ROGUE WAVE SOFTWARE INC /OR/ - 10-K Annual Report

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

FORM 10-K

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

For the fiscal year ended September 30, 1997

OR

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

For the transition period from ____________ to ____________

Commission file number 0-28900

ROGUE WAVE SOFTWARE, INC.
(Exact name of registrant as specified in its charter)

Delaware 93-1064214
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

850 SW 35th Street, Corvallis, Oregon 97333
(Address of principal executive offices) (Zip code)

(541) 754-3010
(Registrant's telephone number, including area code)

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

Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.001 PAR VALUE

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods as the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----

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

As of October 31, 1997, there were 8,374,472 shares of Common Stock
outstanding. The aggregate market value of voting stock held by non-affiliates
of the Registrant was approximately $73,749,698 based upon the closing price of
the Common Stock on October 31, 1997 on the NASDAQ National Market System.
Shares of Common Stock held by each officer, director and holder of five
percent or more of the Common Stock outstanding as of October 31, 1997 have
been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily conclusive.

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

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement for Registrant's 1997 Annual Meeting
of Stockholders to be held January 20, 1998 are incorporated by reference in
Part III of this Form 10-K.

FORM 10-K

INDEX

PART I................................................................Page 2
Item 1. Business.....................................................Page 2
Item 2. Properties...................................................Page 19
Item 3. Legal Proceedings............................................Page 19
Item 4. Submission of Matters to a Vote of Security Holders..........Page 19

PART II...............................................................Page 20
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters........................................Page 20
Item 6. Selected Consolidated Financial Data.........................Page 21
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................Page 22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..Page 27
Item 8. Consolidated Financial Statements and Supplementary Data.....Page 27
Item 9. Changes in and Disagreements with Accountants on Accounting
And Financial Disclosure...................................Page 27

PART III..............................................................Page 27
Item 10. Directors and Executive Officers of the Registrant..........Page 27
Item 11. Executive Compensation......................................Page 27
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................Page 27
Item 13. Certain Relationships and Related Transactions..............Page 27

PART IV...............................................................Page 28
Item 14. Exhibits, Consolidated Financial Statements, Schedules,
and Reports on Form 8-K...................................Page 28

SIGNATURES............................................................Page 29

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PART I

ITEM 1. BUSINESS

THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS REGARDING THE
COMPANY, ITS BUSINESS, PROSPECTS AND RESULTS OF OPERATIONS THAT ARE SUBJECT TO
RISKS AND UNCERTAINTIES POSED BY MANY FACTORS AND EVENTS THAT COULD CAUSE THE
COMPANY'S ACTUAL BUSINESS, PROSPECTS AND RESULTS OF OPERATIONS TO DIFFER
MATERIALLY FROM THOSE THAT MAY BE ANTICIPATED BY SUCH FORWARD-LOOKING
STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED HEREIN AS WELL AS THOSE DISCUSSED UNDER THE
CAPTIONS "RISK FACTORS" AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" AS WELL AS THOSE DISCUSSED ELSEWHERE IN
THIS PROSPECTUS. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE
FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE OF THIS REPORT.
THE COMPANY UNDERTAKES NO OBLIGATION TO REVISE ANY FORWARD-LOOKING STATEMENTS
IN ORDER TO REFLECT EVENTS OR CIRCUMSTANCES THAT MAY SUBSEQUENTLY ARISE.
READERS ARE URGED TO CAREFULLY REVIEW AND CONSIDER THE VARIOUS DISCLOSURES MADE
BY THE COMPANY IN THIS REPORT AND IN THE COMPANY'S OTHER REPORTS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION THAT ATTEMPT TO ADVISE INTERESTED PARTIES OF
THE RISKS AND FACTORS THAT MAY AFFECT THE COMPANY'S BUSINESS.

Rogue Wave is a leading provider of object-oriented software parts and
related tools. The Company's C++ and Java-based products are used to develop
robust, scalable software applications for a wide variety of environments,
including client-server, intranet and Internet environments. These products
enable customers to construct software applications more quickly, with higher
quality and across multiple platforms, and reduce the complexity associated
with the software development process. The Company's software parts provide the
functionality to perform fundamental operations such as network and database
connectivity, thereby allowing programmers to focus on the core functionality
of the software under development.

To date, Rogue Wave has sold over 50,000 end-user licenses. Rogue Wave
markets its software primarily through its telesales and direct field sales
organization, and to a lesser extent through indirect channel partners. The
Company bundles its Tools.h++ and/or Standard C++ Library products with popular
compilers offered by leading vendors, including Hewlett-Packard, Microware,
Siemens-Nixdorf, Silicon Graphics and Sun Microsystems. The Company's products
are used by programmers to develop software applications for organizations in a
wide variety of industries. The Company's customers include 3Com, Boeing,
Hewlett-Packard, IBM, MCI, Morgan Stanley, Motorola and Netscape.

INDUSTRY BACKGROUND

INCREASING DEPENDENCE ON SOFTWARE. Businesses are increasingly relying on
information systems as a strategic resource and as a way of differentiating
themselves from their competitors. A sophisticated enterprise-wide information
system can allow a company to take advantage of new markets before a
competitor, reduce operating expenses and increase ties with suppliers and
customers. Internet and intranet technologies can be particularly effective in
extending the information system outside the bounds of a company, creating even
more opportunities. Of all the pieces that make up an information system, it
is increasingly software that plays a critical role. Therefore, as businesses
become more dependent on these information systems, they become more dependent
on software. In addition, electronic systems manufacturers and independent
software vendors are increasingly dependent on the development of software to
provide critical functionality and product differentiation.

NEED FOR IMPROVED SOFTWARE DEVELOPMENT TECHNOLOGIES AND METHODS. Software
development technologies and methods have not kept pace with the increasing
reliance on software systems. In fact, the intricacies of modern software
systems have tended to make the software development process longer, more
complicated and increasingly error prone. For example, many businesses are
implementing client-server applications that must be scalable (capable of
growing to support additional users) enough to handle hundreds or thousands of
users, yet flexible enough to meet continually changing

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business requirements. Businesses implementing enterprise-wide information
systems face a particularly difficult challenge in developing software for
the distributed, heterogeneous environments that these systems typically
demand. In addition, businesses recognize that not only are these software
systems expensive to develop, they can also be expensive to maintain.

Organizations have taken an initial step in addressing the complexity and
cost of today's software systems by breaking software applications into
functional segments to be developed by separate teams of programmers. However,
traditional software development methodologies often produce unnecessary and
complex interdependencies among functional software segments. The resulting
software is typically difficult to develop and test, as well as expensive to
modify and maintain.

ADOPTION OF OBJECT-ORIENTED TECHNOLOGIES. To address the difficulties of
developing and maintaining complex software systems, organizations are
increasingly adopting object-oriented technologies and development
methodologies. Object-oriented programming allows software to be written in
terms of objects that are used as building blocks to model real-world objects
and systems. Objects are self-contained units that encapsulate a collection of
data and related procedures. Although objects may be internally complex, they
are designed to have simple interfaces that allow programmers to develop and
change objects independently without affecting other segments of the software
system. The generalized, self-contained nature of well-designed objects allows
them to be reused within a single software system and in subsequent
applications. To a large extent, developing software applications then becomes
a matter of assembling new and existing objects, rather than writing entire
programs from scratch, resulting in significantly reduced development times and
improved software quality. In addition, because the internal details of each
object are relatively insulated from the rest of the system, objects can be
tested, modified and maintained independently.

As object-oriented technologies have been adopted over the last several
years, C++ has emerged as the de facto standard computer language for
object-oriented software development. Java, another object-oriented programming
language that is similar to C++, has been recently popularized through the
growth of the Internet and intranet environments. Java offers additional
benefits in the areas of platform independence and distributed computing.

NEED FOR ROBUST THIRD-PARTY SOFTWARE PARTS. While objects are easy to use
once built, developing robust, well-designed objects can be extremely difficult
and time consuming. Many technical details must be addressed, including
support for various platforms, graphical user interfaces, databases and
networking protocols. As a result, object-oriented software development can be
improved significantly through the use of pre-built, industry-standard objects
("software parts"). Software parts are typically sold as a "class library," a
group of 20-100 related object types ("classes"). Organizations seek to improve
quality and time-to-market by purchasing pre-written objects from independent
vendors to handle fundamental operations ranging from simple functions such as
date handling to more complex functions such as network communications. Using
off-the-shelf parts for such tasks allows programmers to focus on the core
functionality of the systems they are developing. For example, using a standard
object for database connectivity allows a programmer to develop an application
without regard to the low level details of programming to any particular
database while allowing the freedom to switch between different database
vendors. In addition, commercially available software parts typically are more
thoroughly tested and provide more complete functionality than parts developed
in-house. The Company believes that the use of third-party software parts will
enable organizations to develop robust software applications more rapidly, at
lower cost and with more functionality than applications using only internally
developed objects.

THE ROGUE WAVE SOLUTION

Rogue Wave is a leading provider of object-oriented software parts and
related tools. The Company's products are designed to enable customers to
construct robust applications more quickly, with higher quality and across
multiple platforms, while reducing the complexity associated with the
development process. The Company provides customers with proven
object-oriented development technology so that they can better apply the
principles of software reuse to their own software development efforts. Rogue
Wave's products are designed to be general purpose in nature, supporting a
broad range of development environments and methodologies. The Company's
software parts span a range of functionality from low-level ANSI/ISO
standardized data structures to higher level database connectivity objects.
The Company follows a cross-platform strategy that allows most objects to be
used on the most popular operating systems, such as Windows and

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UNIX. The Company offers a broad suite of software parts and related tools
for C++, the de facto standard object-oriented programming language, and has
more recently introduced a suite of Java-based software parts and related
tools.

The Company's products and services provide professional programmers with
the following benefits:

IMPROVED SOFTWARE QUALITY. Rogue Wave's products improve software quality
by providing professional programmers with robust and reusable software parts
and related tools. The use of the Company's products can result in
applications that are internally simpler and contain less untested code,
resulting in fewer bugs and higher quality.

ACCELERATED DEVELOPMENT TIME. By using the Company's software parts,
developers produce and test fewer lines of original code, thereby reducing
overall development time. In addition, the Company's C++ and Java application
builders simplify and accelerate prototyping and development efforts by
offering visual design environments along with code generation and testing
capabilities.

INCREASED FLEXIBILITY. Most of the Company's software parts have been
written to be cross-platform. In addition, the database products can be used
with a wide variety of databases, and the visual products with a wide variety
of GUIs. This flexibility allows programmers to develop applications with
minimal regard to the environments in which they will be deployed. Businesses
gain the ability to deploy software systems in a wide variety of environments
with minimal redevelopment.

INCREASED FOCUS ON CRITICAL FUNCTIONALITY. Rogue Wave's products
encapsulate fundamental operations within software parts, allowing developers
to focus on creating the critical business logic within applications rather
than the arcane features of the environments in which they are developing.

REDUCED MAINTENANCE COST. Rogue Wave's products are designed to reduce
overall maintenance and support costs over the life of an application. The use
of the Company's products helps programmers develop flexible, modular
applications that can be more easily updated, modified and refined.

THE ROGUE WAVE STRATEGY

The Company's objective is to be the leading provider of high quality,
reusable software parts and related tools for the development of
object-oriented software applications. The key elements of the Company's
strategy to achieve this objective include:

PROMOTE "TOOLS.h++ EVERYWHERE" STRATEGY. In order to establish brand
awareness and cultivate a loyal base of programmers using the Company's
products, the Company promotes the widespread use of its Tools.h++ product.
The Company believes that Tools.h++ is the most widely used cross-platform C++
class library. In addition to its direct sales efforts, the Company has
entered into OEM agreements to bundle Tools.h++ with popular compilers offered
by leading vendors, including Hewlett-Packard, Microware, Siemens-Nixdorf,
Silicon Graphics and Sun Microsystems. The Company believes its "Tools.h++
Everywhere" strategy enables the Company to leverage its installed base of
Tools.h++ customers by offering additional object-oriented software parts and
related tools through its telesales organization.

DEVELOP STRATEGIC PARTNERSHIPS. The Company intends to continue to establish
close relationships with leading technology companies and systems integrators
through technology licensing and joint distribution and marketing arrangements
to promote the widespread acceptance and distribution of Rogue Wave's products.
In particular, the Company recently entered into a joint marketing agreement
with Rational Software under which Rational will embed references to Rogue Wave
products in the Rational Rose product. In addition, the Company will port key
products to the Rational Apex development environment. This collaboration will
enable the introduction of the Company's products to Rational's customer base.
In addition, the Company has signed agreements with Object Design to provide
DBTools.h++ with its ObjectStore development suite and with HAHT Software to
provide DBTools.h++ in their Web development tool.

EXTEND TECHNOLOGICAL LEADERSHIP. The Company believes that it has developed
industry-leading, standards-based class libraries. The Company is an active
participant on the ANSI/ISO C++ Standards Committee and has authored several

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standards. The Company's implementation of the ANSI/ISO Standard C++ Library
has been evaluated and selected by several compiler vendors such as
Hewlett-Packard, Siemens-Nixdorf, Silicon Graphics and Sun Microsystems. The
Company intends to continue to invest significant resources to maintain and
extend its technological leadership.

LEVERAGE C++ EXPERTISE TO ADDRESS THE JAVA MARKET. The Company has
considerable expertise in the C++ language, gained through the development of
its class libraries, that is directly applicable to the Java language. Java
has many of the same features of C++ but is simpler to use. Java also
explicitly supports cross-platform, distributed applications. The Company
believes it was the first to deliver a commercially available Java interface
builder and intends to continue to leverage its C++ expertise to address the
Java marketplace. The Company's strategy is to continue to focus on the Java
language in order to expand its suite of Java class libraries and related
development tools.

PROMOTE THE ENTERPRISE-WIDE ADOPTION OF ROGUE WAVE PRODUCTS. The Company has
traditionally marketed its products to individual professional programmers, and
the Company has sold over 50,000 end-user licenses to date. The Company
intends to leverage its installed customer base of corporate programmers to
approach its customers' higher level management and promote the standardization
of its products within customer organizations. Furthermore, the Company
intends to broaden its suite of complementary products, allowing the Company to
fulfill more of its customers' software development needs.

CONTINUE TO PROVIDE FLEXIBLE CROSS-PLATFORM SOFTWARE. The Company supports
multiple development platforms, including Windows 3.1, Windows 95, Windows NT
and various versions of UNIX such as Sun Solaris and Hewlett-Packard's HP/UX.
In addition, the Company is committed to providing "policy free" class
libraries that provide users the flexibility to use Rogue Wave's products with
a wide variety of C++ based programming environments and methodologies. The
Company believes that this flexibility improves the competitiveness of its
products.

EXPAND WORLDWIDE DISTRIBUTION. The Company distributes its products primarily
through its direct telesales and field sales organizations and, to a lesser
extent, through OEMs and VARs. The Company intends to expand its global
distribution capabilities by increasing its presence in strategic international
markets. In particular, the Company believes that there are significant growth
opportunities in Europe. In February 1997, the Company expanded its European
operations by acquiring Precision, a distributor of the Company's software
products. The Company also plans to continue to increase its domestic sales
force in order to expand its market presence.

