2 effective January 1, 1998.
Based upon its reading and interpretation of SOP 97-2, SOP 98-4 and SOP 98-9,
the Company believes its current revenue recognition policies and practices
are materially consistent with SOP 97-2, SOP 98-4 and SOP 98-9. However, full
implementation guidelines for SOP 98-9 have not yet been issued. Once
available, such implementation guidance could lead to unanticipated changes in
the Company's current revenue accounting practices, and such changes could
materially adversely affect the Company's future revenue and earnings. Such
implementation guidance may necessitate significant changes in the Company's
business practices in order for the Company to continue to recognize license
fee revenue upon delivery of its software products. Such changes may have a
material adverse effect on the Company's business, operating results and
financial condition.

Potential Volatility of Stock Price

The market price of shares of the Company's common stock has been and is
likely to continue to be highly volatile and may be significantly affected by
factors such as actual or anticipated fluctuations in the Company's operating
results, announcements of technological innovations, new products or new
contracts by the Company or its competitors, developments with respect to
copyrights or proprietary rights, conditions and trends in the software and
other technology industries, changes in corporate purchasing of enterprise
application software, the Year 2000 issue, adoption of new accounting
standards affecting the software industry, changes in financial estimates by
securities analysts, changes in the economic conditions in the United States
and abroad, general market conditions, the purchase or sale of the Company's
common stock by "day traders" and other factors. In addition, the stock market
has from time to time experienced significant price and volume fluctuations
that have particularly affected the market prices for the securities of
technology companies. In the past, following periods of volatility in the
market price of a particular company's securities, securities class action
litigation has often been brought against such company. There can be no
assurance that such litigation will not occur in the future with respect to
the Company. Such litigation could result in substantial costs and a diversion
of management's attention and resources, which could have a material adverse
effect upon the Company's business, operating results and financial condition.

Control of Company by Existing Stockholders

As of December 31, 1998, the executive officers and directors of the
Company and their affiliates in the aggregate beneficially owned approximately
54.2% of the outstanding common stock of the Company, assuming no exercise of
outstanding stock options. As a result, these stockholders will be able to
exercise control over all matters requiring stockholder approval, including
the election of directors and approval of significant corporate transactions.
Such concentration of ownership may have the effect of delaying or preventing
a change in control of the Company.

17

Effect of Certain Charter Provisions; Anti-Takeover Effects of Certificate of
Incorporation, Bylaws and Delaware Law

The Company's Certificate of Incorporation, as amended and restated (the
"Certificate of Incorporation"), and Bylaws, as amended and restated
("Bylaws"), contain certain provisions that may have the effect of
discouraging, delaying or preventing a change in control of the Company or
unsolicited acquisition proposals that a stockholder might consider favorable,
including provisions authorizing the issuance of "blank check" preferred stock
and eliminating the ability of stockholders to act by written consent. In
addition, certain provisions of Delaware law and the Company's 1998 Equity
Incentive Plan may also have the effect of discouraging, delaying or
preventing a change in control of the Company or unsolicited acquisition
proposals. The anti-takeover effect of these provisions may also have an
adverse effect on the public trading price of the Company's common stock.

Shares Eligible for Future Sale

In January 1999, due to the expiration of (i) lock-up agreements between
certain stockholders of the Company and the representatives of the
Underwriters of the Company's initial public offering and (ii) contractual
obligations between certain stockholders and the Company, approximately
10,600,000 shares of the Company's common stock became eligible for sale;
provided however that certain of these shares shall be subject to the volume
and manner of sale restrictions under Rule 144 and certain of these shares
will not be eligible for sale until the underlying stock option associated
with such shares vests. Sales of a substantial number of shares of the
Company's common stock could adversely affect the market price of the common
stock and could impair the Company's ability to raise capital through the sale
of equity securities.

ITEM 2. PROPERTIES

The Company's principal executive offices are located in San Mateo,
California where the Company leases approximately 25,000 square feet under
leases that expire at various times through May 2002. The Company also leases
space (typically less than 2,000 square feet) in other geographic locations
throughout the United States for sales personnel.

ITEM 3. LEGAL PROCEEDINGS

The Company is engaged in certain legal action arising in the ordinary
course of business. The Company believes it has adequate legal defenses and
believes that the ultimate outcome of this action will not have a material
effect on the Company's financial position or results of operations, although
there can be no assurance as to the outcome of such litigation.

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

The Company did not submit any matters to a vote of security holders during
the fourth quarter of the fiscal year ended December 31, 1998.

18

PART II

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

On July 22, 1998, the Company completed it's initial public offering of
3,450,000 shares of its common stock pursuant to a Registration Statement on
Form S-1 (File No. 333-55741) which was declared effective on July 17, 1998 at
a price of $11.00 per share. Of the 3,450,000 shares of common stock offered,
3,140,000 shares were sold by the Company and 310,000 shares were sold by
selling stockholders. The offering was underwritten by Goldman, Sachs & Co.,
and Credit Suisse First Boston. The Company received approximately $30.9
million from the initial public offering, net of underwriting discounts,
commissions and other offering costs and expenses. The Company's common stock
is traded on the Nasdaq National Market under the symbol ACTU. The Company
completed its initial public offering and commenced trading on July 17, 1998.
The following table sets forth the high and low closing sales prices of the
Company's common stock from July 17, 1998 to December 31, 1998 as reported by
the Nasdaq National Market for the periods indicated.

Fiscal 1998 High Low
----------- ------ -----

Third Quarter*................................................ $20.44 $8.25
Fourth Quarter................................................ $19.75 $6.63

- --------
* Commencing July 17, 1998

As of January 31, 1999, there were approximately 140 stockholders of record
(which number does not include the number of stockholders whose shares are
held by a brokerage house or clearing agency, but does include such brokerage
house or clearing agency as one record holder). The company believes it has in
excess of 2,000 beneficial owners of its of its common stock.

The Company has never paid a cash dividend on its common stock and does not
intend to pay cash dividends on its common stock in the foreseeable future.

The Company has used the net proceeds from the offering to fund working
capital and general corporate purposes. The funds that are not being used to
fund short-term needs have been placed in temporary investments pending future
use.

19

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations, and with the Financial Statements and Notes thereto which are
included elsewhere in this Form 10-K. The statement of operations data for the
year ended December 31, 1998, 1997 and 1996 and the balance sheet data at
December 31, 1998 and 1997 are derived from the audited financial statements
included elsewhere in this Form 10-K. The statement of operations data for the
year ended December 31, 1995 and the balance sheet data as of December 31,
1996 and 1995 are derived from audited financial statements that are not
included in this Form 10-K. The statement of operations data for the period
from inception (November 1993) to December 31, 1994 and the balance sheet data
at December 31, 1994 are derived from unaudited financial statements not
included in this Form 10-K. Historical results are not necessarily indicative
of results in the future.

Inception
Years Ended December 31, Through
---------------------------------- December 31,
1998 1997 1996 1995 1994
------- ------- ------- ------- ------------
Statement of Operations Data: (in thousands, except per share data)

Revenues:
License fees................. $17,750 $ 7,542 $ 343 $ -- $ --
Services..................... 4,122 1,976 308 22 --
------- ------- ------- ------- ------
Total revenues............. 21,872 9,518 651 22 --
------- ------- ------- ------- ------
Cost of revenues:
License fees................. 1,012 647 171 -- --
Services..................... 3,171 1,263 305 53 --
------- ------- ------- ------- ------
Total cost of revenues..... 4,183 1,910 476 53 --
------- ------- ------- ------- ------
Gross profit (loss)........... 17,689 7,608 175 (31) --
Operating expenses:
Sales and marketing.......... 11,658 7,366 2,965 847 118
Research and development..... 7,373 6,213 2,731 1,883 635
General and administrative... 2,563 1,317 603 240 102
------- ------- ------- ------- ------
Total operating expenses... 21,594 14,896 6,299 2,970 855
------- ------- ------- ------- ------
Loss from operations.......... (3,905) (7,288) (6,124) (3,001) (855)
Equity in losses of
affiliate.................... -- (36) (25) -- --
Interest and other income,
net.......................... 739 82 90 166 18
------- ------- ------- ------- ------
Net loss...................... $(3,166) $(7,242) $(6,059) $(2,835) $ (837)
======= ======= ======= ======= ======
Basic and diluted net loss per
share(1)..................... $ (0.41) $ (2.48) $ (2.21) $ (1.09) $(0.32)
======= ======= ======= ======= ======
Weighted average shares
outstanding used in per share
calculation(1)............... 7,755 2,920 2,741 2,591 2,580
======= ======= ======= ======= ======
Pro forma basic and diluted
net loss per share
(unaudited) (1)(2)........... $ (0.28) $ (0.78)
======= =======
Shares used in computing pro
forma basic and diluted net
loss per share (unaudited)
(2).......................... 11,388 9,290
======= =======

December 31,
------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- ------------
Balance Sheet Data: (in thousands)

Cash, cash equivalents and
short-term investments....... $32,730 $ 3,191 $ 1,040 $ 1,252 $ 59
Working capital (deficit)..... 24,416 (3,318) (1,564) 637 3,628
Total assets.................. 39,798 7,587 3,664 1,710 3,690
Long-term obligations, less
current portion.............. -- 124 213 144 --
Stockholders' equity
(deficit).................... 26,034 (2,202) (1,191) 870 3,683

- --------
(1) See Note 1 of Notes to Financial Statements for an explanation of the
method used to determine the number of shares used in computing net loss
per share.

(2) Pro forma basic and diluted net loss per share reflects the conversion of
all outstanding preferred stock into common stock (using the if-converted
method) from the original date of issuance.

