Allaire Corp – ‘10-K405’ for 12/31/98

As of:  Wednesday, 3/31/99   ·   For:  12/31/98   ·   Accession #:  1029869-99-397   ·   File #:  0-25265   ·   Correction:  This Filing’s “Filed as of” Date was Corrected and “Changed as of” 4/7/99 by the SEC on 4/8/99. ®

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Annual Report — [x] Reg. S-K Item 405   —   Form 10-K
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Document/Exhibit                   Description                      Pages   Size 

 1: 10-K405     Annual Report -- [x] Reg. S-K Item 405                52    325K 
 2: EX-11.1     Statement Re: Computation of Per Share Earnings        2±     7K 
 3: EX-27       Financial Data Schedule                                1      9K 

10-K405   —   Annual Report — [x] Reg. S-K Item 405
Document Table of Contents

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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:                               Commission File Number:
December 31, 1998                                           0-25265     

 | | Transition Report Pursuant to Section 13 or 15(d)
Of the Securities Exchange Act of 1934

 ALLAIRE CORPORATION
(Exact name of registrant as specified in its charter)

                                                                [Download Table]
                                                                                    
                Delaware                                    41-1830792              
(State or other jurisdiction of Incorporation)  (IRS employer identification number)

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

One Alewife Center
Cambridge, Massachusetts 02140
(Address of principal executive offices)
 Telephone No.: (617) 761-2000
--------------------

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

 Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share

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

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

The aggregate market value of Common Stock held by non-affiliates of the        
registrant at March 2, 1999 was $268,792,810 based upon the last reported sales 
price of the Common Stock as reported by Nasdaq National Market on such date.   

The number of shares of the registrant's Common Stock, $.01 par value,          
outstanding at March 2, 1999 was 10,875,877.                                    

 DOCUMENTS INCORPORATED BY REFERENCE
 None.

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Part I                                                                          

Item 1.  Business                                                               

Introduction                                                                    

Allaire Corporation ("Allaire") develops, markets and supports software for a   
wide range of Web development, from building static Web pages to developing     
high-volume, interactive Web applications. Allaire's products and services      
enable organizations to link their information systems to the Web, as well as to
develop new Web-based business applications in areas such as electronic         
commerce, content management and personalization. Allaire's products            
interoperate with emerging Web application technologies as well as key          
enterprise information systems technologies. Allaire's flagship ColdFusion      
product line employs an easy to learn software development language that allows 
developers to quickly and efficiently create Web applications.                  

Allaire was incorporated in Minnesota on February 1, 1996 as the successor to a 
Minnesota limited liability company and was reincorporated in Delaware on April 
25, 1997. In March 1997, Allaire expanded its product offerings by acquiring the
HomeSite HTML design tool through the purchase of substantially all of the      
assets of Bradbury Software L.L.C. Allaire's principal executive offices are    
located at One Alewife Center, Cambridge, Massachusetts 02140, and the telephone
number at that location is (617) 761-2000.                                      

Industry Background                                                             

The Internet has experienced dramatic growth, both in terms of the number of    
users and as a means of conducting commercial transactions, and is expected to  
continue to grow rapidly. According to a report prepared by International Data  
Corporation, or IDC, the number of Internet users has increased from            
approximately 14 million in 1995 to approximately 97 million in 1998, and is    
expected to more than double over the next three years. The software technology 
that has engendered the openness, ubiquity and usability of the Internet and the
World Wide Web provides a powerful business software platform. Web technology   
provides an alternative to existing mainstream computing platforms, creates new 
opportunities for commerce and information exchange, and represents potential   
replacement technology to existing forms of media and communications.           

Demand from existing businesses and new Web-based enterprises for Web           
application software has created a sizable market experiencing strong growth. In
response to this growth, the number of Web developers is growing quickly. An IDC
report estimates that there were 7 million software developers worldwide at the 
end of 1996. Of these, 3 million were rapid application development ("RAD"), 4GL
and analysis modeling and design developers who used tools such as Visual Basic 
and PowerBuilder. Allaire believes that many of these developers are converting 
from enterprise and client-server application development products to           
Internet-centric products. In addition to the migration of these traditional    
developers, many other Web developers have emerged from non-traditional         
application development backgrounds such as page layout, graphic design, and    
desktop database and spreadsheet programming. IDC estimates that professional   
Web development tools, including Web page design and Web application development
tools, will account for $548 million in license and associated services revenue 
in 1998 and will grow to more than $1.5 billion in license and associated       
services revenue by 2002.                                                       

Allaire believes that most existing Web-enabled RAD tools fail to address the   
unique requirements and challenges faced by Web application developers. Most Web
developers are proficient with Hypertext Markup Language, or HTML, and many are 
familiar with eXtensible Markup Language, or XML, which are both core           
technologies that are specifically designed for the Web platform. The ease of   
using languages such as HTML and XML, which use declarative, English-like tags  
consisting of a bracketed word with attributes, has enabled non-traditional     
programmers to develop complex Web sites. These technologies enable Web         
applications to unite rich content, traditional business transactions,          
interactivity and personalization. Because the Web platform is a hybrid between 
a communications medium and a traditional application environment, the          
background of many developers drawn to Web development is different from the    
background of traditional programmers. Web developers rely more heavily on      
declarative, tag-based development languages than on traditional scripting      
languages.                                                                      

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A number of the programming languages that have migrated from client-server     
development or have emerged for developing Web applications, such as Perl and   
JavaScript, however, use a non-declarative scripting syntax. As a result, Web   
application developers are faced with the prospect of having to code            
simultaneously in unfamiliar scripting languages and declarative, tag-based     
languages. At the same time, developers creating Web applications are often     
required to integrate a variety of enterprise technologies, such as databases,  
directories, messaging servers, transaction monitors and object middleware. Many
of these technologies require the use of complex programming interfaces that are
difficult to learn.                                                             

Products                                                                        

Allaire has two product brands, HomeSite, an HTML design tool, and ColdFusion,  
an integrated Web development environment and Web application server product    
line. Allaire's products enable Web developers to build high-volume, interactive
Web sites and Web applications, including applications for electronic commerce, 
content management and personalization. Allaire introduced versions 4.0 of      
ColdFusion and HomeSite in November 1998. The discussion and chart below        
describe Allaire's products.                                                    

HomeSite                                                                        

HomeSite is a leading HTML design tool, which is principally used for the       
creation of static Web sites. HomeSite 4.0 and earlier versions have won the    
following awards:                                                               

o 1998 Web Techniques Editors' Choice Award;                                    

o 1998 Win 100 Award from Windows Magazine;                                     

o PC Magazine's Editors' Choice Award;                                          

o Internet Computing Magazine's 'Net Best' Award;                               

o Webdeveloper.com's Product Award;                                             

o CNET's builder.com Editor's Choice Award;                                     

o CNET's builder.com 1998 Product Award; and                                    

o CNET's Internet Excellence Award.                                             

HomeSite 4.0 runs on Microsoft Windows NT, Windows 95 and Windows 98.           

ColdFusion                                                                      

ColdFusion is a leading cross-platform Web application development system.      
ColdFusion includes an integrated development environment, ColdFusion Studio,   
and a Web application server, ColdFusion Server. ColdFusion 4.0 and earlier     
versions have won the following awards:                                         

o 1998 Codie Award for software excellence from the Software Publishers         
Association;                                                                

o "Best of the Show Award" at the 1998 Fall Internet World;                     

o CNET's builder.com 1998 Product Award; and                                    

o Network World Blue Ribbon Award.                                              

ColdFusion Studio is the integrated development environment for ColdFusion.     
Based on HomeSite, ColdFusion Studio allows developers to preserve development  
skills as well as individual projects as they move from developing static Web   
pages and sites to interactive Web sites and Web applications. ColdFusion Studio
4.0 runs on Microsoft Windows NT, Windows 95 and Windows 98.                    

ColdFusion Server 4.0 is an open, scalable and secure Web application server. A 
Web application server is a software program that hosts applications to be      
accessed by Web browsers and other client devices and that enables applications 
to access enterprise servers and legacy systems. Web applications built with    
ColdFusion range from simple, database-driven pages to full electronic commerce 

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solutions deployed on intranets, extranets and the Internet. ColdFusion Server  
4.0 is available in two editions, Professional and Enterprise, and runs on      
Windows NT. The Enterprise edition also runs on Sun Solaris.                    

                                                        [Enlarge/Download Table]

      Product                                                                                               
(Suggested List Price)      Description              Typical Applications           Target Users            
----------------------      -----------              --------------------           ------------            

                                                                                                            
HomeSite 4.0            HTML page design and         High-quality static          Web site developers       
(Electronic Version     Web site development tool    corporate Web sites                                    
$89; Packaged Version                                                             Web development           
$99)                    Features an intuitive                                     team managers             
                        graphical interface                                                                 

ColdFusion              An integrated development    Business systems (HR,        Web application           
   Studio 4.0           environment with a           financial, customer          developers                
  ($395)                number of visual tools for   support)                                               
                        creating Web applications                                 Enterprise and client-    
                                                     Electronic commerce          server programmers        
                        Includes the award-          (stores, business to                                   
                        winning HomeSite HTML        business)                    HTML and desktop          
                        design tool                                               database developers       
                                                     Dynamic content                                        
                        Features include             publishing (document         Development team          
                        interactive debugging,       management, dynamic          managers                  
                        remote development           news and personalized                                  
                        capabilities and one-step    information)                                           
                        deployment                                                                          
                                                     Collaboration (discussion,                             
                        Team development support     project and workflow                                   
                                                     management)                                            

  ColdFusion Server     Supports up to four          Business intranets and       Large enterprises         
   Professional 4.0     processors and allows an     extranets                                              
   ($1,295)             unlimited number of                                       Large systems integrators 
                        concurrent users             Field office extranets                                 
                                                                                  New Web-based             
                        Features include open        Single server applications   businesses                
                        state repository and shared  using a relational database                            
                        server security                                           Internet service providers

                        Access to any ODBC and                                                              
                        OLE-DB data source                                                                  

  ColdFusion Server     Supports up to eight         High-volume, business-       Large enterprises         
   Enterprise 4.0       processors and allows an     critical commerce sites                                
   ($3,495)             unlimited number of          and applications             Large systems integrators 
                        concurrent users                                                                    
                                                     Enterprise intranet          New Web-based             
                        Includes all Professional    applications                 businesses                
                        4.0 features, plus features                                                         
                        required for large scale                                                            
                        Enterprise applications                                                             
                        Internet service providers                                                          
                        applications, including                                                             
                        requiring native database                                                           
                        clustering, load balancing                                                          
                        drivers or CORBA and                                                                
                        automatic fail over and                                                             
                        CORBA support                                                                       

                        Sybase, Oracle and                                                                  
                        Microsoft SQL Server                                                                
                        native database drivers                                                             

Technology                                                                      

Allaire's products and services enable Web developers to build high-volume,     
interactive Web sites and Web applications, including applications for          
electronic commerce, content management and personalization. Allaire's          
technology enables organizations to overcome Web development challenges by      
making Web developers more productive in developing Web sites and applications, 
by enabling Web sites and applications to readily incorporate key emerging Web  
platforms and technologies, and by enabling these sites and applications, once  
deployed, to be scalable and secure. Allaire intends to continue to introduce   
additional innovative products for the development of application frameworks to 
accelerate the creation of new Web-based business applications.                 

Productive Development                                                          
Allaire's technology is focused on increasing the productivity of Web developers
and development teams. ColdFusion includes a number of innovative features to   
enhance individual and team development productivity, including the easy to use,
tag-based CFML, an integrated development environment and team development      
capabilities.                                                                   

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CFML is Allaire's tag-based server programming language. CFML uses the same tag 
and attribute syntax as HTML and XML. HTML is the tag-based markup language used
for creating the majority of static Web pages and interfaces for interactive Web
applications. HTML is easy to learn and use, consisting of a limited number of  
descriptive tags, each with a limited number of possible attributes. As a       
result, a large number of people have been able to learn and use HTML           
professionally to develop static Web pages and Web sites. XML is a rapidly      
emerging markup language which uses the same tag and attribute syntax as HTML   
for structuring and manipulating data on the Web platform.                      

Web developers rely more heavily on declarative tag-based development languages 
than on traditional scripting languages. A number of the programming languages  
that have migrated from client-server development or have emerged for developing
Web applications, such as Perl and JavaScript, however, use a non-declarative   
scripting syntax. As a result, Web application developers are faced with the    
prospect of having to code simultaneously in unfamiliar scripting languages and 
declarative, tag-based languages. At the same time, developers creating Web     
applications are often required to integrate a variety of enterprise            
technologies, such as databases, directories, messaging servers, transaction    
monitors and object middleware. Many of these technologies require the use of   
complex programming interfaces that are difficult to learn.                     

CFML's similarity to HTML and XML makes it easy to learn and use, particularly  
for Web developers who are familiar with HTML and are driving the adoption of   
XML. When used in conjunction with HTML for creating user interfaces and XML for
data manipulation, CFML provides developers with a complete application         
programming environment without requiring them to change programming syntax.    
CFML tags also include high-level building blocks that encapsulate complex      
processes to reduce programming effort and the amount of code and development   
time required for advanced interactions with enterprise servers, such as        
database, messaging, directory, Web and file servers.                           

Allaire's HomeSite 4.0 and ColdFusion 4.0 products provide a visual editing     
environment to enable Web developers to quickly build state-of-the-art static   
Web sites and interactive Web applications. Both tools provide two-way visual   
programming, which enables Web developers to prototype and modify pages from    
within a visual representation of the page itself. In addition, ColdFusion      
Studio includes visual debugging capabilities. However, unlike the              
"what-you-see-is-what-you-get" tools, HomeSite and ColdFusion Studio include    
graphical support only where it is likely to enhance productivity. These        
products focus on code development and maintaining the integrity of code        
generated in the graphical editing mode. HomeSite and ColdFusion Studio both    
include a number of additional productivity enhancements, and support emerging  
Web technologies, including JavaScript, cascading style sheets, dynamic HTML and
XML. ColdFusion team development features permit geographically dispersed Web   
development teams to work together productively and securely on large projects  
across servers distributed throughout multiple locations.                       

Open Integration                                                                
Allaire specifically designs its products to be open by supporting key Web      
client and Web server software platforms, technologies and protocols, as well as
key enterprise and client-server standards. ColdFusion is fully integrated with 
a broad range of Internet protocols and technologies, enabling developers to    
incorporate these technologies in ColdFusion applications through the use of    
straightforward CFML tags. The CFML tag for XML supports automatic parsing of   
XML data into CFML variables and the translation of query record sets into XML. 

ColdFusion 4.0 enables interaction with any open database connectivity, or ODBC,
compliant relational database with a single CFQUERY tag. ColdFusion also        
contains native database drivers for Oracle, Sybase or Microsoft SQL servers and
support for object linking and embedding database, or OLE-DB, which permits     
ColdFusion applications to utilize additional datasource types such as Lotus    
Notes and Microsoft Exchange. Additional tags enable interaction with other     
servers, such as mail servers, for groupware and workflow applications.         