PRODUCTS

Rogue Wave's products are designed to be used individually, with each
other, or with other industry standard products. They fall into six different
product groups: Foundation (general purpose data structures and algorithms);
Database (software parts for interfacing to relational databases as well as
related tools); Visual User Interface (GUI libraries as well as related tools);
Mathematical (software parts for numerical and mathematical calculations);
Distributed (software parts for facilitating distributed computing); and Java
(Java software parts and related tools). All products are portable between
Windows and UNIX, except View.h++, which is for UNIX only. During the fourth
quarter of fiscal year 1997 the Company released Tools.h++ for OS/390 giving
Tools.h++ customers cross-platform compatibility from NT through Unix and into
mainframe class machines.

FOUNDATION

STANDARD C++ LIBRARY. Rogue Wave has played an active role on the ANSI/ISO
C++ Standards Committee and has leveraged that experience to develop its
version of the Standard C++ Library. Rogue Wave's Standard C++ Library
includes fundamental data structures, as well as string, numeric limits,
complex, allocator, valarray, iostream and locale classes. Rogue Wave's
Standard C++ Library has been adopted by many of the leading C++ compiler
vendors, including Hewlett-Packard, Microware, Siemens-Nixdorf, Silicon
Graphics and Sun Microsystems.

TOOLS.H++. Tools.h++ encapsulates and extends the Standard C++ Library,
making the Standard C++ Library easier to use by introducing object-oriented
constructs and adding new classes, such as hash tables, that are not part of
the Standard C++

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Library. Used together, Tools.h++ and the Standard C++ Library give users the
portability of the Standard C++ Library plus the safety and reusability
associated with object-oriented design.

THREADS.H++. Threads.h++, which is built on top of the Tools.h++ foundation
class library, is a C++ class library for developing multi-threaded
applications. Multi-threaded applications can offer improved responsiveness and
performance. By writing to the Threads.h++ Application Programming Interface
("API"), users can write code that is both simpler and platform independent.

SERIALIZE.H++. Serialize.h++, which is built on top of the Tools.h++
foundation class library, is a C++ class library that allows objects that have
been saved using the Java "serial protocol" to be restored in C++. This allows
objects to be passed back and forth between Java and C++, providing an
interoperability solution between the two languages.

DATABASE

DBTOOLS.H++. DBTools.h++, which is built on top of the Tools.h++ foundation
class library, provides a common, object-oriented interface to relational
databases. Applications can be written once to the DBTools.h++ API and then
deployed to any of the supported databases, regardless of the differences in
data structures and function calls between the different databases.
DBTools.h++ provides native access to Informix, Microsoft SQL Server, Oracle
and Sybase, plus general connectivity to these and other relational databases
through the ODBC standard. In addition, DBTools.h++ provides a flexible
error-handling model and encapsulates SQL 92 DML functionality, including SQL
extensions such as stored procedures.

OBJECT FACTORY. Object Factory is a development tool that automatically
creates business objects represented in the schemas held in a relational
database, as well as letting users design the visual elements of an application
through a "point and click" interface. Object Factory maps schema information,
stored procedure activation and query results into DBTools.h++ classes. Object
Factory also lets users drag and drop various user elements, such as push
buttons, edit boxes and drop down lists, onto a window, thereby building the
graphical user interface of an application more quickly. Code generation is
controlled through a point-and-click interface, which displays database and
schema information on the screen. Object Factory uses source drivers to control
code generation. Users can edit the source driver files to tailor output to
specific needs. Object Factory is being sold as a value added feature for
DBTools.h++.

VISUAL USER INTERFACE

ZAPP DEVELOPERS SUITE. The zApp Developers Suite consists of four different
products: the zApp Application Framework, Object Factory (described above),
zHelp and the zApp Interface Pack. The zApp Application Framework, which is
built on top of the Tools.h++ foundation class library, is an object-oriented,
GUI library written in C++ that provides portability among Windows 95, Windows
NT and various versions of UNIX such as Sun Solaris and Hewlett-Packard's
HP/UX. Users program once to the zApp API and are then able to deploy to any
supported platform with minimal changes. zHelp allows users to design a
platform-inedependent "Help" system. zApp Interface Pack provides high-level
visual objects and custom controls and extends the functionality of the zApp
Application Framework. zApp Interface Pack consists of approximately 100
classes, including tables, toolbars, status lines, 3D controls and bitmap
buttons.

VIEW.H++. View.h++, which is built on top of the Tools.h++ foundation class
library, is a C++ library that provides an object-oriented, C++ interface to
OSF/Motif, the industry standard GUI for UNIX machines. View.h++ supports both
Motif 1.1 and Motif 1.2 features.

MATHEMATICAL

MONEY.H++. Money.h++ is a C++ class library for representing and manipulating
exact decimal fractions, primarily in banking and other financial applications.
It also includes I/O formatting objects, error handling, control over rounding
and explicit representation for several non-numeric values.

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MATH.H++. Math.h++ is a C++ class library that improves the performance and
reliability of any code that manipulates arrays of numbers. It includes
vectors, matrices, arrays, random number generators and Fast Fourier
Transforms. Math.h++ is useful in mathematical and numerical applications.

LAPACK.H++. LAPACK.h++ is a C++ class library that is designed to solve
numerical linear algebra problems. It manages the details of data
representation, enabling the programmer to concentrate on application
development.

DISTRIBUTED

NET.H++. Net.h++, which is built on top of the Tools.h++ foundation class
library, is a C++ class library for developing applications that communicate
across a network. By programming to the Net.h++ API, the user can write code
that is both simpler and platform independent.

ORBSTREAMS.H++. ORBstreams.h++, which is built on top of the Tools.h++
foundation class library, is a C++ library that makes C++ programming in an OMG
CORBA environment much easier by providing C++ classes that stream complicated
C++ objects across a CORBA interface, eliminating the need to write custom
marshaling and unmarshaling routines.

INTER.NET.H++. Inter.Net.h++, which is built on top of Net.h++, Threads.h++
and Tools.h++, is a C++ library that allows users to add FTP, HTTP, SMTP and
POP3 capabilities to C++ client applications in a platform independent manner.
It also automatically creates threads for users, increasing application
performance and responsiveness.

JAVA

JFACTORY. JFactory generates Java calls to the Abstract Windowing Toolkit
(from Sun Microsystems). The user can design an application visually by
dragging and dropping elements, such as radio buttons and edit boxes, onto a
window. Once the look of the application has been designed, JFactory
automatically generates the code for the application.

JMONEY. JMoney is a Java class library for representing and manipulating
exact decimal fractions, primarily for banking and other financial
applications. It also includes algorithms for calculating amortization and
other schedules.

JTOOLS. JTools is a Java class library that extends the set of utility data
structures that comes with the Java Development Kit distributed by Sun
Microsystems. It also includes a Java version of Rogue Wave's proprietary
"virtual streams" persistence protocol, which allows users to save objects in
C++ and then restore them in Java. This provides a C++/Java interoperability
solution, similar to Serialize.h++.

JWIDGETS. JWidgets is a Java class library that extends the set of user
controls that comes with the Java Development Kit distributed by Sun
Microsystems. It includes such controls as trees, tabbed notebooks, grids and
others.

JCHART. JChart is a Java class library that allows programmers to incorporate
customizable, dynamic charts in Java applets and applications. Possible chart
types include: multi-row, multi-column and stacked bar charts; multi-row and
stacked area charts; and line, pie and scatter-plot charts. A flexible set of
properties gives programmers control over styles, color, font size and types,
scaling factors, titles, background patterns, axis labels and legends.

JDBTOOLS. JDBTools is a Java class library that is similar to the DBTools.h++
C++ class library. It provides a common, object-oriented interface to
relational databases. Applications can be written once to the JDBTools API and
then deployed to any of the supported databases, regardless of the differences
in data structures and function calls between the different databases. JDBTools
provides for flexible connection management, including connection pools and
named connections. Just-in-time binding enhances performance, because
implementations are created only when it comes time to execute the object.

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CUSTOMERS

The Company's products are used by programmers to develop software
applications for organizations in a wide variety of industries. To date, the
Company has sold over 50,000 end-user licenses to individual programmers and
customers in industries such as telecommunications, computers and electronics,
software and information systems, transportation, consulting services,
financial services, and other industrial and consumer products companies.

SALES, MARKETING AND CUSTOMER SUPPORT

The Company markets its software primarily through its direct sales
organization and, to a lesser extent, through outside sales representatives and
indirect channel partners. As of September 30, 1997, the Company's sales and
marketing organization consisted of 107 individuals. In addition, the
Company's products and related tools are sold directly through VARs and OEMs.
The Company primarily sells perpetual use, non-exclusive licenses to use its
products for an up front fee. The licenses generally include a 30-day right of
return policy.

TELESALES. As of September 30, 1997, the Company employed 41 telesales
representatives. A significant part of the Company's "Tools.h++ Everywhere"
strategy is the sale of its products to individual and small groups of
programmers. The Company uses OEM generated and other targeted mailing lists to
distribute product catalogs to those individuals. The Company's telesales force
complements the "Tools.h++ Everywhere" strategy by fielding inquiries and
orders from a broad range of users who are exposed to one or more of the
Company's products. Sales through this channel are typically less than $50,000
per order and the sales cycle is generally less than two months.

DIRECT FIELD SALES. To date, the Company has primarily conducted its direct
sales activities in the United States. As of September 30, 1997, the Company
employed five domestic direct field sales representatives supported by three
technical sales representatives. The Company's domestic field sales force
targets Fortune 500 customers in strategic industries, such as financial
services and telecommunications. The field sales force typically focuses on
reaching chief information officers or similar enterprise-wide technology
purchasers. The sales cycle for this "top down" approach typically ranges from
two to six months. The Company maintains domestic direct sales offices or
personnel in, California, Colorado and New York.

The Company's international channel development efforts have initially
focused on Europe. The Company established a German sales and support office in
January 1996 and acquired PVI Precision Software, GmbH ("Precision"), a
European distributor with offices in Germany, the United Kingdom, France and
the Benelux countries, in February 1997. As of September 30, 1997, the
Company's European sales, support and consulting organization consisted of 39
individuals. The Company maintains European sales and support offices in
Germany, the United Kingdom, France and the Netherlands.

STRATEGIC PARTNERSHIPS. The Company has recently begun to establish strategic
partnerships with leading technology companies and systems integrators through
technology licensing agreements and joint distribution and marketing
arrangements. In addition, the Company offers all of its products for sale and
distribution through its Web site. Telesales representatives utilize this
channel to fulfill certain orders, increasing their productivity.

ORIGINAL EQUIPMENT MANUFACTURERS AND VALUE ADDED RESELLERS. The Company's
foundation products are bundled with many leading C++ compilers and distributed
by major OEMs and VARs. Although this use of OEMs and VARs does not contribute
significantly to the Company's revenue, it does further the Company's
"Tools.h++ Everywhere" strategy by increasing the exposure of C++ users to the
Company's products and providing name recognition for the Company.

The Company's marketing efforts are directed at broadening the market for
its products by increasing awareness among corporate programmers and chief
information officers. In support of its sales efforts, the Company's marketing
department conducts comprehensive programs that include advertising, direct
mail, public relations, trade shows, seminars and ongoing customer
communications programs. The Company also keeps its customers informed of
advances in the field through technical papers and other mailings. The Company
maintains a Web site on the Internet that provides Company and product
information and handles sales and distribution for its products.

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The Company believes that a high level of customer support is important to
the successful marketing and sale of its products. The Company offers
telephone, electronic mail, fax and Internet-based customer support through its
support services staff. Initial product license fees include 30 days of
customer support. The Company also offers annual maintenance agreements that
include technical support and upgrades, and offers introductory and advanced
classes and training programs.

In April 1997, the Company established a consulting services group in
Boulder, Colorado to provide services to the Company's Fortune 1000 customers.
As of September 30, 1997, the Company's domestic consulting group consisted of
9 employees.

PRODUCT DEVELOPMENT

As of September 30, 1997, there were 65 employees on the Company's product
development staff. The Company's product development expenditures in fiscal
1995, 1996 and 1997 were $3.2 million, $5.5 million, $6.5 million,
respectively, and represented 26.8%, 29.4% and 21.5% of total revenue,
respectively. The Company expects that it will continue to commit substantial
resources to product development in the future.

The majority of the Company's research and development department is
located in Corvallis, Oregon, with additional groups in Mountain View,
California and Charlotte, North Carolina. The Company's research and
development department is organized into six different teams, reflecting the
six different product groups, Foundation, Database, Visual User Interface,
Mathematical, Distributed and Java. Each team has a lead architect who is
responsible for the technical content of the product group, as well as a
development manager who is responsible for the personnel in the group, both of
whom work closely with a corresponding marketing manager in the marketing
department. Although development teams are responsible for the overall design,
implementation and testing of products, the Company has a Quality Engineering
("QE") team that designs test suites and maintains configuration management
systems.

The Company has adopted ClearCase from Pure Atria Software for
configuration management. The Company performs synchronization between
development sites using the ClearCase "Remote Site" option. In addition, the
Company uses Purify and Quantify from Pure Atria Software to improve product
quality. All products developed by the Company are tested using Purify during
the Company QE process. The Company uses an internal DESIGN AND STYLE GUIDE to
ensure consistency of general architectural, design and style features.
Furthermore, the Chief Technical Officer is responsible for the design and
implementation of common architectural features across all products.

An important architectural principle of the Company is that all products
should be "policy-free." That is, they should not dictate how the product
should be used and in what environment. As an example, DBTools.h++ can manage
database connections (how and when they are established and terminated) or it
can allow the programmer to manage them manually.

C++ PRODUCTS. Rogue Wave is continuing to expand and enhance its catalogue
of C++ class libraries and related development tools. The Company plans to
introduce a new version of DBTools.h++ that will improve performance and
support for transactions. The Company is also working on new versions of
Tools.h++.

JAVA PRODUCTS. The Company is working to solidify its place as a leader in
the newly developing Java tools market by developing additional products for
Java. Unlike C++, Java comes with a functional set of low-level class
libraries. Accordingly, the Company has chosen to focus on higher-value
components. In particular, the Company is developing software to allow its
customers to write multi-tiered applications in Java, as well as to write
high-performance highly concurrent applications in Java, using software parts.

The Company has developed technology relating to the collection and
verification of data across the Internet. The Company contributed such
technology, and made a funding commitment of up to $2.0 million over the next
three to 15 months, to a majority-owned subsidiary HotData, Inc. ("HotData")
for further development and possible commercialization of this technology. The
Company has the option to purchase the minority interest of the subsidiary
during a specified time period in the future. Dan Whitaker, the Company's
former Executive Vice President, Marketing, resigned his office and his

9

position on the Company's Board of Directors to devote full time to the
management of this HotData, but has agreed to serve as a consultant to the
Company through July 1998.

The Company's future success will depend on its ability to continue to
enhance its current product line and to continue to develop and introduce new
products that keep pace with competitive product introductions and
technological developments, satisfy diverse and evolving customer requirements
and otherwise achieve market acceptance. There can be no assurance that the
Company will be successful in continuing to develop and market on a timely and
cost-effective basis fully functional product enhancements or new products that
respond to technological advances by others, or that its enhanced and new
products will achieve market acceptance. In addition, the Company has in the
past experienced delays in the development, introduction and marketing of new
or enhanced products, and there can be no assurance that the Company will not
experience similar delays in the future. Any failure by the Company to
anticipate or respond adequately to changes in technology and customer
preferences, or any significant delays in product development or introduction,
would have a material adverse effect on the Company's business, financial
condition and results of operations.

INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS

The Company relies primarily on a combination of copyright, trademark and
trade secret laws, confidentiality procedures and contractual provisions to
protect its proprietary rights. The Company also believes that factors such as
the technological and creative skills of its personnel, new product
developments, frequent product enhancements, name recognition and reliable
product maintenance are essential to establishing and maintaining a
technological leadership position. The Company seeks to protect its software,
documentation and other written materials under trade secret and copyright
laws, which afford only limited protection. The Company currently has one
patent application pending in the United States. The technology covered by the
pending patent application currently is not included in any of the Company's
products. There can be no assurance that the Company's pending patent
application, whether or not being currently challenged by applicable
governmental patent examiners, will be issued with the scope of the claims
sought by the Company, if at all. Furthermore, there can be no assurance that
others will not develop technologies that are similar or superior to the
Company's technology or design around the Company's pending patent. 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. The nature of many of the
Company's products requires the release of the source code to all customers.
As such, 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 some foreign countries do not protect the
Company's proprietary rights as fully as do the laws of the United States.
There can be no assurance that the Company's means of protecting its
proprietary rights in the United States or abroad will be adequate or that
competition will not independently develop similar technology.

The Company is not aware that it is infringing any proprietary rights of
third parties. There can be no assurance, however, that third parties will not
claim infringement by the Company of their intellectual property rights. The
Company expects that 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, if at all. In the event of a successful claim of product infringement
against the Company and failure or inability of the Company to license the
infringed or similar technology, the Company's business, operating results and
financial condition would be materially and adversely affected.

COMPETITION

The market for the Company's products is intensely competitive, subject to
rapid change and significantly affected by new product introductions and other
market activities of industry participants. The Company's products are
targeted at the emerging market for C++ software parts and programming tools
and, to a lesser extent, at the emerging Java market. The Company's competitors
offer a variety of products and services to address these markets. The Company
believes that

10

the principal competitive factors in this market are product quality,
flexibility, performance, functionality and features, use of standards based
technology, quality of support and service, company reputation and price.
While price is less significant than other factors for corporate customers,
price can be a significant factor for individual programmers. Direct
competitors in the C++ market include Microsoft (with its MFC), IBM, ILOG and
several privately held companies. Microsoft is a particularly strong
competitor due to its large installed base and the fact that it bundles its
MFC library with its own and other C++ compilers. Microsoft may decide in
the future to devote more resources to or broaden the functions of MFC in
order to address and more effectively compete with the functionality of the
Company's products. The Company faces direct competition in the Java market
from Borland, JavaSoft (a business unit of Sun Microsystems), Microsoft,
Sybase, Symantec and other companies for its current Java products and it
expects to face significant competition in the future from such companies
with respect to other Java products the Company may introduce. Software
applications can also be developed using software parts and programming tools
in environments other than C++ or Java. Indirect competitors with such
offerings include Microsoft (with its ActiveX technology), Borland, Oracle,
ParcPlace-Digitalk and Powersoft (a subsidiary of Sybase). Many of these
competitors have longer operating histories, significantly greater financial,
technical, marketing and other resources, significantly greater name
recognition and larger installed bases of customers than the Company. In
addition, several database vendors, such as Informix, Oracle and Sybase are
increasingly developing robust software parts for inclusion with their
database products and may begin to compete with the Company in the future.
These potential competitors have well-established relationships with current
and potential customers and have the resources to enable them to more easily
offer a single vendor solution. Like the Company's current competitors, many
of these companies have longer operating histories, significantly greater
resources and name recognition and larger installed bases of customers than
the Company. As a result, these potential competitors may be able to respond
more quickly to new or emerging technologies and changes in customer
requirements, or to devote greater resources to the development, promotion
and sale of their products than the Company.

The Company also faces competition from systems integrators and internal
development efforts. Many systems integrators possess industry specific
expertise that may enable them to offer a single vendor solution more easily,
and already have a reputation among potential customers for offering
enterprise-wide solutions to software programming needs. There can be no
assurance that these third parties, many of which have significantly greater
resources than the Company, will not market competitive software products in
the future. It is also possible that new competitors or alliances among
competitors will emerge and rapidly acquire significant market share. The
Company also expects that competition will increase as a result of software
industry consolidation. Increased competition may result in price reductions,
reduced gross margins and loss of market share, any of which could materially
and adversely affect the Company's business, operating results and financial
condition. There can be no assurance that the Company will be able to compete
successfully against current and future competitors or that competitive
pressures faced by the Company will not materially and adversely affect its
business, financial condition and results of operations.

EMPLOYEES

As of September 30, 1997, the Company had a total of 251 employees, of
which 212 were based in the United States and 39 were based in Europe. Of the
total, 107 were in sales and marketing, 65 were in product development, 29 were
in customer support, 9 were in consulting services, and 41 were in finance,
administration and operations. The Company's future performance depends in
significant part upon the continued service of its key technical, sales and
senior management personnel, none of whom is bound by an employment agreement.
The loss of the services of one or more of the Company's key employees could
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company's future success also depends on its
continuing ability to attract, train and retain highly qualified technical,
sales and managerial personnel. Competition for such personnel is intense, and
there can be no assurance that the Company can retain its key technical, sales
and managerial personnel in the future. The Company has not experienced any
work stoppages and considers relations with its employees to be good.

RISK FACTORS

In addition to the other information in this report, the following risk
factors should be considered carefully in evaluating the Company and its
business. This report may contain forward-looking statements that involve
risks and uncertainties. When used in this report, the words "anticipate,"
"believe," "effect," "estimate," "expect" and similar

11

expressions as they relate to the Company or its management are intended to
identify such forward-looking statements. The Company's actual results,
performance or achievements could differ materially from the results
expressed in or implied by these forward-looking statements. Factors that
might cause such differences include, but are not limited to, those discussed
in "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "Business" as well as those discussed elsewhere in this
report.

UNCERTAINTY OF FUTURE OPERATING RESULTS; FLUCTUATIONS IN QUARTERLY
OPERATING RESULTS. Prior growth rates in the Company's revenue and net income
should not be considered indicative of future operating results. Future
operating results will depend upon many factors, including the demand for the
Company's products and services, the level of product and price competition,
the length of the Company's sales cycle, the size and timing of individual
license transactions, the delay or deferral of customer implementations, the
budget cycles of the Company's customers, the Company's success in expanding
its direct sales force and indirect distribution channels, the timing of new
product introductions and product enhancements, the mix of products and
services licensed or sold, levels of international sales, activities of and
acquisitions by competitors, changes in pricing policy by the Company and its
competitors, publication of opinions about the Company, its products and object-
oriented technology by industry analysts, the hiring of new employees, changes
in foreign currency exchange rates, product lifecycles and the ability of the
Company to develop and market new products and control costs. The Company
generally ships orders as received and as a result typically has little or no
backlog. Quarterly revenue and operating results therefore depend on the
volume and timing of orders received during the quarter, which are difficult to
forecast. In addition, the Company has historically earned a substantial
portion of its revenue in the last weeks, or even days, of each quarter. To
the extent this trend continues, the failure to achieve such revenue during the
last weeks of any given quarter will have a material adverse effect on the
Company's business, financial condition and results of operations. Furthermore,
due to all of the foregoing factors, it is possible that in some future quarter
the Company's operating results may be below the expectations of public market
analysts and investors. In such event, the price of the Company's Common Stock
would likely be materially and adversely affected.

Service and maintenance revenue tends to fluctuate as consulting
contracts, which may extend over several months, are undertaken, renewed,
completed or terminated. License fee revenue is difficult to forecast due to
the fact that the Company's sales cycle, from initial evaluation to purchase,
varies substantially from customer to customer. As a result of these and other
factors, revenue for any quarter is subject to significant variation, and the
Company believes that period-to-period comparisons of its results of operations
are not necessarily meaningful and should not be relied upon as indicators of
future performance. Because the Company's operating expenses are based on
anticipated revenue trends and because a high percentage of the Company's
expenses are relatively fixed, a delay in the recognition of revenue from a
limited number of transactions could cause significant variations in operating
results from quarter to quarter and could result in significant losses. The
Company has announced its intention to move its administrative operations from
its current location in Corvallis, Oregon to Boulder, Colorado during fiscal
1998. In connection with this move, the Company expects to incur charges
totaling approximately $1.5 million during fiscal 1998. Such charges will have
a material adverse effect on the operating results for the quarters in which
they are incurred. Specifically, the Company anticipates that it will incur the
substantial majority of such charges during the second quarter of fiscal 1998.
Furthermore, the Company may incur additional charges associated with the move
which, if incurred, may have a material adverse effect on the Company's
operating results. In addition, the Company created a majority-owned subsidiary
to develop technology relating to the collection and verification of data
across the Internet. The Company expects such subsidiary will be in the
development stage through at least fiscal 1998. There can be no assurance that
the technology developed by such subsidiary will be commercialized, or even if
it is commercialized there can be no assurance of market acceptance due to such
subsidiary's new and untested business model. The financial results of such
subsidiary will be consolidated with the Company's financial results.
Accordingly, fluctuations in the operating results of such subsidiary may have
a material adverse effect on the Company's operating results. Fluctuations in
operating results may also result in volatility in the price of the Company's
Common Stock.

LIMITED OPERATING HISTORY. The Company was founded in September 1989 and
first shipped products in November 1989. Although the Company's total revenue
has increased in each of the last eight quarters and the Company had net income
in most of those quarters, the Company incurred a net loss in the quarter ended
June 30, 1996. In fiscal 1995 and fiscal 1996, the Company experienced
significant declines in net income. The declines were primarily

12

the result of two factors, the combination of its financial results with
those of Inmark Development Corporation ("Inmark"), with which the Company
merged in October 1995 (the "Inmark Merger"), as well as the significant
commitment of resources to the Company's product development, sales and
marketing and technical support organizations. The Inmark Merger had a
significant adverse impact on the Company's net income because, prior to the
time of the Inmark Merger, Inmark was engaged in a new product development
effort that resulted in substantial operating losses. The increase in
resources devoted to the Company's product development, sales and marketing
and technical support organization were part of the Company's strategy to
expand market share. The strategy represented a shift away from the Company's
earlier focus on achieving profitability and the short term result was the
decrease in net income. The Company expects to continue to devote substantial
resources in these areas and as a result will need to recognize significant
quarterly revenue to achieve and maintain profitability. The Company's
limited operating history makes the prediction of future operating results
difficult or impossible. Although the Company has experienced significant
revenue growth in recent years, there can be no assurance that the Company
will sustain such growth, if any, or that the Company will remain profitable
on a quarterly basis or at all.

DEPENDENCE ON EMERGING MARKET FOR C++ AND JAVA. The Company's product
lines are designed for use in object-oriented software application development,
specifically the C++ and Java programming languages, and substantially all of
the Company's revenue has been attributable to sales of products and related
maintenance and consulting services related to C++ programming and development.
The Company believes that while the market for object-oriented technology in
general, and C++ tools and programming applications in particular, is growing,
the Company's growth depends upon broader market acceptance of object-oriented
technology and the C++ programming language. Even if broader market acceptance
is achieved, the object-oriented market may continue to be characterized by
multiple software environments, many of which are not supported by the
Company's products, and numerous competitors in the areas of tools,
methodology and services. Furthermore, the C++ programming language is very
complex. Should the C++ programming language lose market acceptance or be
replaced by another programming language, the Company's business, financial
condition and results of operations would be materially and adversely affected.
The Company's financial performance will depend in part upon continued growth
in the object-oriented technology and C++ markets and the development of
standards that the Company's products address. There can be no assurance that
the market will continue to grow or that the Company will be able to respond
effectively to the evolving requirements of the market.

The number of software developers using the C++ programming language is
relatively small compared to the number of developers using more traditional
software development technology. The adoption of the C++ programming language
by software programmers who have traditionally used other technology requires
reorientation to significantly different programming methods, and there can be
no assurance that the acceptance of the C++ programming language will expand
beyond the early adopters of the technology. Furthermore, there can be no
assurance that potential corporate customers will be willing to make the
investment required to retrain programmers to build software using C++ rather
than structured or other object-oriented programming techniques. Many of the
Company's customers have purchased only small quantities of the Company's
products and there can be no assurance that these or new customers will broadly
implement C++ programming or purchase additional products.

In addition, the Company has several products for use in the Java market.
The Company has spent and will continue to devote resources on the development
of new and enhanced products that address the Java market. There can be no
assurance that the Company will be successful in marketing its existing or
future Java products or that the market for Java products will grow. If the
Java market fails to grow, or grows more slowly than the Company currently
anticipates, the Company's business, financial condition and results of
operations could be materially and adversely affected

MANAGEMENT OF GROWTH. The Company is experiencing a period of transition
and aggressive product introductions that has placed, and may continue to
place, a significant strain on its resources, including its personnel.
Expansion of the Company's product lines, additional product development and
product introductions, or acquisitions of other technologies or companies, when
added to the day-to-day activities of the Company, will place a further strain
on the Company's resources and personnel. In particular, the Company has
recently acquired a European distributor with offices and personnel in several
European countries. In addition, the Company recently established a consulting
group in

13

Boulder, Colorado to help expand its ability to provide consulting services.
Such additions involve a number of risks, including risks related to the
integration of new businesses or business units, the substantial management
time devoted to such activities, the failure to achieve anticipated benefits,
such as cost savings and increased revenue, and the difficulties of managing
additional operations. The Company's acquisition of Inmark in October 1995
resulted in the Company's product development team being distributed in three
separate sites across the country. Managing this distribution requires a
significant amount of attention from management, particularly the Vice
President, Development and the Chief Technology Officer, to ensure that the
Company's development efforts are timely, consistent and well integrated. In
addition, the Company recently announced that it will move its administrative
operations from Corvallis, Oregon to Boulder, Colorado. This move will result
in the distribution of the Company's senior management team, which may make
managing the Company's operations more difficult. In particular, managing
this transition will require a significant amount of attention from
management, particularly the Company's Chief Operating Officer and Chief
Financial Officer who will relocate as part of the move.

COMPETITION. The market for the Company's products is intensely
competitive, subject to rapid change and significantly affected by new product
introductions and other market activities of industry participants. The
Company's products are targeted at the emerging market for C++ software parts
and programming tools and, to a lesser extent, at the emerging Java market.
The Company's competitors offer a variety of products and services to address
these markets. The Company believes that the principal competitive factors in
this market are product quality, flexibility, performance, functionality and
features, use of standards based technology, quality of support and service,
company reputation and price. While price is less significant than other
factors for corporate customers, price can be a significant factor for
individual programmers. Direct competitors in the C++ market include Microsoft
(with its Microsoft Foundation Classes, "MFC"), IBM, ILOG and several privately
held companies. Microsoft is a particularly strong competitor due to its large
installed base and the fact that it bundles its MFC library with its own and
other C++ compilers. Microsoft may decide in the future to devote more
resources to or broaden the functions of MFC in order to address and more
effectively compete with the functionality of the Company's products. The
Company faces direct competition in the Java market from Borland, JavaSoft (a
business unit of Sun Microsystems), Microsoft, Sybase, Symantec and other
companies for its current Java products and it expects to face significant
competition in the future from such companies with respect to other Java
products the Company may introduce. Software applications can also be
developed using software parts and programming tools in environments other than
C++ or Java. Indirect competitors with such offerings include Microsoft (with
its ActiveX technology), Borland, Oracle, ParcPlace-Digitalk and Powersoft (a
subsidiary of Sybase). Many of these competitors have longer operating
histories, significantly greater financial, technical, marketing and other
resources, significantly greater name recognition and larger installed bases of
customers than the Company. In addition, several database vendors, such as
Informix, Oracle and Sybase are increasingly developing robust software parts
for inclusion with their database products and may begin to compete with the
Company in the future. These potential competitors have well-established
relationships with current and potential customers and have the resources to
enable them to more easily offer a single vendor solution. Like the Company's
current competitors, many of these companies have longer operating histories,
significantly greater resources and name recognition and larger installed bases
of customers than the Company. As a result, these potential competitors may be
able to respond more quickly to new or emerging technologies and changes in
customer requirements, or to devote greater resources to the development,
promotion and sale of their products than the Company.