20

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

The statements contained in this Report on Form 10-K that are not purely
historical statements are forward-looking statements within the meaning of
Section 21E of the Securities and Exchange Act of 1934, including statements
regarding the Company's expectations, beliefs, hopes, intentions or strategies
regarding the future. These forward-looking statements involve risks and
uncertainties. Actual results may differ materially from those indicated in
such forward-looking statements. See "Risk Factors that May Affect Future
Results" and "Special Note Regarding Forward-Looking Statements" in this
Report on Form 10-K and the risks discussed in other reports filed by the
Company from time to time with the Securities and Exchange Commission.

Overview

The Company is a leading provider of enterprise reporting solutions that
enable organizations to systematically extract, publish and disseminate
information across distributed computing environments. The Company began
shipping its Actuate Reporting System in January 1996, and the Company's most
recent version of the Actuate Reporting System, Version 3.2, began shipping in
October 1998. The Company had net losses of $3.2 million, $7.2 million and
$6.1 million in 1998, 1997 and 1996, respectively.

The Company sells software products through two primary means: (i) directly
to end user customers through its direct sales force and (ii) through indirect
channel partners such as enterprise application vendors, resellers and
distributors. Enterprise application vendors generally integrate the Company's
products with their applications and either embed them into their products or
resell them with their products. The Company's other indirect channel partners
resell the Company's software products to end user customers. The Company's
revenues are derived primarily from license fees for software products and, to
a lesser extent, fees for services relating to such products, including
software maintenance and support, training and consulting.

License fee revenues from sales of software products directly to end user
customers are recognized as revenue after execution of a license agreement or
receipt of a definitive purchase order and shipment of the product, provided
no significant vendor obligations remain and collection of the resulting
receivables is deemed probable. The Company's products do not require
significant customization. The majority of license fee revenues from direct
sales to end user customers is from sales of specific individual products to
such customers and is recognized upon shipment of the applicable product.
Advance payments from end user customers, in arrangements in which the end
user customer has the right to future unspecified products, are deferred and
recognized as revenue ratably over the estimated term of the period, typically
one year, during which the end user is entitled to receive the products. These
license arrangements generally have a term of between one and five years,
which can be extended upon mutual agreement by the parties, are terminable by
either party in the event of a material breach of the license agreement by the
other party if such breach is not cured within a specified cure period,
contain certain representations, warranties and indemnities and provisions
designed to limit the parties' liability under the license agreement. In
addition, license arrangements with enterprise application vendors typically
require that such vendors only license the Company's products to their
customers for use with such vendor's application. Furthermore, license
arrangements with international distributors give such international
distributors the exclusive right to distribute the Company's products to end
user customers headquartered in specified territories.

License arrangements with indirect channel partners such as enterprise
application vendors, resellers and distributors generally take the form of
either (i) fixed price arrangements in which the contracting entity has the
right to the unlimited usage, unspecified future products, and resale of the
licensed software for a specified term and pursuant to which license fee
revenue is deferred and recognized on a straight-line basis over the term of
the license agreement or (ii) arrangements pursuant to which a license fee is
paid to the Company, which the Company recognizes as revenue based on the
enterprise application vendor's sell-through of the Company's product.

21

Service revenues are primarily comprised of revenue from maintenance
agreements, training and consulting fees. Revenue from maintenance agreements
is deferred and recognized on a straight-line basis as service revenue over
the term of the related agreement, which is typically one year. Service
revenues from training and consulting services are recognized upon completion
of the work to be performed.

Statement of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition" was
issued in October 1997 by the American Institute of Certified Public
Accountants ("AICPA") and amended by Statement of Position 98-4 ("SOP 98-4").
In December 1998, AICPA issued Statement of Position 98-9 ("SOP 98-9") which
amended SOP 98-4. The Company adopted SOP 97-2 effective January 1, 1998.
Based upon its reading and interpretation of SOP 97-2, SOP 98-4 and SOP 98-9,
the Company believes its current revenue recognition policies and practices
are materially consistent with SOP 97-2, SOP 98-4 and SOP 98-9. However, full
implementation guidelines for SOP 98-9 have not yet been issued. Once
available, such implementation guidance could lead to unanticipated changes in
the Company's current revenue accounting practices, and such changes could
materially adversely affect the Company's future revenue and earnings. Such
implementation guidance may necessitate significant changes in the Company's
business practices in order for the Company to continue to recognize license
fee revenue upon delivery of its software products. Such changes may have a
material adverse effect on the Company's business, operating results and
financial condition.

The Company to date has sold its products internationally primarily through
distributors located in Europe and Japan. During 1998, 1997 and 1996, the
Company derived 6%, 2% and 6% of its total revenues, respectively, from sales
outside the United States. The Company's ability to achieve revenue growth in
the future will depend in large part on its success in increasing revenues
from international sales. Although the Company intends to continue to invest
significant resources to expand its sales and support operations outside the
United States and to enter additional international markets, there can be no
assurance that such efforts will be successful. In order to successfully
expand international sales, the Company must establish additional foreign
operations, expand its international channel management and support
organizations, hire additional personnel, recruit additional international
distributors and increase the productivity of existing international
distributors. To the extent that the Company is unable to do so in a timely
and cost-effective manner, the Company's business, operating results and
financial condition could be materially adversely affected. The Company is a
party to agreements with its Japanese distributor and the parent company of
its French, German and United Kingdom distributors, under which the Company is
likely to (and under certain circumstances, would bear substantial financial
penalties if it did not) acquire such International Distributors at some point
in the future. Such an acquisition could be triggered by the parent company of
the European distributors at its discretion, and by the Japanese distributor
at its discretion beginning in April 1999. In connection with any such
acquisition, the Company would be required to pay a purchase price (equal to
at least such distributor's last twelve months' revenues as of the date of
such acquisition) in registered shares of the Company's Common Stock or in
cash, which may have the effect of diluting existing stockholders, adversely
affecting the price of the Company's Common Stock or reducing the available
cash for working capital and other purposes. At present, the Company is unable
to predict the accounting treatment of any such acquisitions, in part because
it is unclear what accounting regulations, conventions or interpretations may
prevail in the future. If any such acquisition is accounted for by the Company
as a "purchase" transaction (as opposed to a pooling of interests), it could
cause the Company to recognize substantial goodwill and other intangible asset
amortization charges in the quarters and fiscal years immediately following
the date on which such an acquisition is effected, depending upon the purchase
price paid by the Company for such acquisition. As a result, if the
acquisition is accounted for as a "purchase" transaction, it could have a
material adverse effect on reported earnings per share during these periods in
which the Company records the amortization of intangible assets acquired.
Finally, any such acquisition would require substantial management attention,
impose costs on the Company associated with integrating the acquired entities,
require the Company to coordinate sales and marketing efforts with the
acquired companies and subject the Company to additional, and potentially
substantial, regulation as an owner of foreign subsidiaries, any of which
could have a material adverse effect on the business, operating results and
financial condition of the Company.

The Company's limited operating history makes the prediction of future
operating results difficult and unreliable. In addition, given its limited
operating history and recent rapid growth, historical growth rates in the

22

Company's revenues should not be considered indicative of future revenue
growth rates or operating results. There can be no assurance that any of the
Company's business strategies will be successful or that the Company will be
able to achieve profitability on a quarterly or annual basis.

Results of Operations

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

Year Ended
December 31,
------------------
1998 1997 1996
---- ---- ----

Revenues:
License fees............................................. 81% 79% 53%
Services................................................. 19 21 47
--- --- ----
Total revenues......................................... 100 100 100
--- --- ----
Cost of revenues:
License fees............................................. 5 7 26
Services................................................. 14 13 47
--- --- ----
Total cost of revenues................................. 19 20 73
--- --- ----
Gross profit............................................... 81 80 27
--- --- ----
Operating expenses:
Sales and marketing...................................... 53 78 455
Research and development................................. 34 65 420
General and administrative............................... 12 14 93
--- --- ----
Total operating expenses............................... 99 157 968
--- --- ----
Loss from operations....................................... (18) (77) (941)
Equity in losses of affiliate.............................. -- -- (4)
Interest and other income (expense), net................... 3 1 14
--- --- ----
Net loss................................................... (15)% (76)% (931)%
=== === ====

Revenues

The Company's revenues are derived from license fees and services, which
include software maintenance and support, training and consulting. Total
revenues increased from $651,000 in fiscal 1996 to $9.5 million in fiscal 1997
and by 130% to $21.9 million in fiscal 1998.

License Fees. Revenues from license fees increased from $343,000 in fiscal
1996 to $7.5 million in fiscal 1997 and by 135% to $17.8 million in fiscal
1998. The increases were due primarily to increased sales to new customers and
increased follow-on sales to existing customers and, to a lesser extent,
increases in average selling prices for the Company's products. Revenues from
license fees from the Company's indirect channel partners, including
enterprise application vendors, resellers and distributors, accounted for 41%,
38% and 50% of total revenues from license fees for 1998, 1997 and 1996,
respectively.

Services. Revenues from services increased from $308,000 in fiscal 1996 to
$2.0 million in fiscal 1997 and by 109% to $4.1 million in fiscal 1998. The
increases were due primarily to increases in maintenance and support and, to a
lesser extent, increases in training and consulting revenues related to
increases in the Company's installed customer base.

23

Cost of Revenues

License Fees. Cost of revenues from license fees consists primarily of
product packaging, documentation and production costs, and related personnel
and overhead allocations. Cost of revenues from license fees increased from
$171,000 in fiscal 1996 to $647,000, or 9% of revenues from license fees, in
fiscal 1997 and to $1.0 million, or 6% of revenues from license fees, in
fiscal 1998. The increases in absolute dollars were primarily due to the
increase in the number of licenses sold. The decreases in cost of license fees
revenues as a percentage of license fees revenues were due to improved
leverage in production and personnel costs. The Company expects cost of
revenues from license fees to continue to grow in absolute dollars due to
increasing licensing activity.