ColdFusion supports a number of methods for extending ColdFusion applications to
interoperate with legacy systems and other enterprise technologies. ColdFusion  
natively supports application components built using cross-platform enterprise  
component object standards. CFML is also extensible through ColdFusion          
extensions, or CFXs. CFXs can be used to extend the functionality provided by   
the Allaire's core set of tags or to create a multi-tier component application  
architecture in which advanced programmers can encapsulate complex logic or     
database interaction into component building blocks to be used by other         
developers.                                                                     

Scalable, Secure Deployment                                                     
To successfully support large volume sites and transaction-intensive            
applications, a Web application development system requires performance,        
availability and scalability from the application server. ColdFusion 4.0        
provides a high degree of cross-platform performance and fault-tolerance from   
individual servers and multiple server clusters. ColdFusion runs as a 32-bit    
multithreaded system service, which permits applications to experience an       
increase in processing performance as processors are added to the server.       
Clusters of multiple ColdFusion servers significantly enhance an application's  
availability and scalability. ColdFusion automatically balances load among      
servers deployed in a cluster, so that performance is optimized. ColdFusion     
permits a cluster deployment to store client state information in a shared      
repository, so it will not be lost when a server fails. If any machine in the   
cluster fails or is heavily loaded, ColdFusion automatically transfers its      
responsibilities to one of the remaining servers. Because ColdFusion clusters   
use a                                                                           

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software-based system for load balancing and fail-over, there is no single point
of failure.                                                                     

ColdFusion provides a complete set of features for securely deploying           
applications. Principal among these is the ability of ColdFusion to restrict    
access to specific resources needed to run an application, including            
directories, files, databases and components. Therefore, multiple applications  
on the same server cannot access another application's resources. Other security
features include authentication and encryption for commercial Web applications. 

Research and Development                                                        

Allaire devotes a substantial portion of its resources to developing new        
products and product features, extending and improving its products and         
technology, and strengthening its technological expertise. During 1996, 1997 and
1998, Allaire spent approximately $873,000, $2.7 million and $4.8 million,      
respectively, on research and development. Allaire intends to continue to devote
substantial resources toward research and development. As of December 31, 1998, 
Allaire had 31 employees engaged in research and development activities. Allaire
intends to hire additional skilled software engineers to further its research   
and development efforts.                                                        

Sales, Marketing and Distribution                                               

Allaire markets and sells its products and services to Web developers using a   
combination of direct and indirect distribution channels, including a corporate 
sales force, domestic and international distribution, electronic commerce and   
sales through partners. During 1996, 1997 and 1998, 13%, 28% and 45%,           
respectively, of Allaire's total revenue was generated through the indirect     
distribution channel. As of December 31, 1998, Allaire had 67 sales and         
marketing employees worldwide.                                                  

Corporate Sales Force. Allaire's corporate account sales force focuses on sales 
to corporate customers worldwide. Corporate account sales can be filled either  
directly by Allaire or through its distribution partners. The corporate account 
sales force is comprised of field representatives and telesales representatives.
The field representatives market and sell to corporate customers primarily      
interested in server products for commercial Web sites or intranets. The        
telesales representatives develop and pursue leads generated from inquiries on  
Allaire's Web site and from downloads of its application server products.       

Indirect Distribution. Allaire has a number of domestic and international       
distributors and resellers that market and sell its products. As of December 31,
1998, Allaire had 19 distributors in North America, Europe and Asia Pacific,    
including Ingram Micro and Mitsubishi. In addition, as of December 31, 1998,    
Allaire had over 500 corporate and catalog resellers, original equipment        
manufacturers and value-added resellers. Allaire has an original equipment      
manufacturer agreement with Macromedia pursuant to which HomeSite is bundled    
with Macromedia's Dreamweaver. Allaire also has an original equipment           
manufacturer agreement with NetObjects pursuant to which HomeSite is bundled    
with NetObjects Fusion. None of Allaire's distribution partners have exclusive  
distribution rights.                                                            

Electronic Commerce. Allaire's Web site allows users to download, evaluate and  
purchase its products. A number of third-party electronic commerce sites,       
including CNET's Buydirect.com, Beyond.com, RealStore.com and JapanMarket.com,  
distribute commercial copies of Allaire's products for delivery by direct       
download. Electronic distribution provides Allaire with a low-cost, globally    
accessible, 24-hour sales channel.                                              

Allaire Alliance. Allaire believes that establishing a large community of active
users of its products and technology representing key segments of the Web       
platform is critical to its success. To further the development of this         
community, Allaire has established the Allaire Alliance program. Allaire        
Alliance members include solution developers, application developers and        
Internet service providers. Allaire Alliance members also include the           
distributors, corporate and catalog resellers, original equipment manufacturers 
and value-added resellers referenced above. Allaire typically enters into       
written agreements with its Allaire Alliance members. These agreements typically
do not provide for firm financial commitments from the member, but are intended 
to establish the basis upon which the parties will work together to achieve     
mutually beneficial objectives.                                                 

Marketing Programs. Allaire engages in a broad range of marketing activities,   
including sponsoring seminars for potential customers, participating in trade   
shows and conferences, providing product information through its Web site,      
promoting special events and advertising its products and services in print and 
electronic media. During 1998, Allaire held 108 seminars in 46 cities. Allaire's
marketing programs are aimed at informing customers of the capabilities and     
benefits of its products and services, increasing brand name awareness and      
stimulating demand across all market segments. Certain programs are designed to 
encourage independent software developers to develop products and applications  
that are compatible with Allaire's products and technology.                     

Customers                                                                       

Allaire's products are marketed and distributed to a diverse group of customers,
ranging from small, independent consultants and Internet presence providers to  
Web developers and information technology departments of large organizations.   
Many of Allaire's customers are global organizations that use its products to   
create Web sites and Web applications in areas such as electronic               

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commerce, content management and personalization for Internet, intranet and     
extranet use.                                                                   

Revenue from customers outside North America, primarily Asia and Europe, was    
approximately 17%, 20% and 13% of total revenue in 1996, 1997 and 1998,         
respectively. Sales by Allaire to Ingram Micro accounted for approximately 29%  
of Allaire's total revenue for 1998. No single customer accounted for 10% or    
more of Allaire's total revenue for 1996 or 1997.                               

Support and Professional Services                                               

Allaire offers a broad range of support and professional services to its        
customers. Allaire believes that providing a high level of customer service and 
technical support is necessary to achieve rapid product implementation which, in
turn, is essential to customer satisfaction and continued license sales and     
revenue growth. Allaire's customers have a choice of support options depending  
on the level of service desired. Allaire maintains a technical support hotline  
staffed by engineers from 8:00 a.m. to 8:00 p.m., Eastern time, Monday through  
Friday, from its corporate office in Cambridge, Massachusetts. Internationally, 
distribution partners provide telephone support to customers with technical     
assistance from Allaire. Allaire's support staff also responds to e-mail        
inquiries. Allaire tracks support requests through a series of customer         
databases, including current status reports and historical customer interaction 
logs. Allaire uses customer feedback as a source of ideas for product           
improvements and enhancements. Allaire also provides training and consulting to 
assist its customers in the use of its products. As of December 31, 1998,       
Allaire had 27 technical support engineers and professional services employees. 

Competition                                                                     

The Web development products market is intensely competitive, subject to rapid  
change and significantly affected by new product introductions and other        
activities of market participants. Primary competitors include large Web and    
database platform companies that offer a variety of software products, such as  
Microsoft, IBM, Netscape, Sun Microsystems, Oracle, Sybase, Symantec, Informix  
and Inprise Corporation (formerly Borland). In addition, Allaire experiences    
competition from a number of medium-sized and start-up companies that have      
introduced or are developing Web development products, such as NetDynamics,     
which was recently acquired by Sun Microsystems, Vignette Corporation, HAHT     
Software, GoLive Systems, WebLogic, which was recently acquired by BEA Systems, 
BroadVision and SilverStream Software. In addition, Allaire has strategic       
relationships with NetObjects and Macromedia. In some cases, these Web          
development products vendors compete with Allaire, and there can be no assurance
that these strategic relationships will continue.                               

Allaire believes that additional competitors may enter the market with competing
products as the size and visibility of the market opportunity increases.        
Increased competition could result in pricing pressures, reduced margins or the 
failure of Allaire's products to achieve or maintain market acceptance, any of  
which could have a material adverse effect on Allaire's business, operating     
results and financial condition. Many of Allaire's current and potential        
competitors have longer operating histories and substantially greater financial,
technical, marketing and other resources than Allaire. Therefore, they may be   
able to respond more quickly than Allaire to new or changing opportunities,     
technologies, standards or customer requirements. Many of these competitors also
have broader and more established distribution channels that may be used to     
deliver competing products directly to customers through bundling or other      
means. If competitors were to bundle competing products with their products, the
demand for Allaire's products might be substantially reduced and the ability of 
Allaire to distribute its products successfully would be substantially          
diminished.                                                                     

Competitive factors in the Web development products market include:             

o the quality and reliability of software;                                      

o features for creating, editing and adapting content;                          

o ease of use and interactive user features;                                    

o application server scalability, availability and performance;                 

o cost per user; and                                                            

o compatibility with the user's existing network components and software        
systems.                                                                    

To expand its user base and further enhance the user experience, Allaire must   
continue to innovate and improve the performance of its products. Allaire       
anticipates that consolidation will continue in the Web development products    
industry and related industries such as computer software, media and            
communications. Consequently, competitors may be acquired by, receive           
investments from or enter into other commercial relationships with, larger,     
well-established and well-financed companies. There can be no assurance that    
Allaire can establish or sustain a leadership position in this market.          

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Intellectual Property                                                           

Allaire's success and competitiveness are dependent to a significant degree on  
the protection of its proprietary technology. Allaire relies primarily on a     
combination of copyrights, trademarks, licenses, trade secret laws and          
restrictions on disclosure to protect its intellectual property and trade       
secrets. Allaire also enters into confidentiality agreements with its employees 
and consultants, and generally controls access to and distribution of its       
documentation and other proprietary information. Despite these precautions, it  
may be possible for a third party to copy or otherwise attain and use Allaire's 
intellectual property or trade secrets without authorization. In addition,      
Allaire relies in part on "shrinkwrap" and "clickwrap" licenses that are not    
signed by the end user and, therefore, may be unenforceable under the laws of   
certain jurisdictions. There can be no assurance that the precautions taken by  
Allaire will prevent misappropriation or infringement of its technology. In     
addition, there can be no assurance that others will not independently develop  
substantially equivalent intellectual property. A failure by Allaire to protect 
its intellectual property in a meaningful manner could have a material adverse  
effect on Allaire's business, operating results and financial condition.        

In addition, the laws of some foreign countries do not protect Allaire's        
proprietary rights to the same extent as do the laws of the United States, and  
effective patent, copyright, trademark and trade secret protection may not be   
available in such jurisdictions. Allaire licenses certain of its proprietary    
rights to third parties, and there can be no assurance that such licensees will 
not fail to abide by compliance and quality control guidelines with respect to  
such proprietary rights or take actions that would materially adversely affect  
Allaire's business, operating results and financial condition.                  

Litigation may be necessary in the future to enforce Allaire's intellectual     
property rights, to protect Allaire's trade secrets or to determine the validity
and scope of the proprietary rights of others. Such litigation, whether         
successful or unsuccessful, could result in substantial costs and diversion of  
management and technical resources, either of which could have a material       
adverse effect on Allaire's business, operating results and financial condition.

Allaire attempts to avoid infringing known proprietary rights of third parties  
in its product development efforts. However, Allaire has not conducted and does 
not conduct comprehensive patent searches to determine whether the technology   
used in its products infringes patents held by third parties. In addition,      
product development is inherently uncertain in a rapidly evolving technological 
environment in which there may be numerous patent applications pending, many of 
which are confidential when filed, with regard to similar technologies. If      
Allaire were to discover that its products violated third party proprietary     
rights, there can be no assurance that it would be able to obtain licenses to   
continue offering such products without substantial reengineering or that any   
effort to undertake such reengineering would be successful, or that any licenses
would be available on commercially reasonable terms.                            

Allaire pursues the registration of certain of its trademarks and service marks 
in the United States and in certain other countries, although it has not secured
registration of all its marks. Allaire has registered United States trademarks  
for "Cold Fusion" and a related design, and has an application pending for a    
United States trademark for "HomeSite." A significant portion of Allaire's marks
contain the word "Fusion" (such as ColdFusion). Allaire is aware of other       
companies that use "Fusion" in their marks alone or in combination with other   
words, and Allaire does not expect to be able to prevent third party uses of the
word "Fusion" for competing goods and services. For example, NetObjects markets 
its principal products for designing, building and updating Web sites under the 
names "NetObjects Fusion" and "NetObjects Team Fusion."                         

Allaire currently licenses technology from third parties that it incorporates   
into its products. Examples include licenses for the following:                 

o visual editing technology from Microsoft;                                     

o load balancing and failover technology from Bright Tiger Technologies;        

o security technology from Netegrity; and                                       

o full-text indexing and searching technology from Verity.                      

In light of the rapidly evolving nature of the Web platform and Allaire's       
strategy to pursue industry partnerships to ensure its support of and by the    
emerging platform, Allaire expects that it will increasingly need to rely on    
technology that it licenses from other vendors which is integrated with         
internally developed software and used in Allaire's products to perform key     
functions.                                                                      

Employees                                                                       

As of December 31, 1998, Allaire had 165 employees, 148 of whom were based at   
Allaire's headquarters in Cambridge, Massachusetts. None of Allaire's employees 
is subject to a collective bargaining agreement. Allaire believes that its      
relations with its employees are good.                                          

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Item 1A. Risk Factors                                                           

Allaire has a limited operating history on which to evaluate its prospects      

Allaire commenced operations in May 1995 and recorded its first revenue upon    
delivery of ColdFusion 1.5 to customers in February 1996. Accordingly, Allaire  
has only a limited operating history on which to base an evaluation of Allaire's
business and prospects. In addition, Allaire's prospects must be considered in  
light of the risks and uncertainties encountered by companies in an early stage 
of development in new and rapidly evolving markets.                             

Allaire may not be profitable in the future                                     

Since Allaire began operations, it has incurred substantial net losses in every 
fiscal period. Allaire cannot be certain when it will become profitable, if at  
all. Failure to achieve profitability may adversely affect the market price of  
Allaire's common stock. In 1998, Allaire had a net loss of $10.8 million. As a  
result of accumulated operating losses, at December 31, 1998, Allaire had an    
accumulated deficit of $20.2 million. Allaire has generated relatively small    
amounts of revenue until recent fiscal quarters, while increasing expenditures  
in all areas, particularly in research and development and sales and marketing, 
in order to execute its business plan. Although Allaire has experienced revenue 
growth in recent periods, the growth has been off of a small base, and it is    
unlikely that such growth rates are sustainable.                                

Allaire's quarterly results may fluctuate                                       

Allaire's quarterly revenue and operating results are difficult to predict and  
may fluctuate significantly from quarter to quarter. If Allaire's quarterly     
revenue or operating results fall below the expectations of investors or public 
market analysts, the price of its common stock could fall substantially.        

Allaire's quarterly revenue may fluctuate for several reasons, including the    
following:                                                                      

o    the market for Web development products is in an early stage of development
  and it is therefore difficult to accurately predict customer demand; and

o    the sales cycle for Allaire's products and services varies substantially   
   from customer to customer and, if Allaire's average sales price increases
as expected, Allaire expects the sales cycle to lengthen. As a        
     result, Allaire has difficulty determining whether and when it will receive
license revenue from a particular customer.                           