The Company also faces competition from systems integrators and internal
development efforts. Many systems integrators possess industry specific
expertise that may enable them to offer a single vendor solution more easily,
and already have a reputation among potential customers for offering enterprise-
wide solutions to software programming needs. There can be no assurance that
these third parties, many of which have significantly greater resources than
the Company, will not market competitive software products in the future. It
is also possible that new competitors or alliances among competitors will
emerge and rapidly acquire significant market share. The Company also expects
that competition will increase as a result of software industry consolidation.
Increased competition may result in price reductions, reduced gross margins and
loss of market share, any of which could materially and adversely affect the
Company's business, operating results and financial condition. There can be no
assurance that the Company will be able to compete successfully against current
and future competitors or that competitive pressures faced by the Company will
not materially and adversely affect its business, financial condition and
results of operations.

14

Furthermore, the Company believes that its ability to achieve significant
revenue growth in the future will depend in large part on its success in
recruiting and training sufficient direct sales personnel and establishing and
maintaining relationships with its outside sales representatives. Although the
Company is currently investing, and plans to continue to invest, significant
resources to expand its direct sales force and to develop distribution
relationships with outside sales representatives, the Company has at times
experienced and continues to experience difficulty in recruiting qualified
sales personnel and in establishing necessary sales representative
relationships. The Company believes that the hiring and retaining of qualified
individuals at all levels in the Company is essential to the Company's ability
to manage growth successfully, and there can be no assurance that the Company
will be successful in attracting and retaining the necessary personnel. If
Company management is unable to effectively manage growth, the Company's
business, financial condition and results of operations will be materially and
adversely affected.

RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW PRODUCTS. The market for
software development tools is characterized by rapid technological advances,
changes in customer requirements and frequent new product introductions and
enhancements. The Company must respond rapidly to developments related to
hardware platforms, operating systems and applicable programming languages.
Such developments will require the Company to continue to make substantial
product development investments. Any failure by the Company to anticipate or
respond adequately to technological developments and customer requirements, or
any significant delays in product development or introduction, could result in
a loss of competitiveness or revenue.

The Company's future success will depend on its ability to continue to
enhance its current product line and to continue to develop and introduce new
products that keep pace with competitive product introductions and
technological developments, satisfy diverse and evolving customer requirements
and otherwise achieve market acceptance. There can be no assurance that the
Company will be successful in continuing to develop and market on a timely and
cost-effective basis fully functional product enhancements or new products that
respond to technological advances by others, or that its enhanced and new
products will achieve market acceptance. In addition, the Company has in the
past experienced delays in the development, introduction and marketing of new
or enhanced products. Such delays were primarily associated with increasing
product functionality and implementing new customer requirements. To date, such
delays have not resulted in a material adverse effect on the Company's
business, financial condition and results of operations. There can be no
assurance that the Company will not experience similar delays in the future.
Any failure by the Company to anticipate or respond adequately to changes in
technology and customer preferences, or any significant delays in product
development or introduction, would have a material adverse effect on the
Company's business, financial condition and results of operations.

FUTURE ACQUISITIONS. The Company frequently evaluates strategic
opportunities available to it and may in the future pursue acquisitions of
complementary technologies, products or businesses. Future acquisitions of
complementary technologies, products or businesses by the Company will result
in the diversion of management's attention from the day-to-day operations of
the Company's business and may include numerous other risks, including
difficulties in the integration of the operations, products and personnel of
the acquired companies. Future acquisitions by the Company may also result in
dilutive issuances of equity securities, the incurrence of debt and
amortization expenses related to goodwill and other intangible assets. Failure
of the Company to successfully manage future acquisitions may have a material
adverse effect on the Company's business, financial condition and results of
operations.

RISKS OF EXPANDING INTERNATIONAL SALES AND MARKETING. The Company opened
its first international sales office in Germany in January 1996. In February
1997, the Company expanded its European operations by acquiring Precision.
Precision is a distributor of the Company's software products in Germany, the
United Kingdom, France and the Benelux countries. International revenue
accounted for approximately 19% and 23% of the Company's total revenue in
fiscal 1996 and 1997, respectively. As of September 30, 1997, the Company had
39 employees located outside of the United States. The Company believes that
in order to increase sales opportunities and profitability it will be required
to expand its international operations. The Company has committed and
continues to commit significant management time and financial resources to
developing direct and indirect international sales and support channels. There
can be no assurance, however, that the Company will be able to maintain or
increase international market demand for its products. To the extent that the
Company is unable to do so in a timely manner, the Company's international
revenue would be

15

limited, and the Company's business, financial condition and results of
operations would be materially and adversely affected.

RISKS INHERENT IN INTERNATIONAL OPERATIONS. International operations are
subject to inherent risks, including the impact of possible recessionary
environments in economies outside the United States, costs of localizing
products for foreign markets, longer receivables collection periods and greater
difficulty in accounts receivable collection, unexpected changes in regulatory
requirements, difficulties and costs of staffing and managing foreign
operations, reduced protection for intellectual property rights in some
countries, potentially adverse tax consequences, and political and economic
instability. There can be no assurance that the Company will be able to
sustain or increase international revenue from licenses or from maintenance and
service, or that the foregoing factors will not have a material adverse effect
on the Company's future international revenue and, consequently, on the
Company's business, financial condition and results of operations. The
Company's direct international revenue is generally denominated in local
currencies. As a result of recent fluctuations in international exchange
rates, the Company's Board of Directors has authorized the Company to enter
into forward exchange contracts to minimize the risks associated with such
fluctuations. Although exposure to currency fluctuations to date has not been
material, there can be no assurance that fluctuations in currency exchange
rates in the future will not have a material adverse impact on international
revenue and thus the Company's business, financial condition and results of
operations.

DEPENDENCE UPON KEY PERSONNEL. The Company's future performance depends
in significant part upon the continued service of its key technical, sales and
senior management personnel, none of whom is bound by an employment agreement.
The Company believes that the technological and creative skills of its
personnel are essential to establishing and maintaining a leadership position,
particularly in light of the fact that its intellectual property, once sold to
the public market, is easily replicated. The loss of the services of one or
more of the Company's executive officers or key technical personnel would have
a material adverse effect on the Company's business, financial condition and
results of operations. In particular, the services of Thomas Keffer and
Michael Scally, the Company's President and Chief Executive Officer, and Chief
Operating Officer, respectively, would be difficult to replace. The Company
has key person life insurance policies in the amount of $1.0 million on each of
Dr. Keffer and Mr. Scally. The Company's future success also depends on its
continuing ability to attract and retain highly-qualified technical, sales and
managerial personnel. In July 1997, Dan Whitaker, the Company's former
Executive Vice President, Marketing, resigned to devote full time to the
management of HotData. Although Mr. Whitaker has agreed to serve as a
consultant to the Company through July 1998, there can be no assurance that the
Company will be able to hire a qualified replacement. In the past, the Company
has experienced some difficulty in attracting key personnel to work at its
facilities in Corvallis, Oregon. Competition for such personnel is intense,
and there can be no assurance that the Company can retain its key technical,
sales and managerial employees or that it can attract, assimilate or retain
other highly qualified technical, sales and managerial personnel in the future.

VARIABILITY OF SALES CYCLES. The Company distributes its products through
two different direct sales channels, a telesales force and a field sales force,
each of which is subject to a variable sales cycle. Products sold by the
Company's telesales force may be sold after a single phone call or may require
several weeks of education and negotiation before a sale is made. As such, the
sales cycle associated with telesales typically ranges from a few days to two
months. On the other hand, the purchase of products from the Company's field
sales force is often an enterprise-wide decision and may require the sales
person to provide a significant level of education to prospective customers
regarding the use and benefits of the Company's products. For these and other
reasons, the sales cycle associated with the sale of the Company's products
through its field sales force typically ranges from two to six months and is
subject to a number of significant delays over which the Company has little or
no control. Due to the foregoing factors, quarterly revenue and operating
results can be variable and are difficult to forecast, and the Company believes
that period-to-period comparisons of quarterly revenue are not necessarily
meaningful and should not be relied upon as an indicator of future revenue.

PROPRIETARY RIGHTS, RISKS OF INFRINGEMENT AND SOURCE CODE RELEASE. The
Company relies primarily on a combination of copyright, trademark and trade
secret laws, confidentiality procedures and contractual provisions to protect
its proprietary rights. The Company also believes that factors such as the
technological and creative skills of its personnel, new product developments,
frequent product enhancements, name recognition and reliable product

16

maintenance are essential to establishing and maintaining a technological
leadership position. The Company seeks to protect its software, documentation
and other written materials under trade secret and copyright laws, which afford
only limited protection. The Company currently has one patent application
pending in the United States. There can be no assurance that the Company's
pending patent application, whether or not being currently challenged by
applicable governmental patent examiners, will be issued with the scope of the
claims sought by the Company, if at all. Furthermore, there can be no
assurance that others will not develop technologies that are similar or
superior to the Company's technology or design around the Company's pending
patent. 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. The
nature of many of the Company's products requires the release of the source
code to all customers. As such, 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 some foreign
countries do not protect the Company's proprietary rights as fully as do the
laws of the United States. There can be no assurance that the Company's means
of protecting its proprietary rights in the United States or abroad will be
adequate or that competition will not independently develop similar technology.

The Company is not aware that it is infringing any proprietary rights of
third parties. There can be no assurance, however, that third parties will not
claim infringement by the Company of their intellectual property rights. The
Company expects that 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, if at all. In the event of a successful claim of product infringement
against the Company and failure or inability of the Company to license the
infringed or similar technology, the Company's business, financial condition
and results of operations would be materially and adversely affected.

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

RISK OF PRODUCT DEFECTS. Software products as complex as those offered by
the Company frequently contain errors or failures, especially when first
introduced or when new versions are released. Also, new products or
enhancements may contain undetected errors, or "bugs," or performance problems
that, despite testing, are discovered only after a product has been installed
and used by customers. There can be no assurance that such errors or
performance problems will not be discovered in the future, causing delays in
product introduction and shipments or requiring design modifications that could
materially and adversely affect the Company's competitive position and
operating results. The Company's products are typically intended for use in
applications that may be critical to a customer's business. As a result, the
Company expects that its customers and potential customers have a greater
sensitivity to product defects than the market for software products generally.
Although the Company has not experienced material adverse effects resulting
from any such errors to date, there can be no assurance that, despite testing
by the Company and by current and potential customers, errors will not be found
in new products or releases after commencement of commercial shipments,
resulting in loss of revenue or delay in market acceptance, diversion of
development resources, the payment of monetary damages, damage to the Company's
reputation, or increased service and warranty costs, any of which could have a
material adverse effect upon the Company's business, financial condition and
results of operations.

POSSIBLE VOLATILITY OF STOCK PRICE. The Company's stock price has
fluctuated substantially since its initial public offering in November 1996.
There can be no assurance that the market price of the Common Stock will not
decline

17

below the public offering price. The trading price of the Company's Common
Stock is subject to significant fluctuations in response to variations in
quarterly operating results, the gain or loss of significant orders, changes
in earning estimates by analysts, announcements of technological innovations
or new products by the Company or its competitors, general conditions in the
software and computer industries and other events or factors. In addition,
the stock market in general has experienced extreme price and volume
fluctuations that have affected the market price for many companies in
industries similar or related to that of the Company and that have been
unrelated to the operating performance of these companies. These market
fluctuations may materially and adversely affect the market price of the
Company's Common Stock.

EXECUTIVE OFFICERS OF THE COMPANY

The executive officers of the Company and their ages and positions as of
October 31, 1997 are as follows:

NAME AGE POSITION
---- --- --------
Thomas Keffer, Ph.D. (1)........ 45 President, Chief Executive Officer and
Chairman of the Board of Directors
Michael Scally.................. 46 Chief Operating Officer and Director
Robert M. Holburn, Jr........... 51 Chief Financial Officer and Secretary
Michael A. Foreman.............. 46 Vice President, Development
Thomas M. Atwood................ 49 Director
Louis C. Cole................... 54 Director
Richard P. Magnuson (1)(2)...... 41 Director
Thomas H. Peterson (1)(2)....... 41 Director

THOMAS KEFFER, PH.D., President, Chief Executive Officer and Chairman of
the Board of Directors, has been with the Company since its inception in 1989.
Dr. Keffer was a founder of the Company. Prior to 1989, Dr. Keffer was an
Assistant Professor of Oceanography at the University of Washington.
Dr. Keffer received his Ph.D. in Physical Oceanography from Oregon State
University and his BA from Cornell University.

MICHAEL SCALLY has served as the Chief Operating Officer of the Company
since June 1996 and appointed to the Board of Directors October 1997. From May
1994 until June 1996, he served as Vice President, National Telesales of
Intersolv, a software company. From November 1988 until April 1994, he was the
Vice President, General Manager of Carnegie Group Inc., a computer consulting
company. Mr. Scally received his B.S. from Michigan Technological University.

ROBERT M. HOLBURN, JR., the Chief Financial Officer and Secretary of the
Company, has been with the Company since October 1994. Between March 1994 and
October 1994, he served as the Chief Financial Officer for MacSema, Inc., a
manufacturer of electronic data storage systems. From August 1993 until
March 1994, he served as an independent financial consultant. From August 1992
until August 1993, he served as the Chief Financial Officer for Pacific Coast
Technologies, an electronics company. From 1987 until August 1992, Mr. Holburn
served as Vice President of Administration, Chief Financial Officer and
Secretary of Advanced Power Technology, a semiconductor manufacturer. Prior to
1987, he was employed for 13 years with Texas Instruments, Inc., an electronics
company, where he last served as Controller for its world-wide MOS memory
operations. Mr. Holburn received his MBA from the College of William and Mary
and his B.S. from the University of Rhode Island.

MICHAEL A. FOREMAN has served as Vice President, Development of the
Company since September 1996. From March 1995 to June 1996, he served as Vice
President of Research and Development for EyeSys Technologies, a medical device
company. Between May 1992 and March 1995, he was Senior Manager, Software
Development at Informix Software, a software company. Prior to joining
Informix, he was employed for nine years with Hewlett-Packard, a computer
hardware company, where he last served as Research and Development Project
Manager, Software Engineering Systems Division. Mr. Foreman received his MBA
from the University of Maryland and his B.S. from Virginia Polytechnic
Institute.

18

THOMAS M. ATWOOD has been a director of the Company since October 1994.
From June 1996 until June 1997, Mr. Atwood was Chief Executive Officer of
Cinebase Software, a software company. Prior to that, he founded Object
Design, Inc., a software company, in 1988 and served as its Chairman through
December 1995.