Services. Cost of services revenues consists primarily of personnel and
related costs, facilities costs incurred in providing software maintenance and
support, training and consulting services, as well as third-party costs
incurred in providing training and consulting services. Cost of services
revenues increased from $305,000 in fiscal 1996 to $1.3 million, or 64% of
services revenues, in fiscal 1997 and to $3.2 million, or 77% of services
revenues, in fiscal 1998. The increases in absolute dollars were primarily due
to increases in customer support personnel and increased third-party costs to
support the growing needs of the Company's customers. The increase in cost of
services as a percentage of services revenues in fiscal 1998 was due to costs
of expanding the Company's support and maintenance organization increasing at
a faster rate than services revenues. The Company expects cost of services to
continue to grow in absolute dollars as the Company continues to hire
additional customer support personnel.

Operating Expenses

Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses earned by sales and marketing personnel,
promotional expenses, travel and facility expenses. Sales and marketing
expenses increased by 148% from $3.0 million in fiscal 1996 to $7.4 million,
or 78% of total revenues, in fiscal 1997 and by 58% to $11.7 million, or 53%
of total revenues, in fiscal 1998. The increases in absolute dollars were
primarily due to the hiring of additional sales and marketing personnel,
higher sales commissions associated with increased revenues and increased
marketing activities. The decrease in sales and marketing expenses as a
percentage of total revenues was due to revenues increasing at a faster rate
than sales and marketing expenses. The Company expects that sales and
marketing expense will continue to increase in absolute dollars in future
periods as the Company continues to hire additional sales and marketing
personnel, establish additional sales offices, expand international
distribution channels and increase promotional activities.

Research and Development. Research and development expenses are expensed as
incurred and consist primarily of personnel and related costs associated with
the development of new products, the enhancement of existing products, quality
assurance and testing. Research and development expenses increased by 127%
from $2.7 million in fiscal 1996 to $6.2 million, or 65% of total revenues, in
fiscal 1997 and by 19% to $7.4 million, or 34% of total revenues, in fiscal
1998. The increases in absolute dollars were primarily due to increased
personnel and related costs associated with the development of new products,
the enhancement of existing products, quality assurance and testing,
depreciation of capital expenditures and facilities costs. The decreases in
research and development expenses as a percentage of total revenues were due
to revenues increasing at a faster rate than research and development
expenses. The Company believes that a significant level of investment in
product development is essential to maintain product leadership and
anticipates research and development expenses to increase in absolute dollars
in future periods for developing new products and providing enhancements to
current products.

General and Administrative. General and administrative expenses consist
primarily of personnel and related costs for finance, human resources,
information systems and general management, as well as legal and accounting
expenses. General and administrative expenses increased by 118% from $603,000
in fiscal 1996 to $1.3 million, or 14% of total revenues, in fiscal 1997 and
by 95% to $2.6 million, or 12% of total revenues, in fiscal 1998. The
increases in absolute dollars were primarily due to increases in personnel and
related costs and professional fees necessary to manage and support the
Company's growth and facilities expansion. The decreases

24

as a percentage of total revenues were due to revenues increasing at a faster
rate than general and administrative expenses. The Company believes that
general and administrative expenses will continue to increase in absolute
dollars in future periods as the Company hires additional personnel to support
expanded operations.

Deferred Compensation. The Company recorded deferred compensation of
approximately $197,000 and $619,000 during fiscal 1997 and 1998, respectively,
and the Company recorded amortization expense of approximately 90,000 and
$333,000, respectively, during these periods. These amounts represent the
difference between the exercise price of certain stock option grants and the
deemed fair value of the Company's common stock at the time of such grants.
All such deferred compensation expense has been included in general and
administrative expenses. At December 31, 1998, the Company has a total of
approximately $393,000 remaining to be amortized over the corresponding
vesting period of each respective option, generally five years.

Interest and Other Income, Net

Interest and other income, net, is comprised primarily of interest income
earned by the Company on its cash and short-term investments. Interest and
other income, net, decreased from a net income of $90,000 in fiscal 1996 to
$82,000 in fiscal 1997, and increased to $739,000 in fiscal 1998. The increase
in fiscal 1998 was primarily the result of interest income earned on
investment of $30.9 million in net proceeds from the Company's initial public
offering in July 1998.

Equity in Losses of Affiliate

Equity in losses of affiliate totaled $25,000 and $36,000 during 1996 and
1997, respectively. In 1996, the Company made an equity investment of
approximately $95,000 in a Japanese company ("Actuate Japan"), which
represents approximately 8.3% of the outstanding voting stock of Actuate
Japan. This investment is accounted for on the equity basis due to the
Company's ability to exercise significant influence over Actuate Japan. During
1996 and 1997 the Company loaned a total of $260,000 to Actuate Japan. At
December 31, 1998, the remaining loan balance was $94,000. To date, Actuate
Japan has been primarily funded by investors other than the Company. The
Company believes that such investments will continue until the stage at which
Actuate Japan generates cash from its own operations. The Company will
continue to assess the recoverability of the remaining loan balance.

Provision for Income Taxes

As of December 31, 1998, the Company had federal net operating loss
carryforwards of approximately $15.6 million. The Company also had federal
research and development tax credit carryforwards of approximately $800,000 as
of December 31, 1998. The net operating loss and credit carryforwards will
expire beginning in 2008 through 2018, if not utilized.

Utilization of the net operating loss carryforwards and research and
development tax credit carryforwards may be subject to a substantial annual
limitation due to the "change in ownership" provisions of the Internal Revenue
Code of 1986 and similar state provisions. The annual limitation may result in
the expiration of net operating losses and credits before utilization. See
Note 10 of Notes to Financial Statements.

Liquidity and Capital Resources

Since inception, the Company has funded its operations primarily through
cash from operations and approximately $14.3 million in net proceeds from the
private sales of preferred stock. In July 1998, the Company completed its
initial public offering whereby it sold 3,140,000 shares of its common stock.
The net proceeds to the Company, after deducting expenses relating to the
offering, were $30.9 million. Net cash used in operating activities in fiscal
1998, 1997 and 1996 was $138,000, $2.8 million and $3.9 million, respectively.

As of December 31, 1998, the Company had cash and cash equivalents of $21.8
million and short-term investments of $10.9 million in highly liquid, high
quality debt securities and a certificate of deposit classified as

25

available-for-sale. In addition, the Company maintains a bank line of credit
which provides for up to $5.0 million in borrowings. The Company can borrow up
to 80% of eligible accounts receivable against the line of credit. The
interest rate on any borrowed amounts is the prime rate plus 2.25%. This line
of credit requires the Company to comply with various financial covenants,
prohibits the Company from paying dividends and requires the Company to
deposit $3.0 million of the proceeds of its initial public offering with the
bank through May 25, 1999, the maturity date of the line of credit. The
Company currently has no borrowings under the line of credit.

Net cash used in investing activities was $11.8 million, $1.3 million and
$379,000 in fiscal 1998, 1997 and 1996, respectively. Except for purchases of
short-term investments of $11 million in fiscal 1998, net cash used in
investing activities consists primarily of purchases of property and
equipment.

Net cash provided by financing activities was $30.8 million, $6.0 million
and $4.1 million in fiscal 1998, 1997 and 1996, respectively, consisting
primarily of proceeds from the Company's initial public offering of common
stock in fiscal 1998 and proceeds from private sales of preferred stock in
fiscal 1997 and 1996.

The Company believes that its current cash balances and any cash generated
from operations and from available debt financing, will be sufficient to meet
the Company's cash needs for working capital and capital expenditures at least
the next twelve months. Thereafter, if cash generated from operations is
insufficient to satisfy the Company's liquidity requirements, the Company may
seek to sell additional equity or obtain credit facilities. The sale of
additional equity could result in additional dilution to the Company's
stockholders. A portion of the Company's cash may be used to acquire or invest
in complementary businesses, including the acquisition of the Company's
European and Japanese distributors, or products or to obtain the right to use
complementary technologies. From time to time, in the ordinary course of
business, the Company evaluates potential acquisitions of such businesses,
products or technologies. The Company has no current commitments, and is not
currently engaged in any negotiations with respect to any such transaction.

Year 2000 Readiness

Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit entries in order
to distinguish 21st century dates from 20th century dates. As a result, in
less than a year, computer systems and/or software used by many companies will
need to be upgraded to comply with "Year 2000" requirements. Significant
uncertainty exists in the software industry concerning the potential effects
associated with such issues.

The Company is currently taking steps to address Year 2000 issues in three
areas: (i) the Company's products; (ii); the Company's internal systems
(including information technology systems such as financial systems and non-
information technology systems such as the phone system) and (iii) third party
vendors with whom the Company has a business relationship.

The Company's Year 2000 readiness plan consists of four phases. Phase One
(inventory) consists of identifying all of the Company's systems, products and
relationships that may be impacted by Year 2000. Phase Two (assessment)
involves determining the Company's current state of Year 2000 readiness for
those areas identified in the inventory phase and prioritizing the areas that
need to be fixed based on the importance to the Company's operations. Phase
Three (remediation) will consist of developing a plan to make those areas
identified in the assessment phase Year 2000 ready and implementing such plan.
Phase Four (testing) will consist of testing and validation of Year 2000
readiness for certain mission critical areas as determined by the Company. The
Company is currently in the testing phase with respect to its products and
will continue Year 2000 testing of its products during 1999. The Company is
currently either in the inventory and assessment phase for its internal
systems and third party vendors. The Company currently plans on completing
remediation for these two areas by September 30, 1999. The Company currently
does not have a Year 2000 contingency plan for any area.