In addition, because Allaire's revenue from training services is largely        
correlated with Allaire's license revenue, a decline in license revenue could   
also cause a decline in Allaire's services revenue in the same quarter or in    
subsequent quarters. Other factors, many of which are outside Allaire's control,
could also cause variations in Allaire's quarterly revenue and operating        
results.                                                                        

Most of Allaire's expenses, such as employee compensation and rent, are         
relatively fixed. Moreover, Allaire's expense levels are based, in part, on     
Allaire's expectations regarding future revenue increases. As a result, any     
shortfall in revenue in relation to Allaire's expectations could cause          
significant changes in Allaire's operating results from quarter to quarter and  
could result in quarterly losses.                                               

The development of a market for Allaire's products is uncertain                 

If the market for Web development products does not grow at a significant rate, 
Allaire's business, operating results and financial condition will be materially
adversely affected. Web technology has been used widely for only a short time,  
and the market for Web development products is new and rapidly evolving. As is  
typical for new and rapidly evolving industries, demand for recently introduced 
products is highly uncertain.                                                   

Allaire's performance will depend on the growth and commercial acceptance of the
Internet                                                                        

Allaire's future success will depend substantially upon the widespread adoption 
of the Internet as a primary medium for commerce and business applications. If  
the Internet does not become a viable and substantial commercial medium,        
Allaire's business, operating results and financial condition will be materially
adversely affected. The Internet has experienced, and is expected to continue to
experience, significant user and traffic growth, which has, at times, caused    
user frustration with slow access and download times. The Internet              
infrastructure may not be able to support the demands placed on it by continued 
growth. Moreover, critical issues concerning the commercial use of the Internet,
such as security, reliability, cost, accessibility and quality of service,      
remain unresolved and may negatively affect the growth of Internet use or the   
attractiveness of commerce and business communication on the Internet. In       
addition, the Internet could lose its viability due to delays in the development
or adoption of new standards and protocols to handle increased activity or due  
to increased government regulation and taxation of Internet commerce.           

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Allaire competes with Microsoft while simultaneously supporting Microsoft       
technologies                                                                    

Allaire currently competes with Microsoft in the market for Web development     
products while simultaneously maintaining a working relationship with Microsoft.
Microsoft has a longer operating history, a larger installed base of customers  
and substantially greater financial, distribution, marketing and technical      
resources than Allaire. As a result, Allaire may not be able to compete         
effectively with Microsoft now or in the future, and Allaire's business,        
operating results and financial condition may be materially adversely affected. 

Allaire expects that Microsoft's commitment to and presence in the Web          
development products market will substantially increase competitive pressure in 
the market. Allaire believes that Microsoft will continue to incorporate Web    
application server technology into its operating system software and certain of 
its server software offerings, possibly at no additional cost to its users.     

 Allaire believes that it must maintain a working relationship with Microsoft to
achieve success. Most of Allaire's customers use Microsoft-based operating      
platforms, so it is critical to Allaire's success that Allaire's products be    
closely integrated with Microsoft technologies. Notwithstanding Allaire's       
historical and current support of the Microsoft platform, Microsoft may in the  
future promote technologies and standards more directly competitive with or not 
compatible with Allaire's technology.                                           

Allaire faces significant competition from other technology companies           

The Web development products market is intensely competitive. Many of Allaire's 
current and potential competitors have longer operating histories and           
substantially greater financial, technical, marketing, distribution and other   
resources than Allaire does and therefore may be able to respond more quickly   
than Allaire can to new or changing opportunities, technologies, standards or   
customer requirements. In addition to Microsoft, Allaire competes with other    
large Web and database platform companies that offer a variety of software      
products. Allaire also competes with a number of medium-sized and start-up      
companies that have introduced or that are developing Web development products. 
In addition, Allaire has strategic relationships with NetObjects, a             
majority-owned subsidiary of IBM, and Macromedia. In some cases, these vendors  
compete with Allaire, and there can be no assurance that these strategic        
relationships will continue.                                                    

Allaire expects that additional competitors will enter the market with competing
products as the size and visibility of the market opportunity increases.        
Increased competition could result in pricing pressures, reduced margins or the 
failure of Allaire's products to achieve or maintain market acceptance.         

If, in the future, a competitor chooses to bundle a competing Web development   
product with other products, the demand for Allaire's products might be         
substantially reduced. In addition, new technologies will likely increase the   
competitive pressures that Allaire faces. The development of competing          
technologies by market participants or the emergence of new industry standards  
may adversely affect Allaire's competitive position. As a result of these and   
other factors, Allaire may not be able to compete effectively with current or   
future competitors, which would have a material adverse effect on Allaire's     
business, operating results and financial condition.                            

Allaire's success depends on its ability to expand its sales force and          
distribution channels                                                           

To increase Allaire's revenue, Allaire must increase the size of its sales force
and the number of its indirect channel partners, including original equipment   
manufacturers, value-added resellers and systems integrators. A failure to do so
could have a material adverse effect on Allaire's business, operating results   
and financial condition. There is intense competition for sales personnel in    
Allaire's business, and there can be no assurance that Allaire will be          
successful in attracting, integrating, motivating and retaining new sales       
personnel. Allaire's existing or future channel partners may choose to devote   
greater resources to marketing and supporting the products of other companies.  
In addition, Allaire will need to resolve potential conflicts among its sales   
force and channel partners.                                                     

Allaire's success depends on ongoing sales through a limited number of          
distributors                                                                    

Allaire derives a substantial portion of its revenue from a limited number of   
distributors. For 1998, revenue from Allaire's indirect distribution channel    
accounted for approximately 45% of Allaire's total revenue, and one distributor,
Ingram Micro, accounted for approximately 29% of Allaire's total revenue. The   
loss of, or a reduction in orders from, Ingram Micro or any other significant   
distributor could have a material adverse effect on Allaire's business,         
operating results and financial condition. Because Allaire does not deal        
directly with end users when selling through distributors, Allaire is dependent 
upon the ability of distributors to accurately forecast demand and maintain     
appropriate levels of inventory. If a distributor purchases excess product,     
Allaire may be obligated to accept the return of some products.                 

Allaire may experience lost or delayed sales as its sales cycle lengthens       

A longer sales cycle reduces Allaire's ability to forecast revenue levels. Any  
delay or loss in sales of Allaire's products could have a material adverse      
effect on Allaire's business, operating results and financial condition, and    
could cause its operating results to vary                                       

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significantly from quarter to quarter. As Allaire increases its marketing focus 
on larger purchases by larger customers, Allaire expects that increased         
executive-level involvement of information technology officers and other senior 
managers of Allaire's customers will occur. Potential large sales may be        
delayed, or lost altogether, because Allaire will have to provide a more        
comprehensive education to prospective customers regarding the use and benefits 
of Allaire's products. Allaire's customers' purchase decisions may be subject to
delays over which Allaire may have little or no control, including budgeting    
constraints, internal purchase approval review procedures and the inclusion or  
exclusion of Allaire's products on customers' approved standards list.          

Allaire's performance will depend on continued market acceptance of its products

If Allaire's products do not continue to satisfy the Web developer community or 
otherwise fail to sustain sufficient market acceptance, its business, operating 
results and financial condition would be materially adversely affected. Allaire 
believes that a significant contributing factor to Allaire's initial growth has 
been its ability to create and maintain strong relationships with the community 
of Web developers that initially adopted Allaire's products. This community of  
early adopters demands rapid improvements in the performance, features and      
reliability of Allaire's products, as well as a high level of customer service. 
Due in part to the emerging nature of the Web development products market and   
the substantial resources available to many market participants, Allaire        
believes there is a time-limited opportunity to achieve and maintain market     
share in the Web development products market.                                   

Allaire's efforts to develop brand awareness may be unsuccessful                

Allaire believes that developing and maintaining awareness of the "Allaire,"    
"ColdFusion" and "HomeSite" brand names is critical to achieving widespread     
acceptance of Allaire's products. If Allaire fails to promote and maintain its  
brands or incurs significant related expenses, Allaire's business, operating    
results and financial condition could be materially adversely affected. To      
promote its brands, Allaire may find it necessary to increase its marketing     
budget or otherwise increase its financial commitment to creating and           
maintaining brand awareness among potential customers. Although Allaire has     
obtained a United States registration of the trademark "Cold Fusion," Allaire is
aware of other companies, including competitors, that use the word "Fusion" in  
their marks alone or in combination with other words, and Allaire does not      
expect to be able to prevent third party uses of the word "Fusion" for competing
goods and services. For example, NetObjects markets its principal products for  
designing, building and updating Web sites under the names "NetObjects Fusion"  
and "NetObjects Team Fusion." Competitors that use marks that are similar to    
Allaire's brand names may cause confusion among actual and potential customers, 
which could prevent Allaire from achieving significant brand recognition.       

Allaire's performance depends on the success of ColdFusion and HomeSite         

Allaire derives almost all of its revenue from licenses of Allaire's ColdFusion 
and HomeSite software products and related services. Any competitive pressures  
or other factors that adversely affect market acceptance of ColdFusion or       
HomeSite software would have a material adverse effect on Allaire's business,   
operating results and financial condition.                                      

Allaire's future success will depend on Allaire's ability to enhance existing   
products and develop new products                                               

To be competitive, Allaire must develop and introduce product enhancements and  
new products which increase Allaire's customers' ability to build and deploy Web
applications. In the past, Allaire has been forced to delay introduction of     
several new products. If Allaire fails to develop and introduce new products and
enhancements successfully and on a timely basis, it could have a material       
adverse effect on Allaire's business, operating results and financial condition.
The emerging nature of the Web development products market requires that Allaire
continually improve the performance, features and reliability of Allaire's      
products, particularly in response to competitive offerings and evolving        
customer needs. Allaire must also introduce enhancements to existing products as
quickly as possible and prior to the introduction of competing products.        

Allaire depends on third parties for technology in its products                 

Allaire licenses technology that is incorporated into Allaire's products from   
third parties. The loss of access to such technology could result in delays in  
Allaire's development and introduction of new products or enhancements until    
equivalent or replacement technology could be accessed, if available, or        
developed internally, if feasible. These delays could have a material adverse   
effect on Allaire's business, operating results and financial condition. In     
light of the rapidly evolving nature of Web technology and Allaire's strategy to
pursue industry partnerships, Allaire believes that it will increasingly need to
rely on technology from third party vendors, such as Microsoft, which may also  
be competitors. There can be no assurance that technology from others will      
continue to be available to Allaire on commercially reasonable terms, if at all.

Moreover, although Allaire is generally indemnified against claims that such    
third party technology infringes the proprietary rights of others, such         
indemnification is not always available for all types of intellectual property  
rights (for example, patents may be excluded) and in some cases the scope of    
such indemnification is limited. Even if Allaire receives broad indemnification,
third party indemnitors are not always well capitalized and may not be able to  
indemnify Allaire in the event of infringement, resulting in substantial        
exposure to Allaire. There can be no assurance that infringement or invalidity  
claims arising from the incorporation of third party technology,                

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and claims for indemnification from Allaire's customers resulting from such     
claims, will not be asserted or prosecuted against Allaire. Such claims, even if
not meritorious, could result in the expenditure of significant financial and   
managerial resources in addition to potential product redevelopment costs and   
delays, all of which could materially adversely affect Allaire's business,      
operating results and financial condition.                                      

Allaire may have difficulty managing its growth                                 

Allaire has been experiencing a period of rapid growth that has been placing a  
significant strain on all of Allaire's resources. Allaire's 1998 fourth quarter 
revenue is more than double that of the fourth quarter of 1997. During the year 
ended December 31, 1998, the number of Allaire's employees increased from 95 to 
165. To manage future growth effectively Allaire must maintain and enhance its  
financial and accounting systems and controls, integrate new personnel and      
manage expanded operations. Any failure to do so could have a material adverse  
effect on the quality of Allaire's products, Allaire's ability to retain key    
personnel and Allaire's business, operating results and financial condition.    

Allaire is dependent on Joseph Allaire and David Orfao                          

Allaire's future success depends to a significant degree on the skills,         
experience and efforts of Joseph J. Allaire, Allaire's founder, Chairman of the 
Board, Chief Technology Officer and Executive Vice President, and David J.      
Orfao, Allaire's President and Chief Executive Officer. The loss of the services
of Mr. Allaire or Mr. Orfao could have a material adverse effect on Allaire's   
business, operating results and financial condition. Allaire also depends on the
ability of its executive officers and other members of senior management to work
effectively as a team. Allaire does not have employment agreements with any of  
its executive officers, and does not have any key person life insurance other   
than for Mr. Allaire and Mr. Orfao.                                             

Allaire must hire and retain skilled personnel in a tight labor market          

Qualified personnel are in great demand throughout the software industry.       
Allaire's success depends in large part upon Allaire's ability to attract,      
train, motivate and retain highly skilled employees, particularly sales and     
marketing personnel, software engineers and other senior personnel. Allaire's   
failure to attract and retain the highly trained technical personnel that are   
integral to its direct sales, product development, service and support teams may
limit the rate at which Allaire can generate sales and develop new products or  
product enhancements. This could have a material adverse effect on Allaire's    
business, operating results and financial condition.                            

Allaire's success depends on its ability to protect its proprietary technology  

Allaire's success depends to a significant degree upon the protection of its    
software and other proprietary technology. The unauthorized reproduction or     
other misappropriation of Allaire's proprietary technology could enable third   
parties to benefit from Allaire's technology without paying Allaire for it. This
could have a material adverse effect on Allaire's business, operating results   
and financial condition.                                                        

Although Allaire has taken steps to protect its proprietary technology, they may
be inadequate. Existing trade secret, copyright and trademark laws offer only   
limited protection. In addition, Allaire relys in part on "shrinkwrap" and      
"clickwrap" licenses that are not signed by the end user and, therefore, may be 
unenforceable under the laws of certain jurisdictions. Moreover, the laws of    
other countries in which Allaire markets its products may afford little or no   
effective protection of Allaire's intellectual property.                        

If Allaire resorts to legal proceedings to enforce its intellectual property    
rights, the proceedings could be burdensome and expensive and could involve a   
high degree of risk.                                                            

Other companies may claim that Allaire infringes their proprietary technology   

Although Allaire attempts to avoid infringing known proprietary rights of third 
parties, Allaire is subject to the risk of claims alleging infringement of third
party proprietary rights. If Allaire were to discover that any of its products  
violated third party proprietary rights, there can be no assurance that Allaire 
would be able to obtain licenses on commercially reasonable terms to continue   
offering the product without substantial reengineering or that any effort to    
undertake such reengineering would be successful. Allaire does not conduct      
comprehensive patent searches to determine whether the technology used in its   
products infringes patents held by third parties. In addition, product          
development is inherently uncertain in a rapidly evolving technological         
environment in which there may be numerous patent applications pending, many of 
which are confidential when filed, with regard to similar technologies.         