LOUIS C. COLE has been a director of the Company since July 1997. Mr. Cole
is currently the President, Chief Executive Officer and Chairman of the Board
of Legato Systems, Inc., a network storage management software company. Prior
to that, from March 1987 until July 1988, Mr. Cole served as Executive Vice
President of Novell, Inc., a manufacturer of computer networking equipment and
software.

RICHARD P. MAGNUSON has been a director of the Company since
November 1995. Mr. Magnuson served as a general partner of Menlo Ventures, a
venture capital firm, from 1984 until December 1995. Mr. Magnuson also serves
as a director of OrCAD, Inc., a software company, California Water Service
Company, a water utility, and several privately held companies.

THOMAS H. PETERSON has been a director of the Company since July 1994.
Mr. Peterson has been a general partner of certain venture capital funds
associated with El Dorado Ventures, a venture capital company, since May 1991.
From 1986 to May 1991, Mr. Peterson was an associate with El Dorado Ventures.
Mr. Peterson also serves as a director of several privately held companies.

___________

(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.

ITEM 2. PROPERTIES

The Company's principal domestic administrative, sales, marketing,
support, consulting and product development offices are located in facilities
consisting of approximately 69,000 square feet in Corvallis, Oregon, 13,000
square feet in Mountain View, California and 18,000 square feet in Boulder,
Colorado. The leases on the Corvallis facilities expire on various dates from
1998 through 2001, the lease on the Mountain View facility expires in 1999 and
the lease on the existing Boulder facility expires in 2000. The Company
currently leases other domestic sales, development and support offices in New
York and North Carolina. The Company also rents space on a month-to-month
basis for its international office in Europe. Note 4 of Notes to Consolidated
Financial Statements describes the amount of the Company's lease obligations.
Effective February 1, 1998, the Company has committed to lease an additional
37,000 square feet in Boulder, Colorado in association with the planned move of
it's headquarters' operations. See "Risk Factors - Management of Growth." The
Company believes that these facilities are adequate for its current needs and
that suitable additional or alternative space will be available in the future
on commercially reasonable terms as needed.

ITEM 3. LEGAL PROCEEDINGS

None.

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

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

19

PART II

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

MARKET INFORMATION

The Company's common stock trades on the Nasdaq National Market ("Nasdaq")
under the symbol "RWAV". The following table sets forth the high and low
closing sales prices for the Company's Common Stock since public trading
commenced on November 22, 1996, as furnished by Nasdaq. These prices reflect
prices between dealers, without retail markups, markdowns or commissions, and
may not represent actual transactions.

HIGH LOW
YEAR ENDED SEPTEMBER 30, 1997 ---- ---

1st Quarter (from November 22, 1996)............. $17.250 $12.875
2nd Quarter...................................... 23.500 9.000
3rd Quarter...................................... 14.375 8.375
4th Quarter...................................... 16.875 10.125

As of October 31, 1997, there were approximately 130 stockholders of
record (which number does not include the number of stockholders whose shares
are held of record 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 1,000 beneficial holders of the Company's Common
Stock.

DIVIDEND POLICY

The Company has not historically paid cash dividends and currently intends
to retain any future earnings for use in its business for the foreseeable
future.

USE OF PROCEEDS

The effective date of the Company's first registration statement, filed on
Form SB-2 filed under the Securities Act of 1993 (No. 333-13517), was November
21, 1996 (the "Registration Statement"). The class of securities registered
was Common Stock. The offering commenced on November 21, 1996 and all
securities were sold in the offering. The managing underwriters for the
offering were Hambrecht & Quist LLC and Wessels, Arnold & Henderson, L.L.C.

Pursuant to the Registration Statement, the Company sold 2,367,640 shares
of its Common Stock for its own account, for an aggregate offering price of
$28,411,680, and 449,860 shares of its Common Stock for the account of certain
selling stockholders, for an aggregate offering price of $5,398,320.

The Company incurred expenses of approximately $2,838,818, of which
$1,988,818 represented underwriting discounts and commissions and $850,000
represented estimated other expenses. All such expenses were direct or
indirect payments to others. The net offering proceeds to the issuer after
total expenses was $25,572,863.

The Company has used $1,500,000 of the net proceeds from the offering in
the acquisition of other businesses and $1,000,000 of the net proceeds from the
offering for repayment of indebtedness. All remaining net proceeds have been
invested in high quality investment grade commercial paper. The use of
proceeds from the offering does not represent a material change in the use of
proceeds described in the prospectus.

20

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

YEAR ENDED SEPTEMBER 30,
------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)

CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
License revenue....................................... $ 2,949 $ 6,652 $ 10,417 $ 14,986 $ 21,351
Service and maintenance revenue....................... 263 557 1,520 3,859 8,815
--------- --------- --------- --------- ---------
Total revenue....................................... 3,212 7,209 11,937 18,845 30,166
--------- --------- --------- --------- ---------
Cost of revenue:
Cost of license revenue............................... 301 693 1,048 1,276 1,624
Cost of service and maintenance revenue............... 166 331 1,123 1,663 2,918
--------- --------- --------- --------- ---------
Total cost of revenue............................... 467 1,024 2,171 2,939 4,542
--------- --------- --------- --------- ---------
Gross profit........................................ 2,745 6,185 9,766 15,906 25,624
--------- --------- --------- --------- ---------
Operating expenses:
Product development................................... 893 2,109 3,204 5,548 6,496
Sales and marketing................................... 1,330 2,652 4,880 8,234 13,187
General and administrative............................ 342 780 1,487 2,204 3,059
--------- --------- --------- --------- ---------
Total operating expenses............................ 2,565 5,541 9,571 15,986 22,742
--------- --------- --------- --------- ---------
Income (loss) from operations....................... 180 644 195 (80) 2,882
Other income (expense), net............................. (5) 4 (10) 91 1,375
--------- --------- --------- --------- ---------
Income before income taxes.......................... 175 648 185 11 4,257
Income tax expense (benefit)............................ -- 80 106 (24) 1,459
--------- --------- --------- --------- ---------
Net income.......................................... $ 175 $ 568 $ 79 $ 35 $ 2,798
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------

Net income per common share............................... $ 0.04 $ 0.14 $ 0.02 $ 0.01 $ 0.32
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------

Shares used in per share calculation...................... 3,914 4,154 5,009 6,045 8,747
Pro forma net income data (1):
Income before income taxes, as reported............... $ 175 $ 648
Pro forma income tax expense.......................... 32 142
--------- ---------
Pro forma net income................................ $ 143 $ 506
--------- ---------
--------- ---------
Pro forma net income per common share................... $ 0.04 $ 0.12
--------- ---------
--------- ---------

SEPTEMBER 30,
-------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(IN THOUSANDS)

CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments....... $ 76 $ 609 $ 1,010 $ 1,714 $ 35,021
Total assets............................................ 881 3,301 4,758 10,194 48,690
Long-term obligations, less current portion............. 59 166 230 322 351
Mandatorily redeemable preferred stock.................. -- 941 1,140 4,664 --
Total stockholders' equity.............................. 457 536 619 668 39,405

- -----------
(1) The Company was a Subchapter S corporation until June 30, 1994 and
accordingly not subject to federal and state income taxes during the
periods indicated. Pro forma net income reflects federal and state
income taxes as if the Company has been a C corporation, based on
effective tax rates during the periods indicated.

21

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

THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS REGARDING THE
COMPANY, ITS BUSINESS, PROSPECTS AND RESULTS OF OPERATIONS THAT ARE SUBJECT TO
RISKS AND UNCERTAINTIES POSED BY MANY FACTORS AND EVENTS THAT COULD CAUSE THE
COMPANY'S ACTUAL BUSINESS, PROSPECTS AND RESULTS OF OPERATIONS TO DIFFER
MATERIALLY FROM THOSE THAT MAY BE ANTICIPATED BY SUCH FORWARD-LOOKING
STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED HEREIN AS WELL AS THOSE DISCUSSED UNDER THE
CAPTIONS "RISK FACTORS" AND "BUSINESS" AS WELL AS THOSE DISCUSSED ELSEWHERE IN
THIS PROSPECTUS. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE
FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE OF THIS REPORT.
THE COMPANY UNDERTAKES NO OBLIGATION TO REVISE ANY FORWARD-LOOKING STATEMENTS
IN ORDER TO REFLECT EVENTS OR CIRCUMSTANCES THAT MAY SUBSEQUENTLY ARISE.
READERS ARE URGED TO CAREFULLY REVIEW AND CONSIDER THE VARIOUS DISCLOSURES MADE
BY THE COMPANY IN THIS REPORT AND IN THE COMPANY'S OTHER REPORTS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION THAT ATTEMPT TO ADVISE INTERESTED PARTIES OF
THE RISKS AND FACTORS THAT MAY AFFECT THE COMPANY'S BUSINESS.

OVERVIEW

Rogue Wave was founded in 1989 to provide reusable software parts for the
development of object-oriented software applications. The Company operated as
a Subchapter S corporation until June 1994. In October 1995, Rogue Wave merged
with Inmark Development Corporation ("Inmark"), a privately held corporation
specializing in the development, distribution and support of an object-oriented
graphical user interface library written in the C++ programming language. The
transaction was accounted for as a pooling-of-interests business combination.
See Note 2 of Notes to Consolidated Financial Statements. The Inmark graphical
user interface library is currently being marketed by Rogue Wave as a component
of its Visual User Interface family of products.

The Company has experienced significant revenue growth over the last
several years. During fiscal 1995, the Company shifted its focus from
achieving profitability to expanding its sales channels, marketing efforts and
product development capacity. The shift resulted in expenses growing faster
than revenue, causing a substantial decrease in net income in fiscal 1995 and
fiscal 1996. As part of the shift toward expanding its product development
capacity, the Company acquired Inmark. The Inmark Merger also contributed to
the Company's higher product development expenses as a percentage of total
revenue during fiscal 1994, 1995 and 1996 because, prior to the time of the
Inmark Merger, Inmark was engaged in a new product development effort that
resulted in increased product development expenses.

To date, the Company's revenue has been derived from licenses of its
software products and related maintenance, training and consulting services.
License revenue is recognized upon execution of a license agreement and
shipment of the product if no significant contractual obligations remain and
collection of the resulting receivable is probable. Allowances for credit
risks and for estimated future returns are provided for upon shipment. Returns
to date have not been material. Service and maintenance revenue consists of
fees that are charged separately from the product licenses. Maintenance
revenue consists of fees for ongoing support and product updates and is
recognized ratably over the term of the contract, which is typically 12 months.
Service revenue consists of training and consulting services and is recognized
upon completion of the related activity. For all periods presented, the
Company has recognized revenue in accordance with Statement of Position 91-1,
SOFTWARE REVENUE RECOGNITION. See Note 1 of Notes to Consolidated Financial
Statements.

The Company markets its products primarily through its direct sales force,
and to a lesser extent through the Internet and an indirect channel consisting
of OEMs, VARs, dealers and distributors. The Company's direct sales force
consists of an inside telesales group that focuses on smaller orders ($50,000
or less), and an outside sales force that focuses on larger site licenses. The
Company makes all of its products available for sale and distribution over the
Internet. Revenue through this channel has not been significant to date, and
there can be no assurance that the Company will be successful in marketing its
products through this channel.

22

International revenue accounted for approximately 19% and 23% of total
revenue in fiscal 1996 and fiscal 1997, respectively. In January 1996, the
Company established a wholly-owned subsidiary in Germany to market and support
the Company's products in Germany and neighboring countries. In February 1997,
the Company expanded its European operations by acquiring Precision, a
distributor of Rogue Wave software products in Germany, the United Kingdom,
France and the Benelux countries. The Company anticipates further expansion in
foreign countries and expects that international license and service and
maintenance revenue will account for an increasing portion of its total revenue
in the future. The Company has committed and continues to commit significant
management time and financial resources to developing direct and indirect
international sales and support channels. There can be no assurance, however,
that the Company will be able to maintain or increase international market
demand for its products. To date, other than revenue generated by the
Company's European subsidiaries, the Company's international revenue has been
denominated in United States dollars. The Company may enter into forward
foreign exchange contracts to reduce the risk associated with currency
fluctuations. Although exposure to currency fluctuations to date has been
insignificant, to the extent international revenue is denominated in local
currencies, foreign currency translations may contribute to significant
fluctuations in, and could have a material adverse effect upon, the Company's
business, financial condition and results of operations. See "Risk Factors-
Risks Inherent in International Operations."

The Company has developed technology relating to the collection and
verification of data across the Internet. The Company contributed such
technology, and made a funding commitment of $1.3 million on October 1, 1997
and can contribute up to a total of $2.0 million over the next three to 15
months, to a majority-owned subsidiary, HotData, for further development and
possible commercialization of this technology. The Company will have the option
to purchase the minority interest of the subsidiary during a specified time
period in the future. Dan Whitaker, the Company's former Executive Vice
President, Marketing, resigned his office and his position on the Company's
Board of Directors to devote full time to the management of HotData, but has
agreed to serve as a consultant to the Company through July 1998. The Company
expects that such subsidiary will be in the development stage through at least
fiscal 1998. There can be no assurance that the technology developed by such
subsidiary will be commercialized, and even if it is commercialized there can
be no assurance that the technology will receive market acceptance due to the
subsidiary's new and untested business model. The financial results of HotData
will be consolidated with the Company's financial results. Accordingly,
fluctuations in the operating results of HotData may have a material adverse
effect on the Company's operating results.

In April 1997, the Company established a consulting group in Boulder,
Colorado consisting of 15 employees. The addition of these employees has
resulted in an increase in service and maintenance revenue and a corresponding
increase in the cost of service and maintenance revenue. The gross margin
associated with such consulting work has been and is expected to continue to be
lower than the Company's historical gross margin on service and maintenance
revenue. More recently, the Company announced its intention to move its
administrative operations from its current location in Corvallis, Oregon to
Boulder, Colorado during fiscal 1998. The Company expects to incur charges
totaling approximately $1.5 million during fiscal 1998 in connection with this
move. Such charges will have a material adverse effect on the operating results
for the quarters in which they are incurred. Specifically, the Company
anticipates that it will incur the substantial majority of such charges during
the second quarter of fiscal 1998. Furthermore, the Company may incur
additional charges associated with the move which, if incurred, may have a
material adverse effect on the Company's operating results.

23

RESULTS OF OPERATIONS

The following table sets forth certain operating data expressed as a
percentage of total revenue for each period indicated:

YEAR ENDED SEPTEMBER 30,
------------------------
1995 1996 1997
---- ---- ----

STATEMENTS OF OPERATIONS:
Revenue:
License revenue......................................... 87.3% 79.5% 70.8%
Service and maintenance revenue......................... 12.7 20.5 29.2
----- ----- -----
Total revenue........................................ 100.0 100.0 100.0

Cost of revenue:
Cost of license revenue................................. 8.8 6.8 5.4
Cost of service and maintenance revenue................. 9.4 8.8 9.7
----- ----- -----
Total cost of revenue................................ 18.2 15.6 15.1
----- ----- -----
Gross profit......................................... 81.8 84.4 84.9

Operating expenses:
Product development..................................... 26.8 29.4 21.5
Sales and marketing..................................... 40.9 43.7 43.7
General and administrative.............................. 12.5 11.7 10.1
----- ----- -----
Total operating expenses............................. 80.2 84.8 75.3
----- ----- -----
Income (loss) from operations........................ 1.6 (0.4) 9.6
Other income (expense), net............................... (0.1) 0.5 4.6
----- ----- -----
Income before income taxes........................... 1.5 0.1 14.2
Income tax expense (benefit).............................. 0.8 (0.1) 4.9
----- ----- -----
Net income........................................... 0.7% 0.2% 9.3%
----- ----- -----
----- ----- -----

REVENUE. The Company's total revenue increased 60.1% to $30.2 million in
fiscal 1997 from $18.8 million in fiscal 1996. Total revenue in fiscal 1996
increased 57.9% from $11.9 million in fiscal 1995. License revenue increased
42.5% to $21.4 million in 1997 from $15.0 million in fiscal 1996. License
revenue in fiscal 1996 increased 43.9% from $10.4 million in fiscal 1995.
License revenue increased primarily as a result of an increase in the number of
licenses sold to existing and new customers, reflecting additional product
offerings, an expanding market, increased market awareness and expansion of the
Company's telesales and international sales organizations.