While Year 2000 costs incurred to date have not been material, the Company
believes it will continue to incur costs related to Year 2000 readiness.
Furthermore, the Company is currently unable to determine whether

26

or not future costs associated with achieving Year 2000 readiness will be
material. Additional costs incurred may include but are not limited to, the
cost of manufacturing and distributing free upgrades to products that are not
Year 2000 ready, the administrative costs in completing the Year 2000 project
and the cost of fixing any of the Company's internal systems. Costs related to
Year 2000 readiness are expensed as incurred.

Although the Company is dedicating resources toward attaining Year 2000
readiness there can be no assurance that the Company will be successful in its
effort to achieve Year 2000 readiness. For example, the Company, through
ongoing testing of its products to validate Year 2000 readiness, has
discovered Year 2000 related errors in certain products, which have not
compromised the usability or basic functionality of the products, and there
can be no assurance that additional Year 2000 errors or defects will not be
discovered in the Company's current and future products. Any failure by the
Company to make its products Year 2000 ready could result in a decrease in
sales of the Company's products, an increase in the allocation of resources to
address Year 2000 problems of the Company's customers without additional
revenue commensurate with such dedication of resources, or an increase in
litigation costs relating to losses suffered by the Company's customers due to
such Year 2000 problems. In addition, the failure of the Company's internal
systems or third party vendors to be Year 2000 ready could prevent the company
from manufacturing or shipping products, providing customer support and
completing transactions, all of which could have a material adverse affect on
the Company's business, operating results and financial condition

Furthermore, the Company believes that the purchasing patterns of customers
and potential customers may be impacted by Year 2000 issues. Many companies
are expending significant resources to correct or patch their current software
systems to make such systems Year 2000 ready. These expenditures may result in
reduced funds available to purchase software products such as those offered by
the Company. The occurrence of any of such events could have a material
adverse effect on the Company's business, results of operations and financial
condition. Additionally, to the extent the Company's products are embedded or
bundled with other companies' products that are not Year 2000 ready, the
Company could be exposed to litigation from such companies' customers, and the
Company's reputation in the marketplace and indirect sales of its products by
the Company's indirect channel partners could be adversely affected, all of
which could result in a material adverse effect on the Company's business,
operating results and financial condition. The Company currently has no plans
to assess the Year 2000 readiness of the products of these companies.

Recent Accounting Pronouncements

In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities", which will be effective for our fiscal
year 2000. This statement establishes accounting and reporting standards
requiring that every derivative instrument, including certain derivative
instruments imbedded in other contracts, be recorded in the balance sheet as
either an asset or liability measured at its fair value. The statement also
requires that changes in the derivative's fair value be recognized in earnings
unless specific hedge accounting criteria are met. The Company believes the
adoption of SFAS 133 will not have a material effect on the financial
statements.

In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position, or "SOP" 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires
that entities capitalize certain costs related to internal-use software once
certain criteria have been met. The Company is required to implement SOP 98-1
for the year ending December 31, 1999. Adoption of SOP-98-1 is expected to
have no material impact on the Company's financial condition or results of
operations.

In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities." SOP 98-5, which is effective for fiscal years beginning after
December 15, 1998, provides guidance on the financial reporting of start-up
costs and organization costs. It requires costs of start-up activities and
organization costs to be expensed as incurred. As we have expensed these costs
historically, the adoption of this standard is not expected to have a
significant impact on our results of operations, financial position or cash
flows.

27

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

During 1998, 1997 and 1996, the Company derived 6%, 2% and 6% of its total
revenues, respectively, from sales outside the United States. Because
substantially all of the Company's international revenues and costs, with the
exception of sales in Japan, have been denominated to date in U.S. dollars,
the Company's expenses to market risk with respect to fluctuations in the
relative value of currencies is limited. However, increases in the value of
the U.S. dollar could increase the price of the Company's products so that
they become relatively more expensive to customers in the local currency of a
particular country and result in a reduction in sales and profitability in
that country.

The primary objective of the Company's investment activities is to preserve
principal while at the same time maximizing yields without significantly
increasing risk. To achieve this objective, the Company invests in highly
liquid and high quality debt securities. To minimize the exposure due to
adverse shift in the interest rates the Company invests in short-term
securities and maintains an average maturity of one year or less.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and supplementary data required by this Item 8 are
listed in Item 14(a)(1) and begin at page F-1 of this Report.

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

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information regarding Directors and Executive Officers of the Company
is incorporated herein by reference from the section entitled "Election of
Directors" of the Company's definitive Proxy Statement (the "Proxy Statement")
to be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934,
as amended, for the registrants' 1999 Annual Meeting of Stockholders. The
Proxy Statement is anticipated to be filed within 120 days after the end of
the registrant's fiscal year ended December 31, 1998.

ITEM 11. EXECUTIVE COMPENSATION

Information regarding executive compensation is incorporated herein by
reference from the section entitled "Executive Compensation and Related
Information" of the Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information regarding security ownership of certain beneficial owners and
management is incorporated herein by reference from the section entitled
"Stock Ownership of Certain Beneficial Owners and Management" of the Proxy
Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information regarding certain relationships and related transactions is
incorporated herein by reference from the section entitled "Certain
Relationships and Related Transactions" of the Proxy Statement.

28

PART IV

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

(a)(1) Financial Statements

See Index on Page F-1.

(a)(2) Financial Statement Schedules

Schedules have been omitted because the information required to be set forth
therein is not applicable or is readily available in the financial statements
or notes thereto.

(a)(3) Exhibits

Exhibit No. Description
----------- -----------

3.1 (1) Form of Second Amended and Restated Certificate of
Incorporation.
3.2 (1) Form of Bylaws of the Registrant.
4.1 (1) Reference is made to Exhibits 3.1 and 3.2.
4.2 (1) Specimen Common Stock Certificate.
10.1 (1) Form of Indemnification Agreement.
10.2 (1) 1994 Stock Option Plan, as amended.
10.3 (1) 1998 Equity Incentive Plan.
10.4 (1) 1998 Employee Stock Purchase Plan.
10.5 (1) 1998 Non-Employee Directors Option Plan.
10.6 (1) Office Lease, as amended, between the Company and 999 BW
Corporation dated March 27, 1995.
10.7 (2) Amendment No. 7 to Office Lease between the Company and Spieker
Properties, L.P. dated September 8, 1998.
10.8 (1) Sublease Agreement between the Company and Cisco Systems, Inc.
dated January 15, 1998.
10.9 (1) Promissory Note between the Company and Actuate Japan, Co., Ltd.
dated December 27, 1997.
10.10 (1) Business Loan Agreement between the Company and Silicon Valley
Bank, dated May 26, 1998.
10.11 (1) Share Purchase Agreement, as amended, between the Company and
Schroder Ventures French Enterprise Fund L.P.I., Schroder
Ventures French Enterprise Fund UKLP, SUK VFIV Nominees Limited,
Michael Berman, Pierre Braud , Patrick Chancerelle Giles Vliegen
and Telephos Vastgoed B.V., dated September 25, 1997.
10.12 (1) Stockholders Agreement between the Company and Air Co., Ltd.,
Toshiba Information Systems Corporation, Computer Institute of
Japan, Ltd., Sumitomo Metal Industries and Masanori Harada,
dated March 29, 1996.
10.13 (2) Letter Agreement between the Company and Actuate Japan, Co.,
Ltd. dated September 17, 1998.
10.14 (2) Actuate Japan Agreement between the Company and Actuate Japan,
Co., Ltd. dated August 15, 1998.
10.15 (1) Offer Letter between the Company and Daniel A. Gaudreau dated
May 7, 1997.
10.16 (1) Offer Letter between the Company and Hamid Bahadori dated May
20, 1998.
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney. (see page 31)
27.1 Financial Data Schedule.

- --------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (File No. 333-55741).

(2) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the period ended September 30, 1998.

29

(b) Reports on Form 8-K

No reports on Form 8-K were filed by the Registrant during the fourth
quarter of the fiscal year ended December 31, 1998.

(c) Exhibits

See (a)(3) above.

(d) Financial Statement Schedule

See (a)(2) above.

30

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

ACTUATE SOFTWARE CORPORATION
(Registrant)

By: /s/ Daniel A. Gaudreau
-----------------------------------
Daniel A. Gaudreau
Senior Vice President, Finance and
Administration and Chief Financial
Officer

Date: March 12, 1999

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Nicolas C. Nierenberg and Daniel A.
Gaudreau, and each of them, his or her true and lawful attorneys-in-fact and
agents with full power of substitution, for him or her and in his or her name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Report on Form 10-K, and to file
the same, with exhibits thereto and other documents in connection therewith
with the Securities and Exchange Commission, hereby ratifying and confirming
all that each of said attorneys-in-fact, or his or her substitute or
substitutes may do or cause to be done by virtue hereof.

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

Signature Title Date
--------- ----- ----

/s/ Nicolas C. Nierenberg Chairman of the Board and March 12, 1999
____________________________________ Chief Executive Officer
Nicolas C. Nierenberg (Principal Executive
Officer)

/s/ Daniel A. Gaudreau Senior Vice President, March 12, 1999
____________________________________ Finance and Administration
Daniel A. Gaudreau and Chief Financial Officer
(Principal Financial and
Accounting Officer)

/s/ Peter I. Cittadini Director, President and March 12, 1999
____________________________________ Chief Operating Officer
Peter I. Cittadini

/s/ James W. Breyer Director March 12, 1999
____________________________________
James W. Breyer

/s/ Arthur C. Patterson Director March 12, 1999
____________________________________
Arthur C. Patterson

/s/ Nancy J. Schoendorf Director March 12, 1999
____________________________________
Nancy J. Schoendorf

/s/ Steven D. Whiteman Director March 12, 1999
____________________________________
Steven D. Whiteman

31

ACTUATE SOFTWARE CORPORATION

INDEX TO FINANCIAL STATEMENTS

Page
----

Report of Independent Auditors.......................................... F-2

Balance Sheets as of December 31, 1998 and 1997......................... F-3

Statements of Operations for the year ended December 31, 1998, 1997 and F-4
1996...................................................................