Any claim of infringement could cause Allaire to incur substantial costs        
defending against the claim, even if the claim is invalid, and could distract   
Allaire's management from Allaire's business. Furthermore, a party making such a
claim could secure a judgment that requires Allaire to pay substantial damages. 
A judgment could also include an injunction or other court order that could     
prevent Allaire from selling its products. Any of these events could have a     
material adverse effect on Allaire's business, operating results and financial  
condition.                                                                      

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Allaire's business could be adversely affected if Allaire's products contain    
errors                                                                          

Software products as complex as Allaire's may contain undetected errors or      
"bugs," which result in product failures. The occurrence of errors could result 
in loss of or delay in revenue, loss of market share, failure to achieve market 
acceptance, diversion of development resources, injury to Allaire's reputation, 
or damage to Allaire's efforts to build brand awareness, any of which could have
a material adverse effect on Allaire's business, operating results and financial
condition.                                                                      

Allaire could be subject to product liability claims relating to its customers' 
critical business operations                                                    

Many of the Web applications developed and deployed with Allaire's products are 
critical to the operations of Allaire's customers' businesses. Any failure in a 
customer's Web application could result in a claim for substantial damages      
against Allaire, regardless of Allaire's responsibility for such failure.       
Although Allaire maintains general liability insurance, including coverage for  
errors and omissions, there can be no assurance that such coverage will continue
to be available on reasonable terms or will be available in amounts sufficient  
to cover one or more large claims, or that the insurer will not disclaim        
coverage as to any future claim.                                                

Allaire may be subject to risks associated with future acquisitions             

From time to time, Allaire may pursue acquisitions to obtain complementary      
products, services and technologies. An acquisition may not produce the revenue,
earnings or business synergies that Allaire anticipated, and an acquired        
product, service or technology might not perform as Allaire expected. If Allaire
pursues any acquisition, Allaire's management could spend a significant amount  
of time and effort in identifying and completing the acquisition. If it         
completes an acquisition, Allaire would probably have to devote a significant   
amount of management resources to integrating the acquired business with        
Allaire's existing business.                                                    

To pay for an acquisition, Allaire might use capital stock or cash, including   
proceeds of the initial public offering. Alternatively, Allaire might borrow    
money from a bank or other lender. If Allaire uses capital stock, Allaire's     
stockholders would experience dilution of their ownership interests. If Allaire 
uses cash or debt financing, Allaire's financial liquidity will be reduced.     

Allaire may be affected by unexpected Year 2000 problems                        

Many existing computer systems and software products do not properly recognize  
dates after December 31, 1999. This "Year 2000" problem could result in         
miscalculations, data corruption, system failures or disruptions of operations. 
Allaire is subject to potential Year 2000 problems affecting its products,      
internal systems and the systems of its vendors and distributors, any of which  
could have a material adverse effect on Allaire's business, operating results   
and financial condition.                                                        

Because ColdFusion does not involve data storage, the ability of a Web          
application built with ColdFusion to comply with Year 2000 requirements is      
largely dependent on whether the database underlying the application is Year    
2000 compliant. Therefore, there can be no assurance that Web applications      
developed using Allaire's products will comply with Year 2000 requirements. For 
example, if ColdFusion is connected to a database that is not Year 2000         
compliant, the information received by a ColdFusion application may be          
incorrect.                                                                      

Changing purchasing patterns of customers impacted by Year 2000 issues may      
result in reduced funds available for Web development activities.               

In addition, there can be no assurance that Year 2000 errors or defects will not
be discovered in Allaire's internal software systems and, if such errors or     
defects are discovered, there can be no assurance that the costs of making such 
systems Year 2000 compliant will not be material.                               

Year 2000 errors or defects in the internal systems maintained by Allaire's     
vendors or distributors could require Allaire to incur significant unanticipated
expenses to remedy any problems or replace affected vendors and could reduce    
Allaire's revenue from its indirect distribution channel.                       

Allaire's existing stockholders will exercise significant control over Allaire  

Allaire's officers, directors and greater than 10 percent stockholders together 
control approximately 49% of the outstanding common stock. As a result, these   
stockholders, if they act together, are able to influence Allaire's management  
and affairs and all matters requiring stockholder approval, including the       
election of directors and approval of significant corporate transactions. This  
concentration of ownership may have the effect of delaying or preventing a      
change in control of Allaire and might affect the market price of the common    
stock.                                                                          

Certain provisions of Allaire's charter and of Delaware law make a takeover of  
Allaire more difficult                                                          

Allaire's corporate documents and Delaware law contain provisions that might    
enable its management to resist a takeover of Allaire. These provisions might   
discourage, delay or prevent a change in the control of Allaire or a change in  
Allaire's management. These provisions could also discourage proxy contests and 
make it more difficult for stockholders to elect directors and take other       
corporate actions. The existence of these provisions could limit the price that 
investors might be willing to pay in the future for shares of common stock.     

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Future sales by existing security holders could depress the market price of the 
common stock                                                                    

Immediately after the initial public offering in January 1999, the public market
for the common stock included only the 2,875,000 shares that Allaire sold in the
offering. At that time, there were an additional 7,958,260 shares of common     
stock outstanding. The persons that hold these shares are able to sell some of  
them in the public market following the offering. If these stockholders sell a  
large number of shares, the market price of the common stock could decline      
significantly. Moreover, the perception in the public market that these         
stockholders might sell shares of common stock could depress the market price of
the common stock.                                                               

Of the 7,958,260 additional shares held by Allaire's existing stockholders,     
7,860,524 shares are subject to "lock-up" agreements with the representatives of
the underwriters. When the 180-day "lock-up" period expires (or earlier with the
consent of Credit Suisse First Boston), Allaire's existing stockholders and     
optionholders will be able to sell approximately an additional 7,525,000 shares 
in the public market.                                                           

Some of Allaire's existing stockholders have the right to force Allaire to      
register their shares of common stock with the Securities and Exchange          
Commission. If Allaire registers their shares of common stock, they can sell    
those shares in the public market.                                              

Allaire intends to register approximately 4,986,000 shares of common stock that 
Allaire has issued or may issue under Allaire's stock plans. Once Allaire       
registers these shares, they can be sold in the public market upon issuance,    
subject to the "lock-up" agreements described above.                            

Allaire will have broad discretion in using the proceeds from the initial       
public offering                                                                 

Allaire has not identified specific uses for the proceeds from the offering, and
Allaire will have broad discretion in how it uses them. Investors will not have 
the opportunity to evaluate the economic, financial or other information on     
which Allaire bases its decisions on how to use the proceeds.                   

Investors will be subject to market risks                                       

The stock market in general has recently experienced extreme price and volume   
fluctuations. The market prices of securities of technology companies,          
particularly Internet-related companies, have been extremely volatile, and have 
experienced fluctuations that have often been unrelated or disproportionate to  
the operating performance of such companies. These broad market fluctuations    
could adversely affect the market price of the common stock.                    

Recently, when the market price of a stock has been volatile, holders of that   
stock have often instituted securities class action litigation against the      
company that issued the stock. If any of Allaire's stockholders brought such a  
lawsuit against Allaire, Allaire could incur substantial costs defending the    
lawsuit. The lawsuit could also divert the time and attention of Allaire        
management.                                                                     

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Item 2.   Properties                                                            

Allaire's headquarters is located in Cambridge, Massachusetts. Allaire has two  
leases for approximately 79,000 square feet of space in separate office         
buildings in Cambridge. The first lease, which covers approximately 54,000      
square feet of space, expires in March 2003. The second lease, which covers     
approximately 25,000 square feet of space, expires in December 2003. Allaire    
currently intends to sublet or locate a new tenant for the 25,000 square feet of
space under the second lease. Allaire also leases office space in other cities  
for its sales personnel. Allaire believes that these existing facilities are    
adequate to meet its current foreseeable requirements or that suitable          
additional or substitute space will be available on commercially reasonable     
terms.                                                                          

Item 3.   Legal Proceedings                                                     

From time to time Allaire has been, and expects to continue to be, subject to   
legal proceedings and claims in the ordinary course of its business, including  
claims of alleged infringement of third party trademarks and other intellectual 
property rights by Allaire and its licensees. Such claims, even if not          
meritorious, could result in the expenditure of significant financial and       
managerial resources. Allaire is not aware of any legal proceedings or claims   
that it believes will have, individually or in the aggregate, a material adverse
effect on its business, financial condition or results of operations.           

Item 4.    Submission of Matters to a Vote of Security Holders                  

There were no matters submitted to a vote of security holders during the fourth 
quarter of 1998.                                                                

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 Part II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters   

Allaire has one class of stock outstanding, its common stock, which has a par   
value of $.01 per share. Allaire effected its initial public offering in January
1999 at a price of $20.00 per share. Since that date, Allaire's common stock has
traded on the Nasdaq National Market under the symbol "ALLR."                   

Allaire sold 2,875,000 shares of its common stock, in the initial public        
offering, pursuant to a Registration Statement on Form S-1 (File No. 333-68639),
which was declared effective by the Securities and Exchange Commission on       
January 22, 1999. The managing underwriters of the offering were Credit Suisse  
First Boston, Dain Rauscher Wessels, a division of Dain Rauscher Incorporated,  
and NationsBanc Montgomery Securities LLC. The aggregate gross proceeds of the  
offering were $57.5 million. Allaire's total expenses in connection with the    
offering were $5.2 million, of which $4.0 million was for underwriting discounts
and commissions and $1.2 million was for other expenses paid to persons other   
than directors or officers of Allaire, persons owning more than 10 percent of   
any class of equity securities of Allaire, or affiliates of Allaire. Allaire's  
net proceeds from the offering were $52.3 million.                              

In the fourth quarter of 1998, Allaire issued and sold 4,600 shares of its      
common stock for aggregate consideration of $3,450 pursuant to the exercise of  
previously granted stock options by one employee of Allaire. On December 7,     
1998, Allaire issued and sold 31,250 shares of Series A Convertible Preferred   
Stock to MC Silicon Valley, Inc., a subsidiary of Mitsubishi Corporation,       
Allaire's Japanese distributor for aggregate consideration of $500,000. Each of 
these 31,250 shares of Series A Convertible Stock were automatically converted  
into one share of Allaire's common stock upon the closing of Allaire's initial  
public offering. The issuances in the fourth quarter of 1998 described in this  
Item 5 were made in reliance upon the exemption from registration set forth in  
Section 4(2) of the Securities Act relating to sales by an issuer not involving 
any public offering. None of these issuances involved a distribution or public  
offering. No underwriters were engaged in connection with the foregoing         
issuances of securities, and no underwriting discounts or commissions were paid.

Holders of Record                                                               

As of March 2, 1999, there were 146 holders of record of Allaire's common stock.

Dividends                                                                       

Allaire has never declared or paid any cash dividends on its capital stock and  
does not anticipate paying cash dividends in the foreseeable future. Allaire    
currently intends to retain future earnings, if any, to fund the expansion and  
growth of its business. Payment of future dividends, if any, will be at the     
discretion of Allaire's Board of Directors after taking into account various    
factors, including Allaire's financial condition, operating results, current and
anticipated cash needs and plans for expansion.                                 

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Item 6.  Selected Financial Data                                                

The selected financial data set forth below has been derived from Allaire's     
audited financial statements. This data should be read in conjunction with      
Allaire's financial statements and notes thereto and "Management's Discussion   
and Analysis of Financial Condition and Results of Operations," appearing       
elsewhere in this document.                                                     

Unaudited pro forma basic and diluted net loss per share have been calculated   
assuming the conversion of all outstanding preferred stock into common stock, as
if the shares had converted immediately upon their issuance.                    

                                                        [Enlarge/Download Table]

                                               Period from Inception                    Year Ended December 31,                
                                               (May 5, 1995) through   --------------------------------------------------------
                                                 December 31, 1995          1996                  1997             1998        
                                                 -----------------          ----                  ----             ----        
                                                                      (In thousands, except per share data)                    
                                                                                                                               
Statement of Operations Data:                                                                                                  
Revenue:                                                                                                                       
      Software license fees                               $--              $2,358                $7,116          $17,187       
      Services                                             --                  --                   534            3,325       
                                                           --                  --                   ---            -----       

      Total revenue                                        --               2,358                 7,650           20,512       
                                                           --               -----                 -----           ------       

Cost of revenue:                                                                                                               
      Software license fees                                --                 234                   961            1,915       
      Services                                             --                  --                 1,453            4,081       
                                                           --                  --                 -----            -----       

      Total cost of revenue                                --                 234                 2,414            5,996       
                                                           --                 ---                 -----            -----       

Gross profit                                               --               2,124                 5,236           14,516       
                                                           --               -----                 -----           ------       

Operating expenses:                                                                                                            
      Research and development                             65                 873                 2,702            4,782       
      Sales and marketing                                  49               1,576                 7,272           16,157       
      General and administrative                           74               1,387                 2,874            4,313       
                                                           --               -----                 -----            -----       

      Total operating expenses                            188               3,836                12,848           25,252       
                                                          ---               -----                ------           ------       

Loss from operations                                    (188)             (1,712)               (7,612)         (10,736)       
Interest income (expense), net                             --                  14                   187             (34)       
                                                           --                  --                   ---             ----       

Net loss                                               $(188)            $(1,698)              $(7,425)        $(10,770)       
                                                       ======            ========              ========        =========       

Basic and diluted net loss per share                  $(0.09)             $(0.97)                $(4.40)         $(3.67)       
Shares  used in  computing  basic and  diluted                                                                                 
net loss per share                                      2,200               1,743                  1,687           2,938       
Unaudited  pro  forma  basic and  diluted  net                                                                                 
loss per share                                                                                   $(1.38)         $(1.51)       
Shares used in computing  unaudited  pro forma                                                                                 
basic and diluted net loss per share                                                               5,378           7,139       

                                                        [Enlarge/Download Table]

                                                                    December 31,                        
                                              ----------------------------------------------------------
                                                  1995           1996          1997           1998      
                                                  ----           ----          ----           ----      

                                                                                                        
Balance Sheet Data:                                                                                     
Cash and cash equivalents                            $17          $526         $5,521         $1,847    
Working capital (deficit)                          (231)           224          1,492        (8,513)    
Total assets                                         119         2,038          9,697          9,953    
Total long-term debt, net of current portion          --            --            499          1,193    
Total redeemable convertible preferred stock          --         2,800         12,673         12,673    
Total stockholders' deficit                        (181)       (1,768)        (9,153)       (18,475)    

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Item 7.  Management's Discussion and Analysis of Financial Condition and        
Results of Operations                                         

  This Form 10-K contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities     
Exchange Act of 1934. Any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes,""anticipates,""plans,""expects" and similar 
expressions are intended to identify forward-looking statements. The            
forward-looking statements involve known and unknown risks, uncertainties and   
other factors, including the factors set forth above in "Item 1A. Risk Factors,"
that may cause the actual results, performance and achievements of Allaire to   
differ materially from those indicated by the forward-looking statements.       

Overview                                                                        

Allaire develops, markets and supports software for a wide range of Web         
development, from building static Web pages to developing high-volume,          
interactive Web applications. Allaire was established in May 1995 and recorded  
its first revenue upon delivery of ColdFusion 1.5 to its customers in February  
1996. Also in 1996, Allaire moved its headquarters from Minnesota to Cambridge, 
Massachusetts. In March 1997, Allaire expanded its product offerings by         
acquiring the HomeSite HTML design tool through the purchase of substantially   
all of the assets of Bradbury Software L.L.C. ("Bradbury"). In November 1998,   
Allaire introduced the Enterprise version of its Cold Fusion Server products, as
well as versions 4.0 of its other ColdFusion and HomeSite software products.    