Service and maintenance revenue increased 128.4% to $8.8 million in
fiscal 1997 from $3.9 million in fiscal 1996. Service and maintenance revenue
in fiscal 1996 increased 153.9% from $1.5 million in fiscal 1995. These
increases in service and maintenance revenue were primarily attributable to
increased sales volume of the Company's support and maintenance services
related to the Company's larger installed base, as well as an increase in
consulting revenue resulting from the establishment of the Company's consulting
business group in Boulder, Colorado in April 1997.

COST OF REVENUE. Cost of license revenue consists primarily of amortization
of purchased software, materials, packaging and freight expenses. Cost of
license revenue was $1.0 million, $1.3 million and $1.6 million in fiscal 1995,
1996 and 1997, respectively, representing 10.1%, 8.5%, and 7.6% of the license
revenue for the respective periods. The period to period dollar increases in
cost of license revenue were primarily the result of an increase in the number
of licenses sold. Fluctuations in cost of license revenue as a percentage of
total license revenue are primarily the result of varying levels of royalties
paid, changes in product mix and the timing of large site license sales.

Cost of service and maintenance revenue consists primarily of
personnel-related and facilities costs incurred in providing customer support
and training services, as well as third-party costs incurred in providing
training services. Cost

24

of service and maintenance revenue was $1.1 million, $1.7 million and $2.9
million in fiscal 1995, 1996 and 1997, respectively, representing 73.9%,
43.1% and 33.1% of the service and maintenance revenue for each respective.
The period to period dollar increases in cost of service and maintenance
revenue were primarily the result of expenses associated with the development
of training programs, utilization of training and mentoring consultants,
additional product support personnel and the timing of product upgrades. The
higher percentages of cost of service and maintenance revenue as a percentage
of service and maintenance revenue for fiscal 1995 reflect the fact that the
increase in such costs occurred prior to an anticipated increase in demand.
The decreases as a percentage of service and maintenance revenue for fiscal
1996 and 1997 were primarily the result of the increase in service and
maintenance revenue. The increases in cost of service and maintenance revenue
as a percentage of total cost of revenue during the respective periods
reflect the fact that license revenue grew at a lower percentage rate than
did service and maintenance revenue during such periods, and the gross profit
margin on service and maintenance revenue is lower than the gross profit
margin on license revenue.

PRODUCT DEVELOPMENT. Product development expenses consist primarily of
personnel related expenses. Product development expenses were $3.2 million,
$5.5 million and $6.5 million in fiscal 1995, 1996 and 1997, respectively. As a
percentage of total revenue, product development expenses were 26.8%, 29.4% and
21.5% in each respective period. The increases in product development expenses
were primarily attributable to the hiring of additional product development
personnel. The Company anticipates that it will continue to devote substantial
resources to product development and that product development expenses will
increase in dollar amount for fiscal 1998 as the Company continues to increase
its product development capacity, although the Company does not believe such
expenses will increase as a percentage of total revenue. All costs incurred in
the research and development of software products and enhancements to existing
products have been expensed as incurred. See Note 1 of Notes to Consolidated
Financial Statements.

SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses earned by sales and marketing personnel,
field office expenses, and travel, entertainment and promotional expenses.
Sales and marketing expenses were $4.9 million, $8.2 million and $13.2 million
in fiscal 1995, 1996 and 1997, respectively. As a percentage of total revenue,
sales and marketing expenses were 40.9%, 43.7% and 43.7% in each respective
period. The increase in sales and marketing expenses reflects the hiring of
additional sales and marketing personnel and related costs, as well as
increased costs associated with expanded promotional activities. The Company
expects that sales and marketing expenses will increase in dollar amount for
fiscal 1998 as the Company continues to hire additional sales and marketing
personnel and increase promotional activities. The Company does not expect
sales and marketing expenses to change as a percentage of total revenue in
fiscal 1998.

GENERAL AND ADMINISTRATIVE. General and administrative expenses were $1.5
million, $2.2 million and $3.1 million in fiscal 1995, 1996 and 1997,
respectively. As a percentage of total revenue, general and administrative
expenses were 12.5%, 11.7% and 10.1% in each respective period. The increases
in general and administrative expenses were primarily due to increased
staffing, investment in infrastructure and associated expenses necessary to
manage and support the Company's growing operations. The Company believes that
its general and administrative expenses will increase in dollar amount for
fiscal 1998 as a result of an anticipated expansion of the Company's
administrative staff required to support its growing operations and as a result
of an increase in expenses associated with being a public company. The Company
does not expect general and administrative expenses to change as a percentage
of total revenue in fiscal 1998.

OTHER INCOME (EXPENSE), NET. Other income (expense), net primarily represents
interest income earned on the Company's cash, cash equivalents and short-term
investments, net of interest expense.

INCOME TAX EXPENSE (BENEFIT). The Company's effective tax rates were 57.3%,
(218.2)% and 34.3% for fiscal 1995, 1996 and 1997. The tax rate for fiscal 1995
reflects the inability to offset Inmark's losses against the Company's income
for the period. The tax benefit in fiscal 1996 was due to the use of Inmark net
operating loss carryforwards. The increase in the effective tax rate from
fiscal 1996 to fiscal 1997 is primarily attributable to a decrease in the
impact of research and experimentation credits.

As of September 30, 1997, the Company had net operating loss carryforwards
for federal, state and foreign income tax purposes of $266,000, $119,000, and
$1.5 million, respectively. The federal losses expire 2007 to 2010 and the
state net operating loss expires 2000. As a result of the merger with
Inmark, utilization of federal and state net operating loss

25

carryforwards is limited. Utilization of the acquired foreign net operating
loss carryforwards will first be offset against goodwill associated with the
acquisition of Precision before being recorded as a tax benefit.

Under Statement of Financial Accounting Standards No. 109 ("SFAS 109"),
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. SFAS 109 provides for the recognition of
deferred tax assets if realization of such assets is more likely than not.
Based upon the weight of available evidence, which includes the lack of
historical operating performance for the acquired foreign operations of
Precision, and the limitations on the utilization of federal and state net
operating loss carryforwards related to Inmark, the Company has provided a full
valuation allowance against its net deferred tax assets related to the foreign
and Inmark net operating loss carryforwards. The Company intends to evaluate
the realizability of the deferred tax assets on a quarterly basis. See Note 6
of Notes to Consolidated Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 1997, the Company had cash, cash equivalents and short-
term investments of $35.0 million. Net cash provided by operating activities
was $7.1 million for the period ending September 30, 1997 and was composed
primarily of net income that was increased by non-cash charges for depreciation
and amortization, plus increases in accounts payable and accrued expenses, and
deferred revenue offset by an increase in accounts receivable and other
noncurrent assets. Deferred revenue consists primarily of the unrecognized
portion of revenue under maintenance and support contracts, which revenue is
deferred and recognized ratably over the term of such contracts and for the
unrecognized portion of revenue associated with product license subscription
contracts. See Note 1 of Notes to Consolidated Financial Statements.

The Company's investing activities consisted primarily of purchases of
equipment including those under capital leases of $672,000, $2.4 million and
$2.5 million in fiscal 1995, 1996, and 1997. During fiscal 1997, the Company
purchased Precision for $900,000 in cash and a $1.0 million note payable (see
Note 2 of Notes to Consolidated Financial Statements). The Company's
investment activity also included the purchase and sale of short-term
investments, which totaled $25.7 million in fiscal 1997.

Financing activities generated $29.8 million for fiscal 1997, of which
approximately $25.4 million was generated by the initial public offering of the
Company's Common Stock on November 21, 1996 and $3.9 million was generated by
the public offering of the Company's Common Stock on August 21, 1997. In fiscal
1996, financing activities generated $3.3 million, of which $3.5 million was
generated by the issuance of mandatorily redeemable preferred stock.

The Company believes that expected cash flow from operations combined with
existing cash and cash equivalents and short-term investments will be
sufficient to meet its cash requirements for the foreseeable future. See "Risk
Factors - Future Acquisition."

NEW ACCOUNTING PRONOUNCEMENTS

In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), EARNINGS PER
SHARE, which specifies the computation, presentation and disclosure
requirements for earnings per share. SFAS 128 supersedes Accounting Principles
Board Opinion No. 15 and is effective for financial statements issued for
periods ending after December 15, 1997. SFAS 128 requires restatement of all
prior-period earnings per share data presented after the effective date. SFAS
128 will not have a material impact on the Company's financial position,
results of operations or cash flows.

In June 1997, the FASB issued SFAS 130, REPORTING COMPREHENSIVE INCOME,
which establishes standards for reporting and display of comprehensive income
and its components (revenue, expenses, gains, and losses) in a full set of
general-purpose financial statements. The Company will adopt SFAS 130 in its
fiscal year 1999. Management has not yet evaluated the effects of this change
on reporting comprehensive income.

26

In June 1997, the FASB issued SFAS 131, DISCLOSURE ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, which changes the way public companies
report information about operating segments. SFAS 131, which is based on the
management approach to segment reporting, establishes requirements to report
selected segment information quarterly and to report entity-wide disclosures
about products and services, major customers, and the material countries in
which the entity holds assets and reports revenue. Management has not yet
evaluated the effects of this change on its reporting of segment information.
The Company will adopt SFAS 131 in its fiscal year 1999.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Item 14(a) for an index to the financial statements and
supplementary financial information which are attached hereto.

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

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information regarding Registrant's directors will be set forth under the
caption "Election of Directors - Nominees" in Registrant's proxy statement for
use in connection with the Annual Meeting of Stockholders to be January 20,
1998 (the "1997 Proxy Statement") and is incorporated herein by reference. The
1997 Proxy Statement will be filed with the Securities and Exchange Commission
within 120 days after the end of the Registrant's fiscal year.

Information regarding Registrant's executive officers is set forth in this
Form 10-K in Part I, Item 1.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated herein by reference
from the information set forth under the caption "Compensation of Executive
Officers" in the Registrant's 1997 Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is incorporated by reference into
this Form 10-K from the information set forth under the caption "Security
Ownership of Certain Beneficial Owners and Management" in the Registrant's 1997
Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated herein by reference
from the information set forth under the caption "Certain Transactions" in the
Registrant's 1997 Proxy Statement.

27

PART IV

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

(A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page
------
Report of KPMG Peat Marwick LLP............................ F-1
Consolidated Balance Sheets................................ F-2
Consolidated Statements of Operations...................... F-3
Consolidated Statements of Stockholders' Equity............ F-4
Consolidated Statements of Cash Flows...................... F-5
Notes to Consolidated Financial Statements................. F-6

(B) REPORTS ON FORM 8-K

None.

(C) SEE EXHIBITS LISTED UNDER ITEM 14(a)3.

(D) THE FINANCIAL STATEMENT SCHEDULES REQUIRED BY THIS ITEM ARE LISTED UNDER
ITEM 14(a)2.

28

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

ROGUE WAVE SOFTWARE, INC.

Date: December 3, 1997 /s/ Thomas Keffer
------------------------------
Thomas Keffer
President

KNOWN ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Thomas Keffer and Robert M. Holburn, Jr., and
each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place, and
stead, in any and all capacities, to sign any and all amendments to this Report
on Form 10-K, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming
that all said attorneys-in-fact and agents, or any of them or their or his
substitute or substituted, may lawfully 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/ THOMAS KEFFER President, Chief Executive Officer and December 3, 1997
- ------------------------- Chairman of the Board
Thomas Keffer (PRINCIPAL EXECUTIVE OFFICER)

/s/ MICHAEL SCALLY Chief Operating Officer and Director December 3, 1997
- ------------------------- (PRINCIPAL OPERATING OFFICER)
Michael Scally

/s/ ROBERT M. HOLBURN, JR. Chief Financial Officer and Secretary December 3, 1997
- -------------------------- (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
Robert M. Holburn, Jr.

/s/ THOMAS M. ATWOOD Director December 3, 1997
- --------------------------
Thomas M. Atwood

/s/ LOUIS C. COLE Director December 3, 1997
- --------------------------
Louis C. Cole

/s/ RICHARD P. MAGNUSON Director December 3, 1997
- --------------------------
Richard P. Magnuson

/s/ THOMAS H. PETERSON Director December 3, 1997
- --------------------------
Thomas H. Peterson

29

INDEPENDENT AUDITORS' REPORT

The Board of Directors
Rogue Wave Software, Inc.
and Subsidiaries:

We have audited the accompanying consolidated balance sheets of Rogue Wave
Software, Inc. and subsidiaries as of September 30, 1996 and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended September 30, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Rogue Wave
Software, Inc. and subsidiaries as of September 30, 1996 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended September 30, 1997 in conformity with generally
accepted accounting principles.

KPMG PEAT MARWICK LLP

Portland, Oregon
November 4, 1997

F-1

ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

SEPTEMBER 30,
-------------
1996 1997
---- ----
ASSETS
Current assets:
Cash and cash equivalents............................. $1,714 $9,282
Short-term investments................................ -- 25,739
Accounts receivable, net.............................. 4,527 6,259
Prepaid expenses and other current assets............. 873 840
Deferred income taxes................................. 108 381
------- -------
Total current assets................................ 7,222 42,501
Furniture, fixtures and equipment, net.................. 2,718 3,934
Other noncurrent assets, net............................ 254 2,255
------- -------
Total assets........................................ $10,194 $48,690
------- -------
------- -------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... 637 714
Accrued expenses...................................... 805 2,625
Deferred revenue...................................... 2,881 5,393
Current portion of long-term obligations.............. 217 202
------- -------
Total current liabilities........................... 4,540 8,934
Long-term obligations, less current portion............. 322 351
------- -------
Total liabilities................................... 4,862 9,285

Commitments and contingencies
Mandatorily redeemable preferred stock, $0.001 par
value. Authorized 2,350 and 5,000 shares; issued
and outstanding 1,543 and zero shares at
September 30, 1996 and 1997, respectively............. 4,664 --
------- -------
Stockholders' equity:
Common stock, $0.001 par value. Authorized 35,000
shares; issued and outstanding 3,655 and 8,372
shares at September 30, 1996 and 1997, respectively.. 4 8
Additional paid-in capital............................ 676 36,695
Stockholder note receivable........................... (13) --
Retained earnings..................................... 24 2,822
Cumulative translation adjustment..................... (23) (120)
------- -------
Total stockholders' equity.......................... 668 39,405
------- -------
Total liabilities and stockholders' equity.......... $10,194 $48,690
------- -------
------- -------

See accompanying notes to consolidated financial statements.