Statements of Stockholders' Equity (Net Capital Deficiency) for the year F-5
ended December 31, 1998, 1997 and 1996.................................

Statements of Cash Flows for the year ended December 31, 1998, 1997 and F-6
1996...................................................................

Notes to Financial Statements........................................... F-7

F-1

REPORT OF ERNST & YOUNG, LLP, INDEPENDENT AUDITORS

Board of Directors and Stockholders
Actuate Software Corporation

We have audited the accompanying balance sheets of Actuate Software
Corporation as of December 31, 1998 and 1997, and the related statements of
operations, stockholders' equity (net capital deficiency) and cash flows for
each of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Actuate Software
Corporation at December 31, 1998 and 1997, and the results of its operations
and its cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles.

/s/ Ernst & Young LLP

Palo Alto, California
January 11, 1999

F-2

ACTUATE SOFTWARE CORPORATION

BALANCE SHEETS
(in thousands, except share data)

December 31,
------------------
1998 1997
-------- --------

ASSETS
Current assets:
Cash and cash equivalents................................ $ 21,808 $ 2,901
Short-term investments................................... 10,922 290
Accounts receivable, net of allowance for doubtful
accounts of $794 and $573 at December 31, 1998 and 1997,
respectively............................................ 5,050 2,984
Other current assets..................................... 400 172
-------- --------
Total current assets....................................... 38,180 6,347
Property and equipment, net................................ 1,405 1,096
Other assets............................................... 213 144
-------- --------
$39,798 $ 7,587
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable......................................... $ 1,210 $ 843
Accrued compensation..................................... 1,293 997
Other accrued liabilities................................ 3,393 1,679
Deferred revenue......................................... 7,868 6,021
Capital lease obligations................................ -- 125
-------- --------
Total current liabilities.................................. 13,764 9,665
Capital lease obligations.................................. -- 124
Commitments and contingencies
Stockholders' equity (net capital deficiency):
Convertible preferred stock, $0.001 par value, issuable
in series: 5,000,000 and 10,939,464 shares authorized;
none and 6,489,732 shares issued and outstanding at
December 31, 1998 and 1997, respectively................ -- 6
Common stock, $0.001 par value, 35,000,000 and 20,000,000
shares authorized; 13,779,349 and 3,976,285 shares
issued and outstanding at December 31, 1998 and 1997,
respectively............................................ 14 4
Additional paid-in capital............................... 46,592 14,908
Note receivable from officer............................. (40) (40)
Deferred stock compensation.............................. (393) (107)
Accumulated deficit...................................... (20,139) (16,973)
-------- --------
Total stockholders' equity (net capital deficiency)........ 26,034 (2,202)
-------- --------
$39,798 $ 7,587
======== ========

See accompanying notes.

F-3

ACTUATE SOFTWARE CORPORATION

STATEMENTS OF OPERATIONS
(in thousands, except per share data)

Year ended December 31,
-------------------------
1998 1997 1996
------- ------- -------

Revenues:
License fees..................................... $17,750 $ 7,542 $ 343
Services......................................... 4,122 1,976 308
------- ------- -------
Total revenues..................................... 21,872 9,518 651
------- ------- -------

Operating expenses:
Cost of license fees............................. 1,012 647 171
Cost of services................................. 3,171 1,263 305
Sales and marketing.............................. 11,658 7,366 2,965
Research and development......................... 7,373 6,213 2,731
General and administrative....................... 2,563 1,317 603
------- ------- -------
Total operating expenses........................... 25,777 16,806 6,775
------- ------- -------
Loss from operations............................... (3,905) (7,288) (6,124)
------- ------- -------
Equity in losses of affiliate...................... -- (36) (25)
Interest and other income, net..................... 739 82 90
------- ------- -------
Net loss........................................... $(3,166) $(7,242) $(6,059)
======= ======= =======

Basic and diluted net loss per share............... $ (0.41) $ (2.48) $ (2.21)
======= ======= =======

Weighted average shares outstanding used in
calculation of basic and diluted net loss per
share............................................. 7,755 2,920 2,741
======= ======= =======

Pro forma basic and diluted net loss per Share
(unaudited)....................................... $ (0.28) $ (0.78)
======= =======

Shares used in computing pro forma basic and
diluted net loss per share (unaudited)............ 11,388 9,290
======= =======

See accompanying notes.

F-4

ACTUATE SOFTWARE CORPORATION

STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(in thousands, except share data)

Total
Convertible Note Stockholders'
Preferred Stock Common Stock Additional Receivable Deferred Equity
------------------ ------------------ Paid-in from Stock Accumulated (Net Capital
Shares Amount Shares Amount Capital Officer Compensation Deficit Deficiency)
---------- ------ ---------- ------ ---------- ---------- ------------ ----------- -------------

Balance at December
31, 1995............. 4,373,334 $ 4 3,014,167 $ 3 $ 4,575 $(40) $ -- $ (3,672) $ 870

Issuance of Series C
convertible preferred
stock, net of
issuance costs of
$12.................. 1,176,471 1 -- -- 3,987 -- -- -- 3,988
Issuance of common
stock for cash....... -- -- 18,530 -- 9 -- -- -- 9
Issuance of common
stock upon exercise
of stock options..... -- -- 6,750 -- 1 -- -- -- 1
Net loss............. -- -- -- -- -- -- -- (6,059) (6,059)
---------- --- ---------- --- ------- ---- ----- -------- -------
Balance at December
31, 1996............. 5,549,805 5 3,039,447 3 8,572 (40) -- (9,731) (1,191)

Issuance of Series D
convertible preferred
stock, net of
issuance costs of
$26.................. 939,927 1 -- -- 5,828 -- -- -- 5,829
Issuance of common
stock for services... -- -- 1,605 -- 1 -- -- -- 1
Issuance of common
stock upon exercise
of stock options..... -- -- 817,733 1 236 -- -- -- 237
Repurchase of common
stock................ -- -- (7,500) -- (3) -- -- -- (3)
Issuance of common
stock for acquisition
of intellectual
property............. -- -- 125,000 -- 77 -- -- -- 77
Deferred compensation
related to grant of
stock options........ -- -- -- -- 197 -- (197) -- --
Amortization of
deferred
compensation......... -- -- -- -- -- -- 90 -- 90
Net loss............. -- -- -- -- -- -- -- (7,242) (7,242)
---------- --- ---------- --- ------- ---- ----- -------- -------
Balance at December
31, 1997............. 6,489,732 6 3,976,285 4 14,908 (40) (107) (16,973) (2,202)

Issuance of common
stock upon exercise
of stock options, net
of repurchases....... -- -- 173,332 1 200 -- -- -- 201
Issuance of common
stock in public
offering, net of
issuance costs of
$3,672............... -- -- 3,140,000 3 30,865 -- -- -- 30,868
Conversion of
convertible preferred
stock
into common stock.... (6,489,732) (6) 6,489,732 6 -- -- -- -- --
Deferred compensation
related to
grant of stock
options.............. -- -- -- -- 619 -- (619) -- --
Amortization of
deferred
compensation......... -- -- -- -- -- -- 333 -- 333
Net loss............. -- -- -- -- -- -- -- (3,166) (3,166)
---------- --- ---------- --- ------- ---- ----- -------- -------
Balance at December
31, 1998............. -- $-- 13,779,349 $14 $46,592 $(40) $(393) $(20,139) $26,034
========== === ========== === ======= ==== ===== ======== =======

See accompanying notes.

F-5

ACTUATE SOFTWARE CORPORATION

STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(in thousands)

Year ended December 31,
--------------------------
1998 1997 1996
-------- ------- -------

Operating activities
Net loss.......................................... $ (3,166) $(7,242) $(6,059)
Adjustments to reconcile net loss to net cash used
in operating activities:
Amortization of deferred compensation............ 333 90 --
Depreciation..................................... 695 402 170
Loss on disposal of fixed assets................. 70 -- --
Issuance of common stock for services and
intellectual property........................... -- 78 --
Change in current assets and liabilities:
Accounts receivable............................. (2,066) (1,111) (1,868)
Other current assets............................ (228) (7) (89)
Accounts payable................................ 367 547 200
Accrued compensation............................ 296 629 250
Other accrued liabilities....................... 1,714 1,339 291
Deferred revenue................................ 1,847 2,512 3,160
-------- ------- -------
Net cash used in operating activities.............. (138) (2,763) (3,945)

Investing activities
Purchase of property and equipment................ (1,074) (1,003) (335)
Purchases of short-term investments............... (10,922) (290)
Proceeds from maturity of short-term investments.. 290
Increase in other assets.......................... (69) (53) (44)
-------- ------- -------
Net cash used in investing activities.............. (11,775) (1,346) (379)

Financing activities
Proceeds from issuance of stock, net of issuance
costs............................................ 31,069 234 9
Payments on capital lease obligations............. (249) (93) (114)
Proceeds from issuance of preferred stock......... 5,829 3,988
Proceeds from sale and leaseback of equipment..... 229
--------
Net cash provided by financing activities.......... 30,820 5,970 4,112
-------- ------- -------
Net increase (decrease) in cash and cash
equivalents....................................... 18,907 1,861 (212)
Cash and cash equivalents at beginning of year..... 2,901 1,040 1,252
-------- ------- -------
Cash and cash equivalents at end of year........... $ 21,808 $ 2,901 $ 1,040
======== ======= =======

Supplemental disclosure of cash flow information
Interest paid...................................... $ 22 $ 81 $ 36
======== ======= =======

See accompanying notes.