Allaire's revenue is derived principally from license fees for software products
and, to a lesser extent, fees for a range of services complementing these       
products, primarily training and technical support. Software license fees       
include sales of licenses for the then-current version of Allaire's products,   
product upgrades and subscriptions. Subscriptions entitle the customer to all   
new releases for a specific product during the subscription period, generally 12
months.                                                                         

Revenue from sales of licenses to use Allaire's software products and product   
upgrades is recognized upon delivery to customers, provided no significant      
post-delivery obligations or uncertainties remain and collection of the related 
receivable is probable. Revenue under arrangements where multiple products or   
services are sold together under one contract is allocated to each element based
on their relative fair values, with these fair values being determined using the
price charged when that element is sold separately. For agreements with         
specified upgrade rights, the revenue related to such upgrade rights is deferred
until the specified upgrade is delivered. Allaire provides most of its          
distributors with rights of return. An allowance for estimated future returns is
recorded at the time revenue is recognized based on Allaire's historical        
experience. Revenue from subscription sales is recognized ratably over the term 
of the subscription period. Services revenue is recognized as services are      
rendered or ratably over the term of the service agreement.                     

In October 1997, the Accounting Standards Executive Committee ("AcSEC") of the  
American Institute of Certified Public Accountants ("AICPA") issued Statement of
Position ("SoP") 97-2, Software Revenue Recognition, which provides guidance on 
the timing and amount of revenue recognition when licensing, selling, leasing or
otherwise marketing computer software and related services. Allaire adopted SoP 
97-2 for all transactions entered into after December 31, 1997. Subsequently, in
March 1998, the Financial Accounting Standards Board ("FASB") approved SoP 98-4,
Deferral of the Effective Date of a Provision of SoP 97-2, Software Revenue     
Recognition. SoP 98-4 provides for the one-year deferral of certain provisions  
of SoP 97-2 pertaining to its requirements for what constitutes vendor specific 
objective evidence of the fair value of multiple elements included in an        
arrangement. In December 1998, the FASB issued SoP 98-9, Modification of SoP    
97-2, Software Revenue Recognition, With Respect to Certain Transactions, which 
retained the limitations of SoP 97-2 on what constitutes vendor specific        
objective evidence of fair value. SoP 98-9 is effective for transactions entered
into in fiscal years beginning after March 15, 1999. Based upon its             
interpretation of SoP 97-2, 98-4 and 98-9, Allaire believes that its current    
revenue recognition policies and practices are consistent with the provisions of
the new guidance. Adoption of SoP 97-2 and SoP 98-4 did not have a material     
impact on Allaire's financial condition or results of operation. Adoption of SoP
98-9 is not expected to have a material impact on Allaire's financial condition 
or results of operation.                                                        

In accordance with Statement of Financial Accounting Standards ("SFAS") No. 86, 
Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise   
Marketed, costs associated with the development of computer software are        
expensed prior to the establishment of technological feasibility and capitalized
thereafter when material. No software development costs have been capitalized   
because costs eligible for capitalization have not been material to Allaire's   
financial condition or results of operations.                                   

Allaire generates its revenue through direct sales of licenses to end users and 
through its indirect distribution channel. Direct revenue is generated by       
Allaire's direct sales force and via Allaire's Web site. The indirect           
distribution channel includes distributors, direct and original equipment       
manufacturer resellers, system integrators and Allaire Alliance members. During 
the second half of 1997, Allaire established relationships with its primary     
distribution partners in North America, Europe and Asia Pacific. Revenue        
generated by the indirect distribution channel accounted for 13%, 28% and 45% of
total revenue for 1996, 1997 and 1998, respectively. Allaire anticipates that   
revenue derived from the indirect distribution channel will continue to         
represent a significant percentage of total revenue. Allaire primarily derives  
its international revenue through its indirect distribution channel.            
International revenue accounted for 17%, 20% and 13% of total revenue for 1996, 
1997 and 1998, respectively.                                                    

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Allaire has experienced substantial net losses in each fiscal period since its  
inception and, as of December 31, 1998, had an accumulated deficit of $20.2     
million. Such net losses and accumulated deficit resulted from Allaire's lack of
substantial revenue and the significant costs incurred in the development of    
Allaire's products and in the preliminary establishment of Allaire's            
infrastructure. Allaire expects to increase its expenditures in all areas in    
order to execute its business plan, particularly in research and development and
sales and marketing. The planned increase in sales and marketing expense will   
primarily result from the hiring of additional sales force personnel to focus on
major account sales and marketing programs to increase brand awareness.         

Allaire's limited operating history and the undeveloped nature of the market for
Web development products make predicting future revenue difficult. Allaire's    
expense levels are based, in part, on its expectations regarding future revenue 
increases, and to a large extent such expenses are fixed, particularly in the   
short term. There can be no assurance that Allaire's expectations regarding     
future revenue are accurate. Moreover, Allaire may be unable to adjust spending 
in a timely manner to compensate for any unexpected revenue shortfall.          
Accordingly, any significant shortfall of revenue in relation to Allaire's      
expectations would likely cause significant declines in Allaire's quarterly     
operating results.                                                              

Allaire is also increasing its sales and marketing efforts focused on larger    
purchases by larger customers. Such transactions are generally more complex and 
may increase the length of Allaire's average sales cycle. Allaire anticipates   
that an increasing portion of its revenue could be derived from larger orders,  
in which case the timing of receipt and fulfillment of any such orders could    
cause fluctuations in Allaire's operating results, particularly on a quarterly  
basis.                                                                          

Due to the foregoing factors, Allaire's operating results are difficult to      
forecast. Allaire believes that period-to-period comparisons of its historical  
operating results are not meaningful and should not be relied upon as an        
indication of future performance. Also, Allaire's operating results may fall    
below its expectations or the expectations of securities analysts or investors  
in some future quarter. In such event, the market price of Allaire's common     
stock would likely be materially adversely affected.                            

Results of Operations                                                           

The following table sets forth for the periods indicated the percentage of total
revenue of certain line items included in Allaire's statement of operations.    

                                                                [Download Table]

                                            Year Ended December 31,         
                                       1996               1997          1998
                                       ----               ----          ----
                                                                            
Revenue:                                                                    
      Software license fees           100.0%              93.0%        83.8%
      Services                           0.0                7.0         16.2
                                         ---                ---         ----

      Total revenue                    100.0              100.0        100.0
                                       -----              -----        -----

Cost of revenue:                                                            
      Cost of software license fees      9.9               12.6          9.3
      Cost of services                   0.0               19.0         19.9
                                         ---               ----         ----

      Total cost of revenue              9.9               31.6         29.2
                                         ---               ----         ----

Gross profit                            90.1               68.4         70.8
                                        ----               ----         ----

Operating expenses:                                                         
      Research and development          37.1               35.3         23.3
      Sales and marketing               66.8               95.1         78.8
      General and administrative        58.8               37.5         21.0
                                        ----               ----         ----

      Total operating expenses         162.7              167.9        123.1
                                       -----              -----        -----

Loss from operations                  (72.6)             (99.5)       (52.3)
Interest income (expense), net           0.6                2.4        (0.2)
                                         ---                ---        -----

Net loss                             (72.0)%            (97.1)%      (52.5)%
                                     =======            =======      =======

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Years Ended December 31, 1997 and 1998                                          

Revenue                                                                         

Total revenue increased 168% from $7.7 million for 1997 to $20.5 million for    
1998.                                                                           

Software License Fees. Revenue from software license fees increased 142% from   
$7.1 million for 1997 to $17.2 million for 1998. The increase was primarily due 
to an increase in the number of licenses sold to use Allaire's software products
including HomeSite, which Allaire began selling in March 1997, and ColdFusion   
Studio, which was released in November 1997. The growth in unit sales was also  
attributable to the establishment of relationships with key domestic and        
international distribution partners during the second half of 1997. To a lesser 
degree, the increase in revenue from software license fees resulted from an     
increase in product price associated with the release of new versions of        
Allaire's products during the second half of 1997 and the fourth quarter of     
1998.                                                                           

Services. Revenue from services increased 523% from $534,000 for 1997 to $3.3   
million for 1998. The increase was primarily attributable to growth in training 
revenue resulting from an increase in Allaire's installed customer base.        

Cost of Revenue                                                                 

Cost of Software License Fees. Cost of software license fees includes costs of  
product media duplication, manuals, packaging materials, licensed technology and
fees paid to third party vendors and agents for order fulfillment. Cost of      
software license fees increased 99% from $961,000 for 1997 to $1.9 million for  
1998. The increase in absolute dollars was due to higher unit sales volume. The 
improvement in software license fees gross margins from 86% for 1997 to 89% for 
1998 was primarily attributable to economies of scale achieved with higher sales
volume in 1998. In the future, Allaire expects that additional economies of     
scale may be offset by increased licensed technology costs related to new       
versions of ColdFusion.                                                         

Cost of Services. Cost of services consists primarily of personnel costs. Cost  
of services increased 181% from $1.5 million for 1997 to $4.1 million for 1998. 
The increase in absolute dollars resulted primarily from the hiring of          
additional employees and the use of contract trainers to support increased      
customer demand for training classes and technical support. The improvement in  
services gross margins from (172)% for 1997 to (23)% for 1998 was primarily     
attributable to the substantial growth in services revenue. Continued           
improvement in services gross margins is contingent upon an increase in future  
demand for the services offered by Allaire.                                     

Overall gross margins are primarily affected by the mix of products licensed,   
sales through direct versus indirect distribution channels, software license    
fees revenue versus services revenue, and international versus domestic revenue.
Allaire typically realizes higher gross margins on direct sales relative to     
indirect distribution channel sales and higher gross margins on software license
fees relative to services revenue. As services revenue or revenue derived       
through indirect distribution channels increase as a percentage of total        
revenue, Allaire's gross margins may be adversely affected.                     

Operating Expenses                                                              

Research and Development. Research and development expenses consist primarily of
employee salaries, fees for outside consultants and related costs associated    
with the development of new products, the enhancement and localization of       
existing products, quality assurance and testing. Research and development      
expenses increased 77% from $2.7 million for 1997 to $4.8 million for 1998. The 
increase primarily resulted from salaries associated with newly hired           
development personnel and consulting costs related to product localization.     
Allaire anticipates that research and development expenses will continue to     
increase in absolute dollars.                                                   

Sales and Marketing. Sales and marketing expenses consist primarily of employee 
salaries, commissions and costs associated with marketing programs such as trade
shows, seminars, advertising and new product launch activities. Sales and       
marketing expenses increased 122% from $7.3 million for 1997 to $16.2 million   
for 1998. The increase was primarily attributable to costs associated with      
additional direct sales, pre-sales support and marketing personnel, and, to a   
lesser extent, an increase in marketing programs, including trade shows,        
seminars and product launch activities. Allaire anticipates that sales and      
marketing expenses will continue to increase in absolute dollars as it continues
to expand its marketing programs and sales force to support its brand awareness,
product launches, international expansion and increased focus on major account  
sales.                                                                          

General and Administrative. General and administrative expenses consist         
primarily of employee salaries and other personnel-related costs for executive  
and financial personnel, as well as legal, accounting and insurance costs.      
General and administrative expenses increased 50% from $2.9 million for 1997 to 
$4.3 million for 1998. The increase was primarily attributable to salaries      
associated with newly hired personnel and related costs required to manage      
Allaire's growth and facilities expansion. In addition, Allaire incurred a      
charge of $400,000 in the fourth quarter of 1998 for costs relating to exiting a
facilities lease. Allaire expects that its general and administrative expenses  
will increase in absolute dollars as it continues to expand its staffing to     
support expanded operations and facilities, and incurs expenses relating to its 
new responsibilities as a public company.                                       

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Interest Income (Expense), Net. Interest income (expense), net decreased from   
net interest income of $187,000 for 1997 to net interest expense of $34,000 for 
1998. The decrease was primarily due to an increase in interest expense         
attributable to Allaire's capital lease and notes payable obligations.          

Provision for Income Taxes. Allaire has incurred significant operating losses   
for all periods from inception through December 31, 1998. Allaire has recorded a
valuation allowance for the full amount of its net deferred tax assets as the   
future realization of the tax benefit is not sufficiently assured.              

Years Ended December 31, 1996 and 1997                                          

Revenue                                                                         

Allaire's total revenue increased 224% from $2.4 million for 1996 to $7.7       
million for 1997.                                                               

Software License Fees. Revenue from software license fees increased 202% from   
$2.4 million for 1996 to $7.1 million for 1997. The increase was primarily due  
to an increase in the number of licenses sold to use Allaire's software products
including HomeSite, which Allaire began selling in March 1997. The growth in    
unit sales was also attributable to the establishment of relationships with key 
domestic and international distribution partners during the second half of 1997.
To a lesser degree, the increase in revenue from software license fees resulted 
from an increase in product price associated with the release of new versions of
Allaire's products during the second half of 1997 and the introduction of       
subscription sales in the fourth quarter of 1996.                               

Services. Prior to 1997, Allaire provided minimal technical support to its      
customers and recognized no revenue from such services during 1996. During 1997,
Allaire introduced training and fee-based technical support to its customers.   

Cost of Revenue                                                                 

Cost of Software License Fees. Cost of software license fees increased 311% from
$234,000 for 1996 to $961,000 for 1997. The increase in absolute dollars was due
to higher unit sales volume. The decrease in software license fee gross margins 
from 90% for 1996 to 86% for 1997 was primarily attributable to an increase in  
licensed technology costs and fees paid to third-party agents for order         
fulfillment.                                                                    

Cost of Services. Allaire recognized no revenue from services during 1996. The  
cost of services incurred during 1997 related to the establishment of Allaire's 
training organization and the hiring of additional technical support personnel. 

Operating Expenses                                                              

Research and Development. Research and development expenses increased 210% from 
$873,000 for 1996 to $2.7 million for 1997. The increase primarily resulted from
salaries associated with newly hired development personnel and consulting costs 
related to product localization.                                                

Sales and Marketing. Sales and marketing expenses increased 361% from $1.6      
million for 1996 to $7.3 million for 1997. The increase was primarily           
attributable to costs associated with additional direct sales, pre-sales support
and marketing personnel, and, to a lesser extent, an increase in marketing      
programs, including trade shows, seminars and product launch and brand awareness
activities.                                                                     

General and Administrative. General and administrative expenses increased 107%  
from $1.4 million for 1996 to $2.9 million for 1997. The increase was primarily 
due to employee salaries associated with the hiring of executive and financial  
personnel to help manage Allaire's growth. Allaire also settled a wrongful      
termination action with a former employee and agreed to pay the plaintiff a     
one-time cash settlement of $285,000.                                           

Interest Income, Net. Interest income, net of interest expense, increased from  
$14,000 for 1996 to $187,000 for 1997. The increase was primarily attributable  
to interest earned on cash received from financing activities during 1997,      
partially offset by interest expense attributable to Allaire's capital lease    
obligations.                                                                    

Liquidity and Capital Resources                                                 

From its inception through December 31, 1998, Allaire funded its operations     
primarily through net cash proceeds from private placements of preferred stock  
totaling $12.8 million. At December 31, 1998, Allaire had cash and cash         
equivalents totaling $1.8 million. In January 1999, Allaire sold 2,875,000      
shares of its common stock through an initial public offering. Net proceeds from
the offering were approximately $52.3 million after deducting the underwriting  
discount and offering expenses.                                                 

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Cash used for operating activities for 1997 was $3.3 million, primarily due to a
net loss of $7.4 million, partially offset by increases in accounts payable,    
accrued expenses and deferred revenue. Cash used for operating activities for   
1998 was $3.4 million, primarily due to a net loss of $10.8 million, partially  
offset by increases in accrued expenses and deferred revenue.                   