F-2

ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

YEAR ENDED SEPTEMBER 30,
------------------------
1995 1996 1997
---- ---- ----

Revenue:
License revenue....................................... $10,417 $14,986 $21,351
Service and maintenance revenue....................... 1,520 3,859 8,815
------- ------- -------
Total revenue....................................... 11,937 18,845 30,166
------- ------- -------

Cost of revenue:
Cost of license revenue............................... 1,048 1,276 1,624
Cost of service and maintenance revenue............... 1,123 1,663 2,918
------- ------- -------
Total cost of revenue............................... 2,171 2,939 4,542
------- ------- -------
Gross profit........................................ 9,766 15,906 25,624
------- ------- -------
Operating expenses:
Product development................................... 3,204 5,548 6,496
Sales and marketing................................... 4,880 8,234 13,187
General and administrative............................ 1,487 2,204 3,059
------- ------- -------
Total operating expenses............................ 9,571 15,986 22,742
------- ------- -------
Income (loss) from operations....................... 195 (80) 2,882
Other income (expense), net............................. (10) 91 1,375
------- ------- -------
Income before income taxes.......................... 185 11 4,257
Income tax expense (benefit)............................ 106 (24) 1,459
------- ------- -------
Net income.......................................... $ 79 $ 35 $ 2,798
------- ------- -------
------- ------- -------
Net income per common share............................. $ 0.02 $ 0.01 $ 0.32
------- ------- -------
------- ------- -------

Shares used in per share calculation.................... 5,009 6,045 8,747

See accompanying notes to consolidated financial statements

F-3

ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)

COMMON STOCK ADDITIONAL STOCKHOLDER RETAINED CUMULATIVE TOTAL
------------ PAID-IN NOTE EARNINGS TRANSLATION STOCKHOLDERS'
SHARES AMOUNT CAPITAL RECEIVABLE (DEFICIT) ADJUSTMENT EQUITY
------ ------ ------- ---------- --------- ---------- ------

Balance at September 30,
1994..................... 3,425 $ 3 $ 636 $ (13) $ (90) $ -- $ 536
Issuance of common stock... -- -- 4 -- -- -- 4
Net income................. -- -- -- -- 79 -- 79
------ ------ ------ ------ ------- ------ ------
Balance at September 30,
1995..................... 3,425 3 640 (13) (11) -- 619
Exercise of stock options.. 230 1 36 -- -- -- 37
Net income................. -- -- -- -- 35 -- 35
Foreign currency
translation adjustment... -- -- -- -- -- (23) (23)
------ ------ ------ ------ ------- ------ ------
Balance at September 30,
1996..................... 3,655 4 676 (13) 24 (23) 668
Issuance of common stock,
net...................... 4,297 4 34,269 -- -- -- 34,273
Exercise of stock options.. 420 -- 327 -- -- -- 327
Tax benefit from stock
option exercises......... -- -- 1,423 -- -- -- 1,423
Net income................. -- -- -- -- 2,798 -- 2,798
Payment on shareholder
note receivable.......... -- -- -- 13 -- -- 13
Foreign currency
translation adjustment... -- -- -- -- -- (97) (97)
------ ------ ------ ------ ------- ------ ------
Balance at September 30,
1997..................... 8,372 $ 8 $36,695 $ -- $ 2,822 $ (120) $ 39,405
------ ------ ------ ------ ------- ------ ------
------ ------ ------ ------ ------- ------ ------

See accompanying notes to consolidated financial statements.

F-4

ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

YEAR ENDED SEPTEMBER 30,
------------------------
1995 1996 1997
---- ---- ----

Cash flows from operating activities:
Net income............................................... $79 $35 $2,798
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization........................ 514 807 1,825
Loss on disposal of equipment........................ 23 -- --
Changes in assets and liabilities:
Accounts receivable................................ (1,115) (2,385) (673)
Prepaid expenses and other current assets.......... (54) (661) 228
Deferred income taxes.............................. (80) (28) (273)
Other noncurrent assets............................ (16) (72) (595)
Accounts payable and accrued expenses.............. 440 254 1,944
Deferred revenue.................................. 702 1,530 1,810
------ ------- -------
Net cash from operating activities............... 493 (520) 7,064
------ ------- -------
Cash flows from investing activities:
Purchase of furniture, fixtures and equipment.......... (326) (2,040) (2,534)
(Purchase) maturity of short-term investments.......... 344 -- (25,738)
Purchase of business, net of cash acquired............. -- -- (879)
------ ------- -------
Net cash from investing activities............... 18 (2,040) (29,151)
------ ------- -------
Cash flows from financing activities:
Payments on long-term obligations...................... (313) (296) (198)
Net proceeds from issuance of mandatorily
redeemable preferred stock........................... 199 3,524 --
Net proceeds from issuance of common stock............. 4 -- 29,609
Payment on shareholder note receivable................. -- -- 13
Proceeds from exercise of stock options................ -- 37 327
------ ------- -------
Net cash from financing activities............... (110) 3,265 29,751
------ ------- -------
Effect of exchange rate changes on cash and cash
equivalents............................................ -- (1) (96)
------ ------- -------
Net change in cash and cash equivalents.......... 401 704 7,568
Cash and cash equivalents at beginning of period......... 609 1,010 1,714
------ ------- -------
Cash and cash equivalents at end of period............... $1,010 $1,714 $9,282
------ ------- -------
------ ------- -------
Supplemental disclosure of cash flow information:
Cash paid for interest................................. $53 $37 $38
Cash paid for taxes.................................... 258 106 47

Supplemental disclosure of non-cash investing and
financing activities:
Acquisition of equipment financed by capital
lease obligations.................................... 346 375 --
Common stock issued for conversion of
mandatorily redeemable preferred stock............... -- -- 4,664

Purchase of business, net of cash acquired:
Working capital, other than cash....................... -- -- (823)
Equipment.............................................. -- -- 121
Cost in excess of net assets acquired, net............. -- -- 1,539
Other.................................................. -- -- 42
------ ------- -------
Net cash used to acquire business.................... -- -- 879
------ ------- -------
------ ------- -------

See accompanying notes to consolidated financial statements.

F-5

ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

Rogue Wave Software, Inc. and subsidiaries (the "Company") is primarily
engaged in the development, sale and support of object-oriented software
parts and related tools. The Company markets its products primarily through
its direct sales organization and, to a lesser extent, through outside sales
representatives and indirect channel partners to business and government
customers. The Company operates in a single industry segment across
geographically diverse markets.

BASIS OF PRESENTATION

The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. Intercompany accounts and
transactions have been eliminated. The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.

CURRENCY TRANSLATION

The Company translates the assets and liabilities of its non-U.S.
functional currency subsidiaries into dollars at the rates of exchange in
effect at the end of the period. Revenue and expenses are translated using
rates that approximate those in effect during the period. Gains and losses
from currency translation are included in stockholders' equity in the
consolidated balance sheets.

CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

Cash equivalents consist of investments in highly liquid investment
instruments with original maturities of less than three months at date of
acquisition. Short-term investments consist primarily of commercial paper
with acquired maturities of 180 days or less. Short-term investments are
held as securities available for sale and are carried at their market value
as of the balance sheet date, which approximated cost. At September 30,
1997, there was $300 of cash restricted for various purposes.

FURNITURE, FIXTURES AND EQUIPMENT

Furniture, fixtures and equipment are stated at cost. Maintenance and
repairs are expensed as incurred. Equipment under capital leases is stated at
the present value of future minimum lease payments at the inception of the
lease. Depreciation of furniture, fixtures and equipment is calculated on
the straight-line method over the estimated useful lives of the assets
ranging from three to seven years. Equipment held under capital leases is
amortized straight-line over the shorter of the lease term or estimated
useful lives of the leased assets.

INTANGIBLE ASSETS

Other noncurrent assets include purchased software rights, a covenant not
to compete and goodwill, which are amortized over estimated useful lives of
three to five years using the straight-line method. Original cost of these
intangibles

F-6

was $670 and $2.7 million at September 30, 1996 and 1997 respectively.
Accumulated amortization at September 30, 1996 and 1997 was $562 and $948,
respectively. Amortization charged to expense was $224, $221 and $386 for
the years ended September 30, 1995, 1996 and 1997, respectively.

FOREIGN EXCHANGE CONTRACTS

The Company enters into foreign exchange forward contracts to hedge
certain operational and balance sheet exposures from changes in foreign
currency exchange rates. Such exposures result from the portion of the
Company's operations, assets, and liabilities that are denominated in
currencies other than the U.S. dollar. These transactions are entered into
to hedge purchases, sales, and other normal recurring transactions and
accordingly are not speculative in nature. The Company does not hold or
issue financial instruments for trading purposes nor does it hold or issue
leveraged derivative financial instruments. Market value gains and losses on
such contracts that result from fluctuations in foreign exchange rates are
recognized as offsets to the exchange gains or losses on the hedged
transactions. By their nature, these transactions generally offset. The net
gain or loss on such foreign currency contracts and underlying transactions
was not material during 1997. The Company had outstanding short-term forward
exchange contracts to exchange German marks for U.S. dollars in the amount of
$1.1 million at September 30, 1997.

REVENUE RECOGNITION

License revenue is recognized at the time of shipment. License revenue
includes a limited initial term of maintenance, the cost of which is
insignificant. Maintenance and service revenue includes maintenance revenue
which is recognized ratably over the maintenance period and service revenue
which includes training and consulting services recognized as services are
performed. The Company generally provides a thirty-day right of return policy
for software sales. The allowance for returns was $111 and $223 at September
30, 1996 and September 30, 1997, respectively.

ADVERTISING COSTS

Advertising costs are charged to expense when incurred.

CONCENTRATION OF CREDIT RISK

Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash equivalents, short
term investments, and accounts receivable. The counter parties to the
agreements relating to the Company's cash equivalents and short term
investments consist of various major corporations and financial institutions
of high credit standing. The Company's receivables are derived primarily
from the sales of software products and services to customers in diversified
industries as well as distributors in the U.S. and foreign markets.
International revenue accounted for approximately 20%, 19%, and 23% of the
Company's total revenue for the years ended September 30, 1995, 1996, and
1997, respectively. The Company performs ongoing credit evaluations of its
customers' financial condition and limits the amount of credit extended when
deemed necessary but generally requires no collateral. The Company provided
allowance for doubtful accounts of $107 and $236 at September 30, 1996 and
1997, respectively.

RESEARCH AND DEVELOPMENT

Software development costs have been accounted for in accordance with
Statement of Financial Accounting Standards No. 86, ACCOUNTING FOR THE COSTS
OF COMPUTER SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED. Under the
standard, capitalization of software development costs begins upon the
establishment of technological feasibility, subject to net realizable value
considerations. The Company begins capitalization upon completion of a
working model. To date, such capitalizable costs have not been material.
Accordingly, the Company has charged all such costs to product development
expense.

F-7

COMPUTATION OF NET INCOME PER SHARE

Net income per share is computed using the weighted average number of
shares of common and common equivalent shares outstanding. Common equivalent
shares are excluded from the computation if their effect is antidilutive,
except that pursuant to the Securities and Exchange Staff Accounting
Bulletins, common and common equivalent shares issued at prices below the
public offering price during the twelve months immediately preceding the
initial filing date have been included in the calculation as if they were
outstanding for all periods presented using the treasury stock method and the
initial public offering price. Common equivalent shares consist of the common
shares issuable upon the conversion of the Series A preferred stock (using
the if-converted method) and incremental shares issuable upon the exercise of
stock options and upon the conversion of the Series B preferred stock (using
the treasury stock method).

Beginning in the first quarter of fiscal 1998, the Company will be
required to compute earnings per share in accordance with Statement of
Financial Accounting Standards No. 128, EARNINGS PER SHARE ("SFAS 128"). The
Company believes the implementation of SFAS 128 will not have a material
effect on its earnings per share.

ACCOUNTING FOR STOCK-BASED COMPENSATION

The Company has elected to account for its stock-based compensation in
accordance with Accounting Principles Board Opinion No. 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES ("APB 25") and has adopted the "disclosure
only" alternative described in SFAS 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION.

(2) MERGERS AND ACQUISITIONS

On October 27, 1995, the Company acquired all of the common stock of
Inmark Development Corporation ("Inmark") in exchange for 878 shares of the
Company's common stock in a transaction accounted for as a pooling of
interests. Inmark was a privately held corporation specializing in the
development, distribution and support of object-oriented graphical user
interface library software. The Company's consolidated financial statements
and notes to consolidated financial statements have been restated to include
the results of Inmark for all periods presented.

On February 15, 1997, the Company acquired 100% of the outstanding
stock of PVI Precision Software GmbH ("Precision") for $1.9 million in cash
and notes payable. Precision is a European distributor of Rogue Wave
software products and other companies' software products in Germany, the
United Kingdom, France, and the Benelux countries. The acquisition has been
accounted for under the purchase method and accordingly, the accompanying
consolidated financial statements include Precision's results beginning with
the acquisition date. Consolidated pro forma results of operations as if the
acquisition had occurred at the beginning of the fiscal years 1995, 1996, and
1997 are not presented as the pro forma effect is not material.

(3) BALANCE SHEET COMPONENTS

FURNITURE, FIXTURES AND EQUIPMENT

Furniture, fixtures and equipment at September 30, consist of the
following:
1996 1997
---- ----
Computer equipment.................................... $3,257 $4,710
Furniture, fixtures and equipment..................... 550 1,661
------ ------
3,807 6,371

Less accumulated depreciation and amortization........ 1,089 2,437
------ ------
Furniture, fixtures and equipment, net............. $2,718 $3,934
------ ------
------ ------

Depreciation expense for the years ended September 30, 1995, 1996
and 1997 was $262, $586 and $1,439, respectively.

F-8

ACCRUED EXPENSES

The Company's accrued expenses at September 30, include the following:

1996 1997
---- ----

Accrued payroll and related liabilities.............. $471 $1,503
Other accrued expenses............................... 334 1,122
------ ------
Accrued expenses..................................... $805 $2,625
------ ------
------ ------

(4) LEASES

The Company leases certain equipment and office space through
noncancelable operating lease arrangements. The leases expire 1997 through
2001 and are net leases with the Company paying all executory costs,
including insurance, utilities and maintenance. Rent expense for operating
leases during the years ended September 30, 1995, 1996 and 1997 was $210,
$566 and $821, respectively.

Property under capital leases at September 30, is as follows:

1996 1997
---- ----
Computer equipment................................ $750 $750
Office furniture and equipment.................... 39 39
------ ------
Total........................................... 789 789
Less accumulated amortization..................... 282 522
------ ------
Property under capital leases, net.............. $507 $267
------ ------
------ ------

Amortization expense is included in depreciation expense for furniture,
fixtures and equipment.