F-6

ACTUATE SOFTWARE CORPORATION

NOTES TO FINANCIAL STATEMENTS

December 31, 1998

1. Summary of Significant Accounting Policies

Organization and Nature of Business

Actuate Software Corporation (the "Company" or "Actuate") was incorporated
on November 16, 1993 in the State of California and reincorporated in the
State of Delaware on July 7, 1998. Actuate is a leading provider of enterprise
reporting solutions that enable organizations to systematically extract,
publish and disseminate information across distributed computing environments.
The Company develops and markets software products that are designed to allow
companies to rapidly design, generate and distribute reports throughout the
enterprise, thereby increasing access to and the value of corporate data. The
Company's products have been adopted in a wide variety of industries,
including financial services, telecommunications, technology, and health care.
The Company sells its products through its direct sales force located in the
United States and Canada and worldwide through enterprise application vendors
and distributors.

Investment in Affiliate

In 1996, the Company made an equity investment of approximately $95,000 in
Actuate Japan Company Ltd. ("Actuate Japan"). This represented approximately
8.3% of the outstanding voting stock of Actuate Japan. This investment is
accounted for on the equity basis due to the Company's ability to exercise
significant influence. During 1996, the Company provided a total of $160,000
in the form of loans. An additional $100,000 was advanced in 1997. At December
31, 1998, the remaining loan balance was $94,000. To date, Actuate Japan has
been primarily funded by investors other than the Company. The Company
believes that such investments will continue until the stage at which Actuate
Japan generates cash from its own operations. The Company will continue to
assess the recoverability of the remaining loan balance.

Use of Estimates

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

Net Revenue

The Company recognizes revenue from license fees when a non-cancelable
license agreement has been signed with an end user customer or indirect
channel partner, the software product covered by the license agreement has
been shipped, there are no uncertainties surrounding product acceptance, the
license fees are fixed and determinable, and collection of the license fee is
considered probable. The Company's products do not require significant
customization.

Revenue from license fees from sales of software products directly to end-
user customer or indirect channel partner is recognized as revenue after
execution of a license agreement or receipt of a definitive purchase order,
and shipment of the product, if no significant vendor obligations remain,
there are no uncertainties surrounding product acceptance, the license fees
are fixed and determinable, and collection of the license fee is considered
probable. The Company's products do not require significant customization. The
majority of end user license revenues are derived from end user customer
orders for specific individual products. These types of transactions are
recognized as revenue upon shipment of product. Advance payments from end-
users, in arrangements in which the end user customer has the right to future
unspecified products, are deferred and recognized as revenue ratably over the
estimated term of the period, typically one year, during which the end-user is
entitled to receive the products.

F-7

ACTUATE SOFTWARE CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)

December 31, 1998

License arrangements with enterprise application vendors, resellers and
distributors generally take the form of either (a) fixed price arrangements in
which the contracting entity has the right to the unlimited usage, unspecified
future products, and sublicensing of the licensed software for a specified
term and pursuant to which license fee revenue is deferred and recognized on a
straight-line basis over the term of the license agreement or (b) arrangements
pursuant to which a royalty is paid to the Company, which the Company
recognizes as revenue based on the enterprise application vendor's sell-
through.

Service revenues are primarily comprised of revenue from maintenance
agreements, training and consulting fees. Revenue from maintenance agreements
is deferred and recognized on a straight-line basis as service revenue over
the life of the related agreement, which is typically one year. Service
revenues from training and consulting are recognized upon completion of the
work to be performed.

In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 97-2, "Software Revenue Recognition"
("SOP 97-2"). Effective January 1, 1998, the Company adopted SOP 97-2. SOP 97-
2 generally requires revenue earned on software arrangements involving
multiple elements such as software products, upgrades, enhancements,
postcontract customer support, installation and training to be allocated to
each element based on the relative fair values of the elements. If evidence of
the fair value for all elements of the arrangement does not exist, all revenue
from the arrangement is deferred until such evidence exists or until all
elements are delivered. There was no material change to the Company's
accounting for revenues as a result of the adoption of SOP 97-2, as amended by
Statement of Position 98-4, "Deferral of the Effective Date of a Provision of
SOP 97-2" ("SOP 98-4"). In December 1998, AICPA issued Statement of Position
98-9, "Modification of SOP 97-2 With Respect to Certain Transactions", which
amends SOP 98-4, to extend the deferral of application of certain passages of
SOP 97-2 provided by SOP 98-4 through fiscal years beginning on or before
March 15, 1999. All other provisions of SOP 98-9 are effective for
transactions entered into in fiscal years beginning after March 15, 1999. The
Company has not yet determined the effect of the final adoption of SOP 98-9 or
its future revenues and results of operations.

Cash, Cash Equivalents and Short-Term Investments

Cash and cash equivalents consist of cash deposited with banks and highly
liquid, high quality debt securities with original maturities of 90 days or
less. All short-term investments are classified as available-for-sale, are
carried at amortized cost, which approximates fair value, and consist of high
quality debt securities with original maturities between 90 days and one year.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of marketable investments and accounts
receivable. The Company places its investments with high-credit-quality
multiple issuers. The Company sells to a diverse customer base primarily to
customers in the United States. No single customer accounts for more than 10%
of the Company's sales. Sales for the year ended December 31, 1998 and 1997
are shown net of customer returns of approximately $639,000 and $290,000,
respectively. The Company does not require collateral on sales with credit
terms. During the years ended December 31, 1998 and 1997, respectively, the
Company added approximately $548,000 and $630,000 to its bad debt reserves.
Total write-offs of uncollectible amounts were approximately $328,000 and
$139,000 in these years, respectively.

Fair Value of Financial Instruments

The fair values for marketable debt securities are based on quoted market
prices. The carrying value of these securities approximates their fair value.

F-8

ACTUATE SOFTWARE CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)

December 31, 1998

The fair value of notes is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities. The carrying
value of the note receivable from officer approximates the fair value.

The fair value of short-term and long-term capital lease obligations is
estimated based on current interest rates available to the Company for debt
instruments with similar terms, degree of risk and remaining maturities. The
carrying value of these obligations approximates their respective fair values.

Research and Development

Research and development expenditures are expensed to operations as
incurred. Statement of Financial Accounting Standards No. 86, "Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,"
requires capitalization of certain software development costs subsequent to
the establishment of technological feasibility. Based on the Company's product
development process, technological feasibility is established upon completion
of a working model. Costs incurred by the Company between completion of the
working model and the point at which the product is ready for general release
have been insignificant. Through December 31, 1998, all research and
development costs have been expensed.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the respective assets which range from three to five years.
Assets held under capital leases are amortized over the shorter of the asset
life or the remaining lease term. The related amortization expense is included
in depreciation expense.

Stock-Based Compensation

The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. In accordance with the provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), the
Company has elected to follow Accounting Principles Board Opinion No. 25 ("APB
25"), "Accounting for Stock Issued to Employees" and related interpretations
and to adopt the pro forma disclosure alternative as described in SFAS 123 in
accounting for its employee stock option plan (see Note 9).

Net Loss Per Share

Net loss per share is presented under Statement of Financial Accounting
Standards No. 128 "Earnings Per Share" ("SFAS 128"). SFAS 128 requires the
presentation of basic earnings (loss) per share and diluted earnings (loss)
per share, if more dilutive, for all periods presented. Pursuant to SEC Staff
Accounting Bulletin No. 98, common stock and convertible preferred stock
issued for nominal consideration, prior to the initial public offering are
included in the calculation of basic and diluted net loss per share as if they
had been outstanding for all periods presented. The Company has not had any
issuances or grants for nominal consideration.

In accordance with SFAS 128, basic net loss per share has been computed
using the weighted-average number of shares of common stock outstanding during
the period. Basic pro forma net loss per share as presented in the statement
of operations has been computed as described above and also gives effect,
under Securities and Exchange Commission guidance, to the conversion of the
convertible preferred stock that converted upon completion of the Company's
initial public offering in July 1998 (using the if-converted method) from the
original date of its issuance.

F-9

ACTUATE SOFTWARE CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)

December 31, 1998

A reconciliation of shares used in the calculation of basic and diluted and
pro forma net loss per share follows (in thousands, except per share amounts):

Year ended December 31,
-------------------------
1998 1997 1996
------- ------- -------

Net loss............................................ $(3,166) $(7,242) $(6,059)
======= ======= =======
Basic and diluted:
Weighted-average shares of common stock
outstanding...................................... 8,354 3,578 3,033
Weighted-average shares subject to repurchase..... (599) (658) (292)
------- ------- -------
Shares used in computing basic and diluted net loss
per share.......................................... 7,755 2,920 2,741
======= ======= =======
Basic and diluted net loss per share................ $ (0.41) $ (2.48) $ (2.21)
======= ======= =======
Pro forma:
Shares used above.................................. 7,755 2,920
Adjusted to reflect the weighted effect of the
assumed conversion of convertible preferred stock
(unaudited)...................................... 3,633 6,370
------- -------
Shares used in computing pro forma basic and
diluted net loss per share (unaudited)........... 11,388 9,290
======= =======
Pro forma basic and diluted net loss per share
(unaudited)...................................... $ (0.28) $ (0.78)
======= =======

Had the Company been in a net income position, diluted earnings per share
for fiscal year 1998 and 1997 would have included the shares used in the
computation of pro forma basic net loss per share as well as the dilutive
effect of 634,150, and 229,270 shares, respectively, related to outstanding
options and stock subject to repurchase, calculated using the treasury method.