Cash used for investing activities for 1997 and 1998 was $1.8 million and $2.5  
million, respectively. Investing activities for the periods were primarily      
purchases of equipment, consisting largely of computer servers, workstations and
networking equipment.                                                           

Cash provided by financing activities for 1997 was $10.0 million, primarily due 
to the issuance of preferred stock for net proceeds totaling $9.6 million. Cash 
provided by financing activities for 1998 was $2.2 million, primarily due to the
issuance of notes payable of $1.6 million, the proceeds of $541,000 from the    
exercise of common stock options, and the proceeds of $496,000 from the issuance
of preferred stock.                                                             

In March 1997, Allaire acquired substantially all of the assets of Bradbury,    
including all rights to the HomeSite HTML design tool in exchange for $252,000  
in cash and 13,000 shares of Series A Preferred Stock. In order to finance the  
acquisition, Allaire issued 10% convertible notes payable totaling $252,000 and 
warrants to purchase 6,300 shares of common stock at a price of $4.00 per share 
to two stockholders of Allaire. In addition, as part of the acquisition         
agreement, Allaire paid Bradbury's former owner $165,000 in October 1998, based 
on the length of time he had been employed by Allaire.                          

At December 31, 1998, Allaire was party to a line of credit agreement which     
provided for borrowings up to $2.0 million for working capital purposes and for 
the issuance of letters of credit. Amounts available under the line were        
determined based upon eligible accounts receivable. All borrowings and letters  
of credit were collateralized by substantially all of Allaire's assets and all  
borrowings bore interest at the bank's prime rate (7.75% as of December 31,     
1998) plus 1%. As of December 31, 1998, letters of credit totaling $487,000 had 
been issued against the line and $1.5 million was available for additional      
borrowings. The original terms of the line of credit required the maintenance of
certain minimum financial ratios and conditions; however, these financial       
covenants were waived for the period from May 1998 through the termination of   
the line of credit. The line of credit terminated upon the closing of Allaire's 
initial public offering in January 1999.                                        

In May 1998, Allaire entered into an equipment loan line agreement to borrow up 
to $2.0 million for the purchase of fixed assets through December 1998. The     
initial term of each loan is 36 months from the borrowing date. Monthly payments
are equal to 3.155% of the original amount borrowed, for an effective interest  
rate of approximately 15%. At the end of the term, Allaire may choose to make   
one additional payment of 15% of the original amount funded or, if no default   
has occurred, the term may be extended for an additional six months at the      
original monthly payment rate. At December 31, 1998, Allaire had $1.5 million   
outstanding under the line, which was collateralized by previous purchases of   
furniture and equipment.                                                        

As of December 31, 1998, Allaire's primary commitments consisted of obligations 
related to operating leases, $1.5 million of notes payable under the equipment  
loan line and $499,000 of capital lease obligations.                            

As of December 31, 1998, Allaire had net operating loss carryforwards of        
approximately $18.1 million available for federal purposes to reduce future     
taxable income expiring at various dates through 2018. Under the provisions of  
the Internal Revenue Code, certain substantial changes in Allaire's ownership   
may have limited, or may limit in the future, the amount of net operating loss  
carryforwards which could be utilized annually to offset future taxable income. 

Allaire expects to experience significant growth in its operating expenses for  
the foreseeable future in order to execute its business plan, particularly      
research and development and sales and marketing expenses. As a result, Allaire 
anticipates that such operating expenses, as well as planned capital            
expenditures, will constitute a material use of its cash resources. In addition,
Allaire may utilize cash resources to fund acquisitions or investments in       
complementary businesses, technologies or product lines. Allaire believes that  
the net proceeds from the closing of the initial public offering, together with 
its existing cash and cash equivalents, will be sufficient to meet its          
anticipated cash requirements for working capital and capital expenditures for  
the foreseeable future.                                                         

Year 2000 Compliance                                                            

Many currently installed computer systems and software products are coded to    
accept only two digit entries in the date code field. These date code fields    
will need to accept four digit entries to distinguish 21st century dates from   
20th century dates. The use of software and computer systems that are not Year  
2000 compliant could result in system failures or miscalculations causing       
disruptions of operations including, among other things, a temporary inability  
to process transactions, send invoices or engage in similar normal business     
activities. As a result, many companies' software and computer systems may need 
to be upgraded or replaced in order to comply with Year 2000 requirements.      
Because ColdFusion does not involve data storage, the ability of a Web          
application built with ColdFusion to comply with Year 2000 requirements is      
largely dependent on whether the database underlying the application is Year    
2000 compliant. If ColdFusion is connected to a database that is not Year 2000  
compliant, the information received by a ColdFusion application may be          
incorrect. Therefore, although Allaire believes its products are Year 2000      
compliant, there can be no assurance that Web applications developed using its  
products will comply with Year 2000 requirements.                               

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The purchasing patterns of customers or potential customers may be affected by  
Year 2000 issues as companies expend significant resources to correct their     
current systems for Year 2000 compliance. These expenditures may result in      
reduced funds available for Web development activities, which could have a      
material adverse effect on Allaire's business, operating results and financial  
condition. Year 2000 complications may disrupt the operations, viability or     
commercial acceptance of the Internet, which could have a material adverse      
impact on Allaire's business, operating results and financial condition.        

In connection with Allaire's installation of new internal software systems in   
October 1998, Allaire received verbal confirmations from software vendors that  
the software it installed is Year 2000 compliant, and it is in the process of   
obtaining written certifications from such vendors to the same effect. Based on 
the foregoing, Allaire currently has no reason to believe that its internal     
software systems are not Year 2000 compliant. To date, Allaire has not incurred 
significant incremental costs in order to comply with Year 2000 requirements and
does not believe it will incur significant incremental costs in the foreseeable 
future. However, there can be no assurance that Year 2000 errors or defects will
not be discovered in Allaire's internal software systems and, if such errors or 
defects are discovered, there can be no assurance that the costs of making such 
systems Year 2000 compliant will not have a material adverse effect on Allaire's
business, operating results and financial condition.                            

Allaire relies on third party vendors which may not be Year 2000 compliant for  
certain equipment and services. In addition, many of Allaire's distributors are 
dependent on commercially available operating systems, which may be impacted by 
Year 2000 complications. To date, Allaire has not conducted a Year 2000 review  
of its vendors or distributors. Failure of systems maintained by Allaire's      
vendors or distributors to operate properly with regard to the Year 2000 and    
thereafter could require Allaire to incur significant unanticipated expenses to 
remedy any problems or replace affected vendors, could reduce Allaire's revenue 
from its indirect distribution channel and could have a material adverse effect 
on Allaire's business, operating results and financial condition.               

Recently Issued Accounting Pronouncements                                       

In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an    
Enterprise and Related Information, which supersedes SFAS No. 14, Financial     
Reporting for Segments of a Business Enterprise. This statement changes the way 
that public business enterprises report segment information, including financial
and descriptive information about their selected segment information. Under SFAS
No. 131, operating segments are defined as revenue-producing components of the  
enterprise which are generally used internally for evaluating segment           
performance. SFAS No. 131 is effective for Allaire's fiscal year ending December
31, 1998 and relates to disclosure only.                                        

In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures about    
Pensions and Other Postretirement Benefits. SFAS No. 132 standardizes the       
disclosure requirements for pensions and other postretirement benefits and is   
effective for Allaire's fiscal year ending December 31, 1998. SFAS No. 132      
relates to disclosure only and did not affect Allaire's financial condition or  
results of operations.                                                          

In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative           
Instruments and Hedging Activities. The new standard establishes accounting and 
reporting standards for derivative instruments, including certain derivative    
instruments embedded in other contracts, (collectively referred to as           
derivatives) and for hedging activities. SFAS No. 133 is effective for all      
fiscal quarters of fiscal years beginning after June 15, 1999. Allaire does not 
expect SFAS No. 133 to have a material effect on its financial condition or     
results of operations.                                                          

In February 1998, the AcSEC issued SoP 98-1, Accounting for the Costs of        
Computer Software Developed or Obtained for Internal Use. SoP 98-1 establishes  
the accounting for costs of software products developed or purchased for        
internal use, including when such costs should be capitalized. Allaire does not 
expect SOP 98-1, which is effective for Allaire beginning January 1, 1999, to   
have a material effect on its financial condition or results of operations.     

In April 1998, the AcSEC issued SoP 98-5, Reporting on the Costs of Start-Up    
Activities. Start-up activities are defined broadly as those one-time activities
relating to opening a new facility, introducing a new product or service,       
conducting business in a new territory, conducting business with a new class of 
customer, commencing some new operation or organizing a new entity. Under SoP   
98-5, the cost of start-up activities should be expensed as incurred. SoP 98-5  
is effective for Allaire's fiscal 1999 financial statements and Allaire does not
expect its adoption to have a material effect on its financial condition or     
results of operations.                                                          

Quantitative and Qualitative Disclosures About Market Risk                      

As of December 31, 1998, Allaire was exposed to market risks which primarily    
include changes in U.S. interest rates. Allaire maintains a significant portion 
of its cash and cash equivalents in financial instruments with purchased        
maturities of three months or less. These financial instruments are subject to  
interest rate risk and will decline in value if interest rates increase. Due to 
the short duration of these financial instruments, an immediate increase in     
interest rates would not have a material effect on Allaire's financial condition
or results of operations.                                                       

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Item 8. Financial Statements and Supplementary Data                             

ALLAIRE CORPORATION 

INDEX TO FINANCIAL STATEMENTS 
                                                                        Page
Financial Statements:                                                           
Report of Independent Accountants......................................  25 
Balance Sheet as of December 31, 1997 and 1998.........................  26 
Statement of Operations for the Years Ended                                 
 December 31, 1996, 1997 and 1998.....................................  27
Statement of Redeemable Convertible Preferred                               
Stock and Stockholders' Deficit for the Years                           
 Ended December 31, 1996, 1997 and 1998...............................  28
Statement of Cash Flows for the Years Ended                                 
 December 31, 1996, 1997 and 1998.....................................  29
Notes to Financial Statements..........................................  30 

Financial Statement Schedule:                                                   
For the Years Ended December 31, 1996, 1997 and 1998                        
 Schedule II-Valuation and Qualifying Accounts........................  52

All other schedules are omitted because they are not applicable or the      
required information is shown in the financial statements or notes thereto. 

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 REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and                                                   
Stockholders of Allaire Corporation                                             

In our opinion, the financial statements listed in the accompanying index       
present fairly, in all material respects, the financial position of Allaire     
Corporation at December 31, 1997 and 1998, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,     
1998, in conformity with generally accepted accounting principles. These        
financial statements are the responsibility of the Company's management; our    
responsibility is to express an opinion on these financial statements based on  
our audits. We conducted our audits of these statements in accordance with      
generally accepted auditing standards which 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,    
assessing the accounting principles used and significant estimates made by      
management, and evaluating the overall financial statement presentation. We     
believe that our audits provide a reasonable basis for the opinion expressed    
above.                                                                          

/s/ PricewaterhouseCoopers LLP                                                  
Boston, Massachusetts                                                           
February 3, 1999                                                                

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 ALLAIRE CORPORATION
 BALANCE SHEET
 (In thousands, except share and per share data)

                                                        [Enlarge/Download Table]


                                                                                      December 31,        Pro Forma  
                                                                                  --------------------   December 31,
                                                                                     1997       1998        1998     
                                                                                  ----------  --------   ------------
                                                                                                          (Note 14)  
                                                                                                          unaudited) 
                                                                                                                     
Assets                                                                                                               
Current Assets:                                                                                                      
   Cash and cash equivalents ..................................................   $  5,521    $  1,847    $ 54,815   
   Accounts receivable, net of allowance for doubtful accounts and                                                   
      sales returns of $487 and $479 at December 31, 1997                                                            
      and 1998, respectively ..................................................      1,413       3,142       3,142   
   Prepaid expenses and other current assets ..................................        236       1,060         421   
                                                                                  --------    --------    --------   
        Total current assets ..................................................      7,170       6,049      58,378   
   Property and equipment, net ................................................      2,209       3,484       3,484   
   Other assets, net ..........................................................        318         420         420   
                                                                                  --------    --------    --------   
Total assets ..................................................................   $  9,697    $  9,953    $ 62,282   
                                                                                  ========    ========    ========   
Liabilities, Redeemable Convertible Preferred                                                                        
Stock and Stockholders' Deficit                                                                                      
Current liabilities                                                                                                  
   Current portion of capital lease obligations ...............................   $    315    $    340    $    340   
   Current portion of notes payable ...........................................       --           418         418   
   Accounts payable ...........................................................      1,601       3,256       3,256   
   Accrued expenses ...........................................................      1,320       3,712       3,712   
   Accrued employee compensation and benefits .................................      1,130       2,189       2,189   
   Deferred revenue ...........................................................      1,312       4,647       4,647   
                                                                                  --------    --------    --------   

Total current liabilities .....................................................      5,678      14,562      14,562   

   Capital lease obligations ..................................................        499         159         159   
   Notes payable ..............................................................       --         1,034       1,034   
                                                                                  --------    --------    --------   
        Total liabilities .....................................................      6,177      15,755      15,755   
                                                                                  --------    --------    --------   
Redeemable convertible preferred stock:                                                                              
   Series B, $.01 par value;                                                                                         
      Authorized:  514,306 shares at December 31, 1997 and December 31,                                              
        1998 actual and pro forma                                                                                    
      Issued and outstanding:  514,306 shares at December 31, 1997 and                                               
        December 31, 1998 actual; no shares issued and outstanding                                                   
        at December 31, 1998 pro forma ........................................      2,325       2,325        --     
   Series C, $.01 par value;                                                                                         
      Authorized:  169,200 shares at December 31, 1997 and December 31,                                              
        1998 actual and pro forma                                                                                    
      Issued and outstanding:  169,200 shares at December 31, 1997 and                                               
        December 31, 1998 actual; no shares issued and outstanding                                                   
         at December 31, 1998 pro forma .......................................      1,000       1,000        --     
   Series D, $.01 par value;                                                                                         
      Authorized: 2,500,000 shares at December 31, 1997 and                                                          
        December 31, 1998 actual and pro forma                                                                       
      Issued and outstanding: 2,336,909 shares at December 31, 1997 and                                              
        December 31, 1998 actual; no shares issued and outstanding                                                   
        at December 31, 1998 pro forma ........................................      9,348       9,348        --     
                                                                                  --------    --------    --------   
Total redeemable convertible preferred stock ..................................     12,673      12,673        --     
                                                                                  --------    --------    --------   
Stockholders' equity (deficit):                                                                                      
   Series A convertible preferred stock, $.01 par value;                                                             
      Authorized: 200,000 shares at                                                                                  
        December 31, 1997 and December 31, 1998 actual and pro forma                                                 
      Issued and outstanding:  56,557 shares at December 31, 1997;                                                   
        88,463 at December 31, 1998 actual; no shares issued and                                                     
        outstanding at December 31, 1998 pro forma ............................        255         751        --     
   Common stock, $.01 par value;                                                                                     
      Authorized: 10,000,000 shares at December 31, 1997,                                                            
        35,000,000 at December 31, 1998 actual and pro forma                                                         
      Issued and outstanding: 3,002,500 shares at December 31, 1997, 4,148,586                                       
        issued and 4,145,169 outstanding at December 31, 1998 actual; 10,872,527                                     
        issued and 10,869,110 outstanding at December 31, 1998 pro forma .......         30          41         109  
   Additional paid-in capital .................................................         13       1,804      67,489   
   Deferred compensation ......................................................       --          (850)       (850)  
   Accumulated deficit ........................................................     (9,435)    (20,205)    (20,205)  
   Stock subscriptions receivable .............................................        (16)        (16)        (16)  
                                                                                  --------    --------    --------   
   Total stockholders' equity (deficit)........................................     (9,153)    (18,475)     46,527   
                                                                                  --------    --------    --------   
   Commitments and contingencies (Note 13)                                                                           
                                                                                  --------    --------    --------   
        Total liabilities, redeemable conertible preferred stock and                                                 
           stockholders' equity (deficit)......................................   $  9,697    $  9,953    $ 62,282   
                                                                                  ========    ========    ========   

The accompanying notes are an integral part of these financial statements.