Future minimum lease payments under capital and operating leases (with
initial or remaining lease terms in excess of one year) and the present value
of future minimum capital lease payments are as follows:

CAPITAL OPERATING
------- ---------
Year ending September 30:
1998................................................. $217 $1,856
1999................................................. 119 1,962
2000................................................. 4 1,162
2001................................................. -- 812
2002................................................. -- 619
2002 thereafter...................................... -- 1,586
------- ---------
Total minimum lease payments........................ 340 $7,997
---------
---------
Less amounts representing interest..................... 18
-------
Present value of future minimum lease payments..... 322
Less current portion................................... 202
-------
Obligations under capital leases, less
current portion.................................. $120
-------
-------

F-9

(5) LONG-TERM DEBT

Long-term debt at September 30, consists of the following:

1997
----
Non-interest bearing note payable related to business combination
due February 2012, discounted on an imputed interest rate of 10%
(unamortized discount of $769)..................................... $ 231
Less current portion of long-term debt............................... --
------
Long-term debt, less current portion.............................. $ 231
------
------

(6) INCOME TAXES

The provision for income taxes consists of the following:

YEAR ENDED SEPTEMBER 30,
------------------------
1995 1996 1997
---- ---- ----
Current:
Federal............................... $ 142 $ -- $ 1,582
State and local....................... 44 4 150
------- ------- -------
186 4 1,732
------- ------- -------
Deferred:
Federal............................... (49) (22) (213)
State and local....................... (31) (6) (60)
------- ------- -------
(80) (28) (273)
------- ------- -------
Total.............................. $ 106 $ (24) $ 1,459
------- ------- -------
------- ------- -------

Income tax expense differs from the expected tax expense (computed by
applying the U.S. federal corporate income tax rate of 34% to net income
before income taxes) as follows:

YEAR ENDED SEPTEMBER 30,
------------------------
1995 1996 1997
---- ---- ----

Computed expected income tax expense...... $ 63 $ 4 $ 1,447
Increase (reduction) in income tax
expense resulting from:
State income tax expense.............. 1 3 228
Research and experimentation credit... (110) (108) (312)
Change in valuation allowance......... 120 43 610
Acquired foreign net operating loss
carryforwards....................... -- -- (568)
Rate differential..................... 14 -- --
Non-deductible meals and entertainment 9 14 59
Other, net............................ 9 20 (5)
----- ----- -------
Income tax expense (benefit)........ $ 106 $ (24) $ 1,459
----- ----- -------
----- ----- -------

F-10

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are
presented below:

SEPTEMBER 30,
-------------
1996 1997
---- ----
Deferred tax assets:
Accounts receivable ................................ $ -- $ 120
Intangible assets .................................. 37 61
Accrued expenses ................................... 95 99
Net operating loss carryforwards ................... 74 96
Foreign operating loss carryforwards ............... 66 692
Research and experimentation credit carryforward ... 217 288
Other .............................................. 14 30
----- -----
Total gross deferred tax assets .................. 503 1,386
Valuation allowance ................................ (357) (967)
----- -----
Net deferred tax assets .......................... 146 419
Deferred tax liabilities:
Cash to accrual adjustment ......................... 18 9
Property and equipment, due to differences
in depreciation ................................... 20 29
----- -----
Total gross deferred tax liabilities ............. 38 38
----- -----
Net deferred taxes ............................... $ 108 $ 381
----- -----
----- -----

At September 30, 1997, the Company had net operating loss carryforwards
for federal, state and foreign income tax purposes of $266, $119 and $1,544,
respectively. The federal net operating loss expires 2007 to 2010 and the
state net operating loss expires in 2000. The Company also had $288 of tax
credit carryforwards that expire 2003 to 2012. The net federal and state
operating losses and $86 of the tax credit carryforwards were generated by
Inmark prior to Inmark's merger with the Company on October 27, 1995. As a
result, utilization of all such amounts are limited by the future taxable
income of Inmark. Utilization of the acquired foreign net operating loss
carryforwards will first be offset against goodwill associated with the
acquisition of Precision before being recorded as a tax benefit.

(7) STOCKHOLDERS' EQUITY

INITIAL PUBLIC OFFERING

On November 21, 1996, the Company completed an initial public offering
of 2,368 shares of common stock at $12.00 per share. The Company received net
proceeds of $25.4 million. In connection with the initial public offering,
all outstanding shares of preferred stock converted into 1,543 shares of
common stock.

FOLLOW-ON PUBLIC OFFERING

On August 21, 1997, the Company completed a public offering of 350
shares of common stock at $12.00 per share. The Company received net proceeds
of $3.9 million.

(8) EQUITY INCENTIVE PLAN

In June 1996, the Company's Board of Directors adopted the 1996 Equity
Incentive Plan (the Equity Incentive Plan). The Company has reserved 3,000
shares of common stock for issuance under the Equity Incentive Plan. The
Equity Incentive Plan replaces the Company's 1994 Stock Option Plan and the
Inmark Stock Option Plan.

The Equity Incentive Plan provides for grants of stock options to
employees (including officers and employee directors) and nonstatutory stock
options to employees (including officers and employee directors), directors
and consultants of the Company. The Equity Incentive Plan is administered by
the Board of Directors of a committee appointed by the Board, which
determines recipients and types of awards to be granted, including the
exercise price, number of shares subject to the award and the exercisability
thereof.

F-11

The terms of a stock option granted under the Equity Incentive Plan
generally may not exceed ten years (five years in the case of holders of more
than 10% of the Company's capital stock). The exercise price of options
granted under the Equity Incentive Plan is determined by the Board of
Directors but, in the case of an incentive stock option, cannot be less than
100% of the fair market value of the common stock on the date of grant.
Options granted under the Equity Incentive Plan vest at the rate specified in
the option agreement.

The following table summarizes stock option activity through September
30, 1997:

WEIGHTED AVG.
-------------
SHARES PRICE PER SHARE
------ ---------------

Outstanding options at September 30, 1994 ............... 1,188 $ 0.19
Granted ................................................. 460 0.72
Exercised ............................................... -- --
Canceled ................................................ (267) 0.15
----- -------
Outstanding options at September 30, 1995 ............... 1,381 0.37
Granted ................................................. 554 6.02
Exercised ............................................... (230) 0.25
Canceled ................................................ (255) 1.36
----- -------
Outstanding options at September 30, 1996 ............... 1,450 2.39
Granted ................................................. 908 10.78
Exercised ............................................... (420) 0.81
Canceled ................................................ (98) 3.44
----- -------
Outstanding options at September 30, 1997 ............... 1,840 $ 6.83
----- -------
----- -------

Of the 1,840 options outstanding at September 30, 1997, 458 options were
vested and exercisable. For various price ranges, weighted average
characteristics of outstanding stock options at September 30, 1997 were as
follows:

OUTSTANDING OPTIONS EXERCISABLE OPTIONS
------------------------- ---------------------
REMAINING WEIGHTED WEIGHTED
EXERCISE PRICE SHARES LIFE (YEARS) AVG. PRICE SHARES AVG. PRICE
- -------------- ------ ------------ ---------- ------ -----------
$0.15-$0.53 467 7.0 $0.25 241 $0.24
$1.94-$7.50 482 8.7 $5.90 146 $5.65
$8.25-$10.00 463 9.1 $8.87 10 $9.95
$10.25-$23.50 428 11.3 $12.84 61 $12.82
----- ---
1,840 8.97 $6.83 458 $3.86
----- ---
----- ---

The Company follows APB 25, to account for stock option and employee
stock purchase plans. No compensation cost is recognized because the option
exercise price is equal to the market price of the underlying stock on the
date of grant. Had compensation cost for these plans been determined based
on the Black-Scholes value at the grant dates for awards as prescribed by
SFAS 123, pro forma net income and earnings per share would have been:

YEAR ENDED SEPTEMBER 30, 1996 1997
------- --------
Pro forma net income (loss) .................... $ (138) $ 1,752
Pro forma earnings (loss) per share ............ (0.02) 0.20

The pro forma disclosures above include the amortization of the fair
value of all options vested during 1996 and 1997. The effects of applying
SFAS 123 in this pro forma disclosure may not be indicative of future amounts.

F-12

The weighted average Black-Scholes value of options granted under the
stock option plans during 1996 and 1997 was $3.57 and $6.64. Value was
estimated using an expected life of five years, no dividends, volatility of
.80, and risk-free interest rates of 6.1% and 6.4% in 1996 and 1997.

(9) EMPLOYEE STOCK PURCHASE PLAN

In June 1996, the Board adopted the Employee Stock Purchase Plan (the
"Purchase Plan") covering an aggregate of 350 shares of common stock. The
Purchase Plan is intended to qualify as an employee stock purchase plan
within the meaning of Section 423 of the Internal Revenue Code. Under the
Purchase Plan, the Board of Directors may authorize participation by eligible
employees, including officers, in periodic offerings following the adoption
of the Purchase Plan. The offering period for any offering will be no more
than 27 months.

Employees are eligible to participate if they are employed by the
Company or an affiliate of the Company designated by the Board of Directors.
Employees who participate in an offering can have up to 15% of their earnings
withheld pursuant to the Purchase Plan and applied, on specific dates
determined by the Board of Directors, to the purchase of shares of common
stock. The price of common stock purchased under the Purchase Plan will be
equal to 85% of the lower of the fair market value of the common stock on the
commencement date of each offering period or the relevant purchase date.
Employees may end their participation in the offering at any time during the
offering period, and participation ends automatically on termination of
employment with the Company. During the year ended September 30, 1997, 36
shares were purchased under this plan.

(10) QUALIFIED PROFIT SHARING PLAN

The Company adopted a 401(k) profit sharing plan in January 1993. The
plan is offered to eligible employees and calls for a discretionary employer
match of employee contributions which is approved by the Board of Directors.
To participate in the plan, employees must have been employed for 90 days,
and work a minimum of 1,000 hours during the plan year. The Company matches
all employee contributions up to 3% of earnings and half of employee
contributions from 3% to 5%. Company contributions paid in the years ended
September 30, 1995, 1996 and 1997 were $31, $118, and $271, respectively.

F-13

(11) WORLDWIDE OPERATIONS

Information regarding worldwide operations is as follows:

UNITED
STATES EUROPE ELIMINATIONS TOTAL
------ ------ ------------ -----

September 30, 1997, and for the year then ended:
Revenue to unaffiliated customers ................. $25,046 $ 5,120 $ - $30,166
Intercompany transfers ............................ 1,567 - (1,567) -
------- -------- -------- -------
Net revenues .................................... 26,613 5,120 (1,567) 30,166
Operating income (loss) ........................... 3,062 (180) - 2,882
Assets ............................................ 47,409 3,340 (2,059) 48,690

September 30, 1996, and for the year then ended:
Revenue to unaffiliated customers ................. 17,841 1,004 - 18,845
Intercompany transfers ............................ 491 - (491) -
------- -------- -------- -------
Net revenues ................................... 18,332 1,004 (491) 18,845
Operating income (loss) ........................... 53 (133) - (80)
Assets ............................................ 10,143 608 (557) 10,194

September 30, 1995, and for the year then ended:
Revenue to unaffiliated customers ................. 11,937 - - 11,937
Intercompany transfers ............................ - - - -
------- -------- -------- -------
Net revenues ................................... 11,937 - - 11,937
Operating income .................................. 195 - - 195
Assets ............................................ 4,758 - - 4,758

(12) CONTINGENCIES

The Company is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.

(13) QUARTERLY INFORMATION (UNAUDITED)

The following table presents unaudited quarterly operating results for
each of the Company's eight quarters in the two-year period ended September
30, 1997.

QUARTER ENDED
------------------------------------------------------
DEC. 31, MAR. 31, JUN. 30, SEPT. 30,
-------- -------- -------- ---------

FISCAL YEAR 1997
Total revenue .................... $ 5,879 $ 6,912 $ 8,252 $ 9,123
Gross margin ..................... 5,035 5,879 6,898 7,812
Operating income ................. 369 560 757 1,196
Net income ....................... 321 604 803 1,070
Net income per share ............. 0.04 0.07 0.09 0.12

FISCAL YEAR 1996
Total revenue .................... 3,537 4,647 5,008 5,653
Gross margin ..................... 3,024 4,062 4,208 4,612
Operating income (loss) .......... 22 (25) (252) 175
Net income (loss) ................ 29 14 (157) 149
Net income (loss) per share ...... 0.01 0.00 (0.04) 0.02

F-14

(14) SUBSEQUENT EVENTS

On October 1, 1997 the Company acquired 66% of the outstanding stock of
HotData Inc. ("HotData") for $1.3 million in cash and can contribute up to a
total of $2.0 million over the next three to 15 months. HotData is
developing technology to collect and verify data across the Internet. The
acquisition will be accounted for under the equity method and HotData will
become a majority-owned subsidiary with the financial results of such
subsidiary will be consolidated with the Company's financial results. The
Company will have the option to purchase the minority interest of the
subsidiary during a specified time period in the future.

In October 1997, the Board adopted the Company's 1997 Non-Officer Stock
Option Plan (the "1997 Plan") providing for the issuance of either
nonstatutory common stock options, stock bonuses, or rights to purchase
restricted stock to employees and consultants of the Company. The 1997 Plan
specifically excludes directors and employees serving as officers of the
Company. Under the 1997 Plan, 900 shares have been authorized for issuance.

F-15

ROGUE WAVE SOFTWARE CORPORATION

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995

BALANCE BALANCE
AT BEGINNING AT END
OF PERIOD ADDITIONS DEDUCTIONS OF PERIOD
--------- --------- ---------- ---------

September 30, 1997
Allowance for doubtful accounts ........ $ 107 $ 129 $ -- $ 236
Sales returns and allowance ............ 111 112 -- 223

September 30, 1996
Allowance for doubtful accounts ........ 251 -- (144) 107
Sales returns and allowance ............ 111 598 (598) 111

September 30, 1995
Allowance for doubtful accounts ........ 34 539 (322) 251
Sales returns and allowance ............ 36 453 (378) 111

S-1

EXHIBIT INDEX

EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------

(1)2.1 Agreement and Plan of Reorganization between Registrant, Inmark
Development Corporation and RW Acquisition, Inc., dated as of
September 19, 1995.

(1)2.2 Agreement and Plan of Merger between the Registrant and Rogue
Wave Software, Inc., an Oregon corporation, dated as of November
21, 1996.

(1)3.2 Amended and Restated Certificate of Incorporation of the
Registrant.

(1)3.3 Bylaws of the Registrant.

(1)4.1 Reference is made to Exhibits 3.2 and 3.3.

(1)4.2 Specimen Stock Certificate.

(1)4.3 Amended and Restated Investors' Rights Agreement between the
Registrant and certain investors, dated November 10, 1995, as
amended June 27, 1996.

(1)10.1 Registrant's 1996 Equity Incentive Plan.

(1)10.2 Registrant's Employee Stock Purchase Plan.

(1)10.3 Form of Indemnity Agreement entered into between the Registrant
and its officers and directors.

(1)10.4 Lease Agreement between Registrant and the State of Oregon, dated
May 1, 1996.

(1)10.5 Lease Agreement between the Registrant and the Landmark, dated
April 22, 1996.

(1)10.6 Loan and Security Agreement between the Registrant and Silicon
Valley Bank, dated October 16, 1996.

(1)10.7 Collateral Assignment, Patent Mortgage and Security Agreement
between the Registrant and Silicon Valley Bank, dated October 16,
1996.

11.1 Statement Regarding Computation of Net Income Per Share.

21.1 List of Subsidiaries of Registrant.

22.1 Schedule of Valuation and Qualifying Accounts. Reference is made
to Schedule II.

23.1 Consent of KPMG Peat Marwick LLP. Reference is made to page II-6.

24.1 Power of Attorney (reference is made to signature page).

27.1 Financial Data Schedule.

- -----------
(1) Incorporated by reference to an exhibit bearing the same number in the
Registrant's Registration Statement on Form SB-2 (No. 333-13517).