Comprehensive Loss

Effective January 1, 1998, the Company adopted the Financial Accounting
Standards Board's ("FASB") Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income," ("SFAS 130"). The Company has no
material components of other comprehensive net loss and accordingly the
comprehensive loss is the same as net loss for all periods presented.

Segment Information

Effective January 1, 1998, the Company adopted the FASB's Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 superseded FASB's
Statement No. 14, "Financial Reporting for Segments of a Business Enterprise".
SFAS 131 establishes standards for the way the public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports. SFAS 131 also establishes standards for
related disclosures about products and services, geographic areas, and major
customers.

The management has organized its business in a single operating segment,
the marketing and sale of software products for developing, administering,
viewing and distributing reports in both client server and Internet
environments. Further, the Company derives the vast majority of its revenue
from its operations in the United States. See Note 11 for geographic
information.

F-10

ACTUATE SOFTWARE CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)

December 31, 1998

Recent Accounting Pronouncements

In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities", which will be effective for our fiscal
year 2000. This statement establishes accounting and reporting standards
requiring that every derivative instrument, including certain derivative
instruments imbedded in other contracts, be recorded in the balance sheet as
either an asset or liability measured at its fair value. The statement also
requires that changes in the derivative's fair value be recognized in earnings
unless specific hedge accounting criteria are met. The Company believes the
adoption of SFAS 133 will not have a material effect on the financial
statements.

In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position, or "SOP" 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires
that entities capitalize certain costs related to internal-use software once
certain criteria have been met. The Company is required to implement SOP 98-1
for the year ending December 31, 1999. Adoption of SOP-98-1 is expected to
have no material impact on the Company's financial condition or results of
operations.

In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities." SOP 98-5, which is effective for fiscal years beginning after
December 15, 1998, provides guidance on the financial reporting of start-up
costs and organization costs. It requires costs of start-up activities and
organization costs to be expensed as incurred. As we have expensed these costs
historically, the adoption of this standard is not expected to have a
significant impact on our results of operations, financial position or cash
flows.

2. Investment in Affiliate

In March 1996, the Company established a joint venture company in Japan
with six other corporate partners. The Company received approximately 8.3% of
the equity ownership of the venture known as Actuate Japan.

The Company has a call option for all of the shares issued to the other
investors. The price to purchase the remaining (approximately 92%) of Actuate
Japan at December 31, 1998 would have been a maximum of 220,000,000 million
yen (approximately $1.9 million). In the event of a purchase of the remaining
92% interest of the other Actuate Japan stockholders, the Company would
attribute the purchase price to the identified assets and liabilities at the
date of acquisition. The remaining excess purchase price would be attributed
to goodwill arising on the acquisition. The potential range that the Company
could be required to pay for the remaining 92% interest ranges from
approximately $1.5 million as of April 1999 (the earliest potential date for
exercise of the put) to approximately $2.9 million as of April 2001, based on
current exchange rates.

In March 1999, the other corporate partners have the right to cause at
their discretion the Company to buy all of their outstanding shares, at a
specified price, for securities of the Company, cash or through the reduction
of a future royalty stream.

3. Share Purchase Agreement

The Company has entered into an agreement with Actuate B.V., and
independent holding company, pursuant to which Actuate B.V. has established
subsidiaries in France, Germany and the United Kingdom. Each of these
subsidiaries of Actuate B.V. have the exclusive right (other than with respect
to value added resellers who have been or will be granted worldwide
distribution rights) to distribute the Company's products and use the
Company's name in Belgium, France, Germany, Switzerland and the United
Kingdom, in exchange for a

F-11

ACTUATE SOFTWARE CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)

December 31, 1998

50% royalty on sales of the Company's products by these entities. Beginning in
January 1999, Actuate B.V. may at its discretion request the Company to
purchase its outstanding shares at a price approximately equal to its last
twelve months' revenues. The Company has a right of first refusal on any
transfer of ownership interest in the B.V. On July 1, 1999, and subsequently,
the Company may request the Actuate B.V. stockholders to sell all of the
outstanding shares of the B.V. to the Company based on the above pricing
formula. The failure of the Company to purchase the shares upon the request of
the B.V. stockholders will cause the licenses held by the subsidiaries of
Actuate B.V. to become perpetual and royalty free.

4. Short-Term Investments

The following table summarizes the amortized cost, which approximates the
fair value of the Company's investments and their contractual maturities (in
thousands):

December 31,
--------------
1998 1997
------- ------

Corporate debt obligations and deposits.................... $18,077 $2,073
======= ======
Included in cash and cash equivalents...................... $ 7,155 $1,783
Included in short-term investments......................... 10,922 290
------- ------
Due within one year........................................ $18,077 $2,073
======= ======

Unrealized gains and losses at December 31, 1998 and 1997and realized gains
and losses for the year ended December 31, 1998 and 1997 were not material.

At December 31, 1998, the Company had restricted cash of $3 million related
to a line of credit, invested in a certificate of deposit at a bank as a
condition for granting the line of credit (see Note 7). This amount is
included in short-term investments. There was no such restricted cash at
December 31, 1997.

5. Property and Equipment

Property and equipment consists of the following (in thousands):

December 31,
--------------
1998 1997
------ ------

Furniture and fixtures..................................... $ 316 $ 282
Computers and purchased software........................... 2,094 1,450
------ ------
2,410 1,732
Less accumulated depreciation.............................. (1,005) (636)
------ ------
Property and equipment, net................................ $1,405 $1,096
====== ======

Property and equipment includes certain furniture, computers and equipment
financed under capital leases. The cost and accumulated depreciation of such
assets under capital leases was approximately $564,000 and $381,000 at
December 31, 1997, respectively. During 1998, the Company acquired the leased
assets by paying off the balance of its capital lease obligations.

F-12

ACTUATE SOFTWARE CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)

December 31, 1998

6. Note Receivable

As of December 31, 1998 and 1997, the Company had outstanding a note
receivable under full recourse terms from an officer of the Company in the
amount of $40,375, for the issuance of 269,167 shares of common stock upon
exercise of the officer's stock option. Interest accrues at the rate of 6.28%
per annum. The entire principal balance, together with all accrued interest,
becomes due and payable in one lump sum on September 22, 2000.

7. Bank Line of Credit

In May 1998, the Company obtained a bank line of credit which provides for
up to $5.0 million in borrowings. The Company can borrow up to 80% of eligible
accounts receivable against the line of credit. The interest rate on borrowed
amounts is prime plus 2.25%. The Company is required to comply with various
financial covenants, including it is prohibited from paying dividends and it
must deposit $3.0 million of the proceeds from the initial public offering
completed in July 1998, with the bank through May 25, 1999, the maturity date
of the line of credit. In fiscal 1998, the Company did not borrow under this
line of credit.

8. Commitments

Operating Lease Commitments

The Company leases its facilities under noncancelable operating leases
expiring in May 2000 and May 2002. The Company also leases equipment under
operating lease agreements. Rent expense for facilities under operating leases
was approximately $805,000, $441,000 and $189,000 for the years ended December
31, 1998, 1997 and 1996, respectively. Aggregate minimum lease commitments
under all operating leases are as follows (in thousands):

Fiscal year
1999............................................................... $ 862
2000............................................................... 776
2001............................................................... 723
2002............................................................... 301
------
$2,662
======

9. Stockholders' Equity

In July 1998, the Company raised $30.9 million, net of issuance costs, from
an initial public offering of 3,140,000 shares of common stock. All 6,489,732
shares of convertible preferred stock were converted into 6,489,732 shares of
common stock of the Company upon completion of the Company's initial public
offering.

Stock Option Plans

In May 1994, the board of directors adopted the 1994 Stock Option Plan (the
"Predecessor Plan") for issuance of common stock to employees, consultants and
nonemployee directors. In May 1998, the 1998 Equity Incentive Plan (the
"Plan") was adopted by the board of directors and approved by the stockholders
in July 1998 as the successor to the Predecessor Plan. Outstanding options
under the Predecessor Plan have been incorporated into the Plan and no further
options grants will be made under the Predecessor Plan. A total of

F-13

ACTUATE SOFTWARE CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)

December 31, 1998

1,300,000 shares of common stock have been reserved for issuance under the
Plan. As of December 31, 1998, there were options to purchase 1,046,300 shares
outstanding under the Predecessor Plan. Except as otherwise noted, options
outstanding under the Predecessor Plan are subject to substantially the same
terms as described below for option awards under the Plan. As of January 1 of
each year, commencing with the year 1999, the number of shares reserved for
issuance under the Plan will be increased automatically by the lesser of (i)
5% of the total number of shares of Common Stock then outstanding or (ii)
700,000 shares.

Under the Plan, eligible participants may be awarded options to purchase
shares of Common Stock, stock appreciation rights ("SARs"), restricted shares
or stock units (collectively, the "Awards"). Currently no Awards have been
granted under the Plan. Options under the Plan may be incentive stock options
designed to satisfy Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code") or nonstatutory stock options not designed to meet such
requirements. If restricted shares or shares issued upon the exercise of
options granted under the Plan or the Predecessor Plan are forfeited, then
such shares will again become available for awards under the Plan. If stock
units, options or SARs granted under the Plan or the Predecessor Plan are
forfeited or terminated for any other reason before being exercised, then the
corresponding shares will again become available for awards under the Plan.
The exercise price for nonstatutory and incentive stock options granted under
the Plan may not be less than 85% or 100%, respectively, of the fair market
value of the Common Stock on the option grant date. The Board may amend or
terminate the Plan at any time. Amendments may be subject to stockholder
approval to the extent required by applicable laws.