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ALLAIRE CORPORATION 
STATEMENT OF OPERATIONS 
(In thousands, except per share data) 

                                                        [Enlarge/Download Table]

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

                                                                                        
Revenue:                                                                                
     Software license fees ....................  $  2,358       $  7,116       $ 17,187 
     Services .................................      --              534          3,325 
                                                 --------       --------       -------- 
        Total revenue .........................     2,358          7,650         20,512 
                                                 --------       --------       -------- 

Cost of revenue:                                                                        
     Software license fees ....................       234            961          1,915 
     Services .................................      --            1,453          4,081 
                                                 --------       --------       -------- 
        Total cost of revenue .................       234          2,414          5,996 
                                                 --------       --------       -------- 

Gross profit ..................................     2,124          5,236         14,516 
                                                 --------       --------       -------- 

Operating expenses:                                                                     
     Research and development .................       873          2,702          4,782 
     Sales and marketing ......................     1,576          7,272         16,157 
     General and administrative ...............     1,387          2,874          4,313 
                                                 --------       --------       -------- 

        Total operating expenses ..............     3,836         12,848         25,252 
                                                 --------       --------       -------- 

Loss from operations ..........................    (1,712)        (7,612)       (10,736)
Interest income (expense), net ................        14            187            (34)
                                                 --------       --------       -------- 
Net loss ......................................  $ (1,698)      $ (7,425)      $(10,770)
                                                 ========       ========       ======== 
Basic and diluted net loss per share ..........  $  (0.97)      $  (4.40)      $  (3.67)

Shares used in computing basic and                                                      
     diluted net loss per share ...............     1,743          1,687          2,938 

Unaudited pro forma basic and diluted                                                   
     net loss per share .......................                 $  (1.38)      $  (1.51)

Shares used in computing unaudited pro                                                  
     forma basic and diluted net loss per share                    5,378          7,139 

The accompanying notes are an integral part of these financial statements.

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ALLAIRE CORPORATION 
STATEMENT OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT 
(In thousands, except share data) 

                                                        [Enlarge/Download Table]

                                                                           Redeemable                                           
                                                                           convertible                         Convertible      
                                                                         preferred stock                     preferred stock    
                                                                    Shares            Amount             Shares           Amount

                                                                                                                                
Balance, December 31, 1995                                                --       $       --               --       $       -- 

Issuance of common stock in exchange                                                                                            
  for stock subscriptions receivable                                                                                            

Issuance of Series A convertible preferred stock upon conversion                                                                
   of notes payable and accrued interest                                                                43,557              177 

Issuance of Series B redeemable convertible preferred stock,                                                                    
  net of issuance costs of $55                                       508,849            2,300                                   

Forgiveness of stock subscriptions receivable in exchange                                                                       
  for cancellation of shares of common stock                                                                                    

Repurchase and cancellation of shares of common stock                                                                           

Issuance of Series C redeemable convertible preferred stock,                                                                    
  net of issuance costs of $12                                        84,600              500                                   

Exercise of employee stock options                                                                                              

Net loss                                                                                                                        
                                                                  ----------       ----------       ----------       ---------- 

Balance, December 31, 1996                                           593,449            2,800           43,557              177 

Issuance of Series A convertible preferred stock in                                                                             
  acquisition of Bradbury Software L.L.C                                                                13,000               78 

Issuance of Series C redeemable convertible preferred stock           84,600              500                                   

Issuance of Series B redeemable convertible preferred stock            5,457               25                                   

Issuance of Series D redeemable convertible preferred stock,                                                                    
   net of issuance costs of $42                                    2,272,719            9,091                                   

Issuance of Series D redeemable convertible preferred stock upon                                                                
  conversion of notes payable and accrued interest                    64,190              257                                   

Repayment of stock subscription receivable                                                                                      

Net loss                                                                                                                        
                                                                  ----------       ----------       ----------       ---------- 

Balance, December 31, 1997                                         3,020,415           12,673           56,557              255 

Issuance of Series A convertible preferred stock,                                                                               
   net of issuance costs of $9                                                                          31,906              496 

Exercise of employee stock options                                                                                              

Repurchase of common stock held in treasury                                                                                     

Deferred compensation relating to grants of stock options                                                                       

Compensation relating to grants of stock options                                                                                

Net loss                                                                                                                        
                                                                  ----------       ----------       ----------       ---------- 

Balance, December 31, 1998                                         3,020,415       $   12,673           88,463       $      751 
                                                                  ==========       ==========       ==========       ========== 


                                                                                               Additional                       
                                                                       Common stock              paid-in        Deferred        
                                                                   Shares       Par value        capital      Compensation      

                                                                                                                                
Balance, December 31, 1995                                        2,200,000      $      22      $      --      $      --        

Issuance of common stock in exchange                                                                                            
  for stock subscriptions receivable                              1,800,000             18             27                       

Issuance of Series A convertible preferred stock upon conversion                                                                
   of notes payable and accrued interest                                                                                        

Issuance of Series B redeemable convertible preferred stock,                                                                    
  net of issuance costs of $55                                                                                                  

Forgiveness of stock subscriptions receivable in exchange                                                                       
  for cancellation of shares of common stock                       (920,000)            (9)           (14)                      

Repurchase and cancellation of shares of common stock               (80,000)            (1)            (1)                      

Issuance of Series C redeemable convertible preferred stock,                                                                    
  net of issuance costs of $12                                                                                                  

Exercise of employee stock options                                    2,500             --              1                       

Net loss                                                                                                                        
                                                                  ---------      ---------      ---------      ---------        

Balance, December 31, 1996                                        3,002,500             30             13             --        

Issuance of Series A convertible preferred stock in                                                                             
  acquisition of Bradbury Software L.L.C                                                                                        

Issuance of Series C redeemable convertible preferred stock                                                                     

Issuance of Series B redeemable convertible preferred stock                                                                     

Issuance of Series D redeemable convertible preferred stock,                                                                    
   net of issuance costs of $42                                                                                                 

Issuance of Series D redeemable convertible preferred stock upon                                                                
  conversion of notes payable and accrued interest                                                                              

Repayment of stock subscription receivable                                                                                      

Net loss                                                                                                                        
                                                                  ---------      ---------      ---------      ---------        

Balance, December 31, 1997                                        3,002,500             30             13             --        

Issuance of Series A convertible preferred stock,                                                                               
   net of issuance costs of $9                                                                                                  

Exercise of employee stock options                                1,146,086             11            530                       

Repurchase of common stock held in treasury                                                            (2)                      

Deferred compensation relating to grants of stock options                                             997           (997)       

Compensation relating to grants of stock options                                                      266            147        

Net loss                                                                                                                        
                                                                  ---------      ---------      ---------      ---------        

Balance, December 31, 1998                                        4,148,586      $      41      $   1,804      $    (850)       
                                                                  ---------      ---------      ---------      ---------        


                                                                                     Stock           Total                      
                                                                   Accumulated   subscriptions   stockholders'                  
                                                                     deficit       receivable       deficit                     

                                                                                                                                
Balance, December 31, 1995                                        $    (203)      $      --       $    (181)                    

Issuance of common stock in exchange                                                                                            
  for stock subscriptions receivable                                                    (45)             --                     

Issuance of Series A convertible preferred stock upon conversion                                                                
   of notes payable and accrued interest                                                                177                     

Issuance of Series B redeemable convertible preferred stock,                                                                    
  net of issuance costs of $55                                          (55)                            (55)                    

Forgiveness of stock subscriptions receivable in exchange                                                                       
  for cancellation of shares of common stock                                             23              --                     

Repurchase and cancellation of shares of common stock                                     2              --                     

Issuance of Series C redeemable convertible preferred stock,                                                                    
  net of issuance costs of $12                                          (12)                            (12)                    

Exercise of employee stock options                                                                        1                     

Net loss                                                             (1,698)                         (1,698)                    
                                                                  ---------       ---------       ---------                     

Balance, December 31, 1996                                           (1,968)            (20)         (1,768)                    

Issuance of Series A convertible preferred stock in                                                                             
  acquisition of Bradbury Software L.L.C                                                                 78                     

Issuance of Series C redeemable convertible preferred stock                                                                     

Issuance of Series B redeemable convertible preferred stock                                                                     

Issuance of Series D redeemable convertible preferred stock,                                                                    
   net of issuance costs of $42                                         (42)                            (42)                    

Issuance of Series D redeemable convertible preferred stock upon                                                                
  conversion of notes payable and accrued interest                                                                              

Repayment of stock subscription receivable                                                4               4                     

Net loss                                                             (7,425)                         (7,425)                    
                                                                  ---------       ---------       ---------                     

Balance, December 31, 1997                                           (9,435)            (16)         (9,153)                    

Issuance of Series A convertible preferred stock,                                                                               
   net of issuance costs of $9                                                                          496                     

Exercise of employee stock options                                                                      541                     

Repurchase of common stock held in treasury                                                              (2)                    

Deferred compensation relating to grants of stock options                                                --                     

Compensation relating to grants of stock options                                                        413                     

Net loss                                                            (10,770)                        (10,770)                    
                                                                  ---------       ---------       ---------                     

Balance, December 31, 1998                                        $ (20,205)      $     (16)      $ (18,475)                    
                                                                  ---------       ---------       ---------                     

The accompanying notes are an integral part of these financial statements.

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 ALLAIRE CORPORATION
 STATEMENT OF CASH FLOWS
 (In thousands, except share data)

                                                        [Enlarge/Download Table]

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

Cash flows from operating activities:                                                                           
                                                                                                                
   Net loss                                                              $ (1,698)      $ (7,425)      $(10,770)
   Adjustments to reconcile net loss to net cash                                                                
     provided by (used for) operating activities:                                                               
     Depreciation and amortization                                             94            726          1,378 
     Interest converted into shares of preferred stock                          2              5             -- 
     Compensation expense relating to issuance of                                                               
       note payable under severance agreement                                  90             --             -- 
     Compensation expense relating to issuance of                                                               
      equity instruments                                                       --             --            413 
     Changes in assets and liabilities:                                                                         
      Accounts receivable                                                    (577)          (796)        (1,729)
      Prepaid expenses and other current assets                               (76)          (149)          (824)
      Other assets                                                           (254)           (55)          (305)
      Accounts payable                                                        459          1,115          1,655 
      Accrued expenses                                                        368          2,071          3,451 
      Deferred revenue                                                       (103)         1,204          3,335 
                                                                         --------       --------       -------- 

      Total adjustments                                                         3          4,121          7,374 
                                                                         --------       --------       -------- 

      Net cash used for operating activities                               (1,695)        (3,304)        (3,396)
                                                                         --------       --------       -------- 

Cash flows from investing activities:                                                                           
   Purchases of property and equipment                                       (598)        (1,502)        (2,450)
   Payment for acquisition of Bradbury Software L.L.C                          --           (252)            -- 
                                                                         --------       --------       -------- 

      Net cash used for investing activities                                 (598)        (1,754)        (2,450)
                                                                         --------       --------       -------- 

Cash flows from financing activities:                                                                           
   Proceeds from sale leaseback transaction                                    --            421             -- 
   Principal payments on capital lease obligations                             --           (165)          (315)
   Proceeds from issuance of convertible                                                                        
     notes payable                                                            175            252             -- 
   Proceeds from issuance of notes payable                                     88             --          1,620 
   Principal payments on notes payable                                       (195)           (33)          (168)
   Proceeds from sale of common stock                                           1             --            541 
   Proceeds from sale of redeemable convertible                                                                 
     preferred stock, net of issuance costs                                 2,733          9,574             -- 
   Proceeds from sale of convertible preferred                                                                  
     stock, net of issuance costs                                              --             --            496 
   Payments to acquire treasury stock                                          --             --             (2)
   Payment received on stock subscription receivable                           --              4             -- 
                                                                         --------       --------       -------- 

      Net cash provided by financing activities                             2,802         10,053          2,172 
                                                                         --------       --------       -------- 

Net increase (decrease) in cash and cash equivalents                          509          4,995         (3,674)

Cash and cash equivalents, beginning of year                                   17            526          5,521 
                                                                         --------       --------       -------- 
Cash and cash equivalents, end of year                                   $    526       $  5,521       $  1,847 
                                                                         ========       ========       ======== 

Supplemental disclosure of cash flow information:                                                               
   Cash paid for interest                                                $      4       $     46       $    162 

Supplemental disclosure of non-cash investing and financing activities:                                         
   Conversion of notes payable and related accrued                                                              
     interest of $2 into 43,557 shares of Series A                                                              
     convertible preferred stock                                         $    175       $     --       $     -- 
   Series A convertible preferred stock issued in acquisition                                                   
     of Bradbury Software L.L.C                                          $     --       $     78       $     -- 
   Conversion of note payable and related accrued                                                               
     interest of $5 into 64,190 shares of Series D redeemable                                                   
     convertible preferred stock                                         $     --       $    252       $     -- 
   Capital lease obligations                                             $     --       $    979       $     -- 

The accompanying notes are an integral part of these financial statements.

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 ALLAIRE CORPORATION

 NOTES TO FINANCIAL STATEMENTS

1. NATURE OF THE BUSINESS AND BASIS OF PRESENTATION                             

Allaire Corporation develops, markets and supports software for a wide range of 
Web development, from building static Web pages to developing high-volume,      
interactive Web applications. Allaire's products and services enable            
organizations to link their information systems to the Web, as well as to       
develop new Web-based business applications in areas such as electronic         
commerce, content management and personalization. Allaire's products            
interoperate with emerging Web application technologies as well as key          
enterprise information systems technologies.                                    