Options granted under the Predecessor Plan are generally exercisable upon
grant, subject to repurchase rights by the Company until vested. Options
granted under the Plan are exercisable when vested. Shares generally vest at
the rate of 20% after one year from the date of grant and the remaining
balance vesting monthly over the next four years. At December 31, 1998 and
1997, 585,051 and 770,436 shares of common stock issued under the Plan were
subject to repurchase by the Company, respectively. All outstanding repurchase
rights under the Plan shall terminate automatically upon the occurrence of any
merger, consolidation, or disposition of all or substantially all of the
Company's assets, except to the extent the repurchase rights are expressly
assigned to the successor corporation.

1998 Non-Employee Directors Option Plan

The Company's 1998 Non-Employee Directors Option Plan (the "Directors
Option Plan") was adopted by the board of directors in May 1998, and approved
by the stockholders in July 1998. Under the Directors Option Plan, non-
employee members of the Board of Directors are eligible for automatic option
grants. For issuance under the Directors Option Plan, 200,000 shares of common
stock have been authorized. No shares have been issued under the Directors
Option Plan. Each individual who first joins the board as a non-employee
director, whether through election or appointment, will receive at that time
an automatic option grant for 20,000 shares of common stock. With respect to
the initial automatic option grant, the option will become exercisable as to
20% of the shares after one year of board service, with the balance of the
shares becoming exercisable ratably in 48 monthly installments over the
remaining period of optionee's board service. At each annual stockholders
meeting beginning in 1999, each current non-employee director will
automatically be granted a stock option to purchase 2,500 shares of common
stock, whether or not he or she is standing for re-election at that particular
meeting, which will become fully exercisable on the first anniversary of such
meeting. Each option will have an exercise price equal to the fair market
value of the common stock on the automatic grant date and a maximum term of
ten years, subject to earlier termination following the optionee's cessation
of Board service. The Board may amend or modify the Directors Option Plan at
any time. The Directors Option Plan will terminate on May 27, 2008, unless
terminated sooner by the board.

F-14

ACTUATE SOFTWARE CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)

December 31, 1998

Activity under the Plan was as follows:

Outstanding Options
Shares Available -------------------------------- Weighted-Average
For Grant Number of Shares Price Per Share Exercise Price
---------------- ---------------- --------------- ----------------

Balance at December 31,
1995................... -- 413,000 $ 0.15 $ 0.15
Additional
authorization........ 182,000 -- -- --
Options granted....... (159,500) 159,500 $ 0.15-$0.34 $ 0.29
Options exercised..... -- (6,750) $ 0.15 $ 0.15
Options forfeited..... 56,000 (56,000) $ 0.15-$0.34 $ 0.18
---------- --------- ------------
Balance at December 31,
1996................... 78,500 509,750 $ 0.15-$0.34 $ 0.19
Additional
authorization........ 1,074,600 -- -- --
Options granted....... (1,146,350) 1,146,350 $ 0.34-$2.10 $ 0.81
Options exercised..... -- (817,733) $ 0.15-$1.25 $ 0.29
Options forfeited..... 36,417 (36,417) $ 0.15-$0.62 $ 0.34
Options repurchased... 7,500 -- $ 0.34 $ 0.34
---------- --------- ------------
Balance at December 31,
1997................... 50,667 801,950 $ 0.15-$2.10 $ 2.60
Additional
authorization........ 1,580,666 -- -- --
Options granted....... (1,324,425) 1,324,425 $2.10-$19.25 $10.25
Options exercised..... -- (219,116) $ 0.15-$3.00 $ 0.99
Options forfeited..... 246,084 (246,084) $0.34-$16.13 $ 2.94
Options repurchased... 45,784 -- $ 0.34-$0.62 $ 0.35
---------- --------- ------------
Balance at December 31,
1998................... 598,776 1,661,175 $0.15-$19.25 $ 8.07
========== ========= ============

The weighted-average deemed fair value of stock options granted in fiscal
year 1998 and 1997 was $7.83 and $0.21, respectively.

The following table summarizes information concerning outstanding and
exercisable options:

As of December 31, 1998
-----------------------------------------------------------------
Range of Options Outstanding Weighted-Average Weighted-Average
Exercise Prices and Exercisable Remaining Contractual Life Exercise Price
--------------- ------------------- -------------------------- ----------------

$ 0.15-$ 3.00 561,650 8.7 years $ 1.40
$ 5.00-$11.00 494,500 9.5 years $ 8.20
$11.13-$19.25 605,025 9.9 years $14.16
---------
$ 0.15-$19.25 1,661,175 9.4 years $ 8.07
=========

At December 31, 1998 and 1997, 105,521 and 26,037 outstanding options were
vested, respectively.

1998 Employee Stock Purchase Plan

The Company's 1998 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the board of directors in May 1998, and approved by the
stockholders in July 1998. A total of 250,000 shares of common stock have been
reserved for issuance under the Purchase Plan. As of January 1 of each year,
the number of shares reserved for issuance under the Purchase Plan will be
automatically increased by 150,000 shares. The Purchase Plan is intended to
qualify under Section 423 of the Code. Each calendar year, two overlapping
24-month offering periods will commence on February 1 and August 1. Each
offering period contains four

F-15

ACTUATE SOFTWARE CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)

December 31, 1998

six-month accumulation periods, with purchases occurring at the end of each
six-month accumulation period. The Purchase Plan permits each eligible
employee to purchase common stock through payroll deductions, which may not
exceed 15% of an employee's cash compensation. No more than 1,000 shares may
be purchased on any accumulation date. The price of each share of common stock
purchased under the Purchase Plan will be 85% of the lower of (i) the fair
market value per share of common stock on the date immediately prior to the
first date of the applicable offering period (except that in the case of the
first offering period, the price per share was $11.00, the price offered to
the public in the initial public offering) or (ii) the date at the end of the
applicable accumulation period. Employees may end their participation in the
Purchase Plan at any time during the accumulation period, and participation
ends automatically upon termination of employment with the Company.

Stock Compensation

The Company recorded deferred compensation of approximately $619,000 and
$197,000 during the year ended December 31, 1998 and 1997, respectively. These
amounts represent the difference between the exercise price and the deemed
fair value of the Company's common stock during the periods in which such
stock options were granted. The Company recorded amortization of deferred
compensation as an expense of approximately $333,000 and $90,000,
respectively, during these periods. At December 31, 1998, the Company has a
total of approximately $393,000 remaining to be amortized over the
corresponding vesting period of each respective option, generally five years.

Pro Forma Information

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

Pro forma information regarding net loss is required by SFAS 123, and has
been determined as if the Company had accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of SFAS
123. The fair value for these options was estimated at the date of grant using
the minimum value method with the following weighted-average assumptions for
fiscal year 1997 and 1996: risk-free interest rate of approximately 6.0%, a
weighted-average expected life of the option of five years and a dividend
yield of zero for all periods. For fiscal 1998, the fair value has been
estimated using the Black-Scholes Option Pricing Model with the following
weighted-average assumptions: risk-free interest rate of approximately 5.25%,
a weighted-average life of the option of four years, volatility of 70% and a
dividend yield of zero.

Years ended December
31,
-------------------------
1998 1997 1996
------- ------- -------

Net loss (in thousands):
As reported.................................. $(3,166) $(7,242) $(6,059)
Pro forma.................................... $(4,212) $(7,270) $(6,067)
Basic and diluted net loss per share:
As reported.................................. $ (0.41) $ (2.48) $ (2.21)
Pro forma.................................... $ (0.54) $ (2.49) $ (2.21)

These pro forma amounts may not be representative of the effects on pro
forma net income (loss) for future years as options vest over several years
and additional awards may be made in subsequent years.

F-16

ACTUATE SOFTWARE CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)

December 31, 1998

10. Income Taxes

As of December 31, 1998, the Company had federal net operating loss
carryforwards of approximately $15.6 million. The Company also had federal
research and development tax credit carryforwards of approximately $800,000 at
December 31, 1998. The net operating loss and credit carryforwards will expire
beginning in 2008 through 2018, if not utilized.

Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the "change in ownership" provisions of
the Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets for federal and state income taxes are as
follows (in thousands):

December 31,
--------------
1998 1997
------ ------

Net operating loss carryforwards........................... $5,400 $5,200
Research credit carryforwards.............................. 1,200 500
Capitalized research and development....................... 400 300
Warranty reserve........................................... 200 400
Other, net................................................. 1,200 400
------ ------
Total deferred tax assets.................................. 8,400 6,800
Valuation allowance........................................ (8,400) (6,800)
====== ======
$ -- $ --
====== ======

The net valuation allowance increased by $2.9 million and $2.3 million
during the year ended December 31, 1997 and 1996, respectively.

11. Geographic Information

The Company's operations are located in the United States. Revenues from
international sources relate to export sales, primarily to distributors in
Europe and Japan. The Company's revenue by geographic area is as follows (in
thousands):

Years ended
December 31,
-------------------
1998 1997 1996
------- ------ ----

Revenues:
United States........................................ $20,470 $9,311 $611
International........................................ 1,402 207 40
------- ------ ----
Total.............................................. $21,872 $9,518 $651
======= ====== ====

12. Contingencies

The Company is engaged in certain legal action arising in the ordinary
course of business. The Company believes it has adequate legal defenses and
believes that the ultimate outcome of this action will not have a material
effect on the Company's financial position or results of operations, although
there can be no assurance as to the outcome of such litigation.

F-17