Allaire was incorporated in the state of Minnesota in February 1996 as the      
surviving entity of a reorganization of Allaire, L.L.C., a Minnesota limited    
liability company originally formed in May 1995. At the time of the             
reorganization, the members of Allaire, L.L.C. exchanged their existing         
ownership interests for a proportionate number of shares of Allaire's common    
stock and substantially all assets and liabilities of Allaire, L.L.C. were      
transferred to Allaire at historical cost. In April 1997, Allaire was           
reorganized as a Delaware corporation.                                          

Allaire operates in one industry segment and is subject to risks and            
uncertainties common to growing technology-based companies, including rapid     
technological change, growth and commercial acceptance of the Internet,         
dependence on principal products and third party technology, new product        
development, new product introductions and other activities of competitors,     
dependence on key personnel, reliance on a limited number of distributors,      
international expansion, lengthening sales cycle and limited operating history. 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES                                   

Cash and Cash Equivalents                                                       

Allaire considers all highly liquid investments purchased with an original      
maturity of three months or less to be cash equivalents. Allaire invests its    
excess cash in money market funds, commercial paper and U.S. Treasury securities
which are subject to minimal credit and market risk. Allaire's cash equivalents 
are classified as available-for-sale and recorded at amortized cost which       
approximates fair value.                                                        

Revenue Recognition                                                             

Allaire recognizes revenue from software license fees upon delivery to customers
provided no significant post-delivery obligations or uncertainties remain and   
collection of the related receivable is probable. Allaire accrues insignificant 
support costs associated with these licenses when revenue is recognized. Revenue
under arrangements where multiple products or services are sold together under  
one contract is allocated to each element based on their relative fair values,  
with these fair values being determined using the price charged when that       
element is sold separately. For arrangements which include specified upgrade    
rights, the fair value of such upgrade rights is deferred until the specified   
upgrade is delivered. Allaire provides most of its distributors with certain    
rights of return. An allowance for estimated future returns is recorded at the  
time revenue is recognized based on Allaire's return policies and historical    
experience. Allaire offers subscriptions which entitle customers to all new     
releases for a specific product during the term of the subscription agreement.  
Revenue from subscription sales is recognized ratably over the term of the      
subscription agreement. Training and consulting services revenue is recognized  
as services are rendered, and revenue under support agreements is recognized    
ratably over the term of the support agreement.                                 

Fair Value of Financial Instruments                                             

The carrying amounts of Allaire's financial instruments, which include cash     
equivalents, accounts receivable, accounts payable, accrued expenses, notes     
payable and redeemable convertible preferred stock, approximate their fair      
values at December 31, 1998.                                                    

Concentrations of Credit Risk and Significant Customers                         

Financial instruments which potentially expose Allaire to concentrations of     
credit risk consist primarily of trade accounts receivable. To minimize this    
risk, ongoing credit evaluations of customers' financial condition are          
performed, although collateral generally is not required. One customer accounted
for 22% and 44% of gross accounts receivable at December 31, 1997 and 1998,     
respectively. In addition, this same customer accounted for 29% of total revenue
for the year ended December 31, 1998. No single customer accounted for 10% of   
total revenue for the years ended December 31, 1996 and 1997. Allaire maintains 
reserves for potential credit losses and such losses, in the aggregate,         
historically have not exceeded existing reserves.                               

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Research and Development and Software Development Costs                         

Costs incurred in the research and development of Allaire's products are        
expensed as incurred, except for certain software development costs. Costs      
associated with the development of computer software are expensed prior to the  
establishment of technological feasibility (as defined by Statement of Financial
Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer     
Software to be Sold, Leased or Otherwise Marketed") and capitalized thereafter  
when material to Allaire's financial position or results of operations. No      
software development costs have been capitalized by Allaire since costs eligible
for capitalization under SFAS No. 86 have been insignificant.                   

Property and Equipment                                                          

Property and equipment are recorded at cost and depreciated over their estimated
useful lives, generally three to five years, using the straight-line method.    
Equipment held under capital leases are stated at the lower of fair market value
of the related asset or the present value of the minimum lease payments at the  
inception of the lease and are amortized on a straight-line basis over the      
shorter of the life of the related asset or the lease term. Repair and          
maintenance costs are expensed as incurred.                                     

Accounting for Stock-Based Compensation                                         

Allaire accounts for stock-based awards to employees using the intrinsic value  
method as prescribed by Accounting Principles Board ("APB") Opinion No. 25,     
"Accounting for Stock Issued to Employees," and related interpretations.        
Accordingly, no compensation expense is recorded for options issued to employees
in fixed amounts and with fixed exercise prices at least equal to the fair      
market value of Allaire's common stock at the date of grant. Allaire has adopted
the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation,"      
through disclosure only (Note 9). All stock-based awards to non-employees are   
accounted for at their fair value in accordance with SFAS No. 123.              

Income Taxes                                                                    

Prior to its reorganization as a C Corporation in February 1996 (Note 1),       
Allaire was treated as a partnership for federal and state income tax purposes. 
Accordingly, no provision for corporate income taxes was recorded during this   
period and all losses were passed through to Allaire's members. At the time of  
its reorganization, Allaire adopted the liability method of accounting for      
income taxes as set forth in SFAS No. 109, "Accounting for Income Taxes."       

Advertising Expense                                                             

Allaire recognizes advertising expense as incurred. Advertising expense was     
$152,000, $643,000 and $763,000 for the years ended December 31, 1996, 1997 and 
1998, respectively.                                                             

Use of Estimates                                                                

The preparation of financial statements in conformity with generally accepted   
accounting principles requires management to make estimates and assumptions that
affect the 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 revenues and expenses during the reporting period.      
Actual results could differ from those estimates.                               

Net Loss Per Share                                                              

Net loss per share is computed under SFAS No. 128, "Earnings Per Share." Basic  
net loss per share is computed using the weighted average number of shares of   
common stock outstanding, excluding shares of common stock subject to           
repurchase. Diluted net loss per share does not differ from basic net loss per  
share since potential common shares from conversion of preferred stock, stock   
options and warrants and outstanding shares of common stock subject to          
repurchase are anti-dilutive for all periods presented. Pro forma basic and     
diluted net loss per share have been calculated assuming the conversion of all  
outstanding shares of preferred stock into common stock, as if the shares had   
converted immediately upon their issuance.                                      

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Comprehensive Income                                                            

Allaire adopted SFAS No. 130 in 1998. SFAS No. 130 requires that a full set of  
general purpose financial statements be expanded to include the reporting of    
"comprehensive income". Comprehensive income is comprised of two components, net
income and other comprehensive income. During the years ended December 31, 1996,
1997 and 1998, Allaire had no items qualifying as other comprehensive income;   
accordingly, the adoption of SFAS No. 130 had no impact on Allaire's financial  
statements.                                                                     

Recently Issued Accounting Pronouncements                                       

In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an   
Enterprise and Related Information" which supersedes SFAS No. 14, "Financial    
Reporting for Segments of a Business Enterprise." This statement changes the way
that public business enterprises report segment information, including financial
and descriptive information about their selected segment information. Under SFAS
No. 131, operating segments are defined as revenue-producing components of the  
enterprise which are generally used internally for evaluating segment           
performance. SFAS No. 131 is effective for Allaire's fiscal year ending December
31, 1998 and relates to disclosure only.                                        

In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about   
Pensions and Other Postretirement Benefits." SFAS No. 132 standardizes the      
disclosure requirements for pensions and other postretirement benefits and is   
effective for Allaire's fiscal year ending December 31, 1998. SFAS No. 132      
relates to disclosure only and did not affect Allaire's financial position or   
results of operations.                                                          

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative          
Instruments and Hedging Activities." The new standard establishes accounting and
reporting standards for derivative instruments, including certain derivative    
instruments embedded in other contracts, (collectively referred to as           
derivatives) and for hedging activities. SFAS No. 133 is effective for all      
fiscal quarters of fiscal years beginning after June 15, 1999. Allaire does not 
expect SFAS No. 133 to have a material affect on its financial position or      
results of operations.                                                          

In February 1998, the Accounting Standards Executive Committee ("AcSEC") issued 
Statement of Position ("SoP") 98-1, "Accounting for the Costs of Computer       
Software Developed or Obtained for Internal Use." SoP 98-1 establishes the      
accounting for costs of software products developed or purchased for internal   
use, including when such costs should be capitalized. Allaire does not expect   
SoP 98-1, which is effective for Allaire beginning January 1, 1999, to have a   
material affect its financial position or results of operations.                

In April 1998, the AcSEC issued SoP 98-5, "Reporting on the Costs of Start-Up   
Activities." Start-up activities are defined broadly as those one-time          
activities related to opening a new facility, introducing a new product or      
service, conducting business in a new territory, conducting business with a new 
class of customer, commencing some new operation or organizing a new entity.    
Under SoP 98-5, the cost of start-up activities should be expensed as incurred. 
SoP 98-5 is effective for Allaire's fiscal 1999 financial statements and Allaire
does not expect its adoption to have a material affect on its financial position
or results of operations.                                                       

3. ACQUISITION                                                                  

In March 1997, Allaire acquired the business and substantially all of the assets
of Bradbury Software L.L.C. ("Bradbury"), including all rights to Bradbury's    
HomeSite software product, in exchange for $252,000 in cash and 13,000 shares of
Allaire's Series A convertible preferred stock valued at $78,000. The Bradbury  
acquisition was accounted for under the purchase method of accounting.          
Accordingly, the purchase price was allocated based upon the fair value of      
assets acquired and liabilities assumed. The excess of the purchase price over  
the fair value of the net assets acquired totaled $315,000. This amount has been
included in other assets and is being amortized using the straight-line method  
over a three-year period. Amortization expense relating to this excess purchase 
price totaled $88,000 and $105,000 for the years ended December 31, 1997 and    
1998, respectively. The operating results of Bradbury have been included in the 
financial statements since the date of the acquisition. Pro forma presentations 
have not been included as the acquisition was not material to the results of    
operations of Allaire.                                                          

The former owner of Bradbury is entitled to additional cash payments of up to   
$165,000, depending on the length of time he remains employed by Allaire. During
the years ended December 31, 1997 and 1998, a total of $82,000 and $83,000,     
respectively, was earned and recorded as compensation expense under this        
arrangement.                                                                    

In order to finance the Bradbury acquisition, Allaire issued 10% convertible    
notes payable totaling $252,000 and warrants to purchase 6,300 shares of        
Allaire's common stock at a price of $4.00 per share to two stockholders (Note  
8). All principal and accrued interest of $5,000 on these notes was converted   
into 64,190 shares of Series D preferred stock in May 1997.                     

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4. INVESTMENT IN YESLER SOFTWARE, INC.                                          

In July 1998, Allaire entered into an agreement under which it contributed      
certain non-core technology and agreed to provide certain services to Yesler    
Software, Inc. ("Yesler") in exchange for 907,591 shares of Yesler's voting     
common stock, representing approximately 34% of the outstanding capital stock of
Yesler at that time. Subsequently, Allaire transferred 76,903 shares of Yesler  
common stock to three of its employees. The value of the shares transferred was 
not material at the date transferred. Of the shares acquired, an aggregate of   
605,060 shares are subject to repurchase at a price of $0.10 per share under    
certain circumstances. The number of shares subject to this repurchase right    
will be reduced quarterly over a three-year period. Allaire has no obligation to
fund the future operations of Yesler and accounts for its investment under the  
equity method.                                                                  

5. PROPERTY AND EQUIPMENT                                                       

Property and equipment consist of the following:                                

                                                                [Download Table]

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

                                                                              
Furniture and fixtures                              $574,000       $951,000   
Furniture and fixtures under capital lease           127,000         78,000   
Equipment                                            638,000      2,365,000   
Equipment under capital lease                        852,000        843,000   
Software                                             316,000        470,000   
Leasehold improvements                               148,000        386,000   
                                                     -------        -------   

                                                   2,655,000      5,093,000   
Less: Accumulated depreciation and amortization    (446,000)    (1,609,000)   
                                                   ---------    -----------   

                                                  $2,209,000     $3,484,000   
                                                  ==========     ==========   

Depreciation and amortization expense for the years ended December 31, 1996,    
1997 and 1998 was $80,000, $434,000 and $1,175,000, respectively.               

Capital Lease                                                                   

In December 1996, Allaire entered into an agreement with a leasing company to   
establish a line of credit which enabled Allaire to finance up to $1,000,000 in 
purchases of property and equipment under capital leases (the "Lease Line").    
Each borrowing under the Lease Line is payable in equal monthly installments    
over a period of 36 months. In connection with this agreement, Allaire issued   
warrants to purchase shares of its Series A convertible preferred stock (Note   
7). The Lease Line expired in December 1997.                                    

During 1997, Allaire sold and immediately leased back certain equipment under   
the Lease Line. The loss on this sale leaseback transaction was recorded in 1997
and was not material to Allaire's results of operations. Amortization of        
property and equipment under capital leases totaled $181,000 and $297,000 for   
the years ended December 31, 1997 and 1998, respectively. Accumulated           
amortization on property and equipment under capital lease totaled $181,000 at  
December 31, 1997 and $478,000 at December 31, 1998. Interest expense relating  
to capital lease obligations totaled $38,000 and $51,000 for the years ended    
December 31, 1997 and 1998, respectively.                                       

6. LINES OF CREDIT                                                              

Working Capital Line                                                            

At December 31, 1998, Allaire was party to a line of credit agreement which     
provided for borrowings of up to $2,000,000 for working capital purposes and for
the issuance of letters of credit. Amounts available under the line were        
determined based upon eligible accounts receivable. All borrowings and letters  
of credit were collateralized by substantially all of Allaire's assets and all  
borrowings bore interest at the bank's prime rate (7.75% as of December 31,     
1998) plus 1%. As of December 31, 1998, letters of credit totaling $487,000 had 
been issued against the line and $1,513,000 was available for additional        
borrowings. The original terms of the line of credit required the maintenance of
certain minimum financial ratios and conditions; however, these financial       
covenants were waived for the period from May 1998 through the termination of   
the line of credit. The line of credit terminated upon Allaire's initial public 
offering in January 1999.                                                       

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Equipment Loan Line                                                             

In May 1998, Allaire entered into an equipment loan line agreement (the         
"Equipment Loan Line") under which Allaire was able to borrow up to $2,000,000  
to finance fixed asset purchases through December 1998. The initial term of each
loan is 36 months from the borrowing date. Monthly payments are equal to 3.155% 
of the original amount borrowed, for an effective interest rate of approximately
15%. At the end of term, Allaire may choose to make one additional payment of   
15% of the original amount funded or, if no default has occurred, the term may  
be extended for an additional 6 months at the original monthly payment rate. The
Equipment Loan Line contains no financial covenants and there are no            
cross-default provisions in connection with the equipment and working capital   
line described above. All borrowings are collateralized by the purchased assets.
Allaire borrowed $1,406,000 in June 1998 and $214,000 in November 1998 under the
Equipment Loan Line, which was collateralized by previously purchased equipment.
The Equipment Loan Line expired in December 1998. At December 31, 1998, annual  
cash payments on the borrowings under the Equipment Loan Line are as follows:   

                                                                [Download Table]
                                                               
1999............................................      $ 613,000
2000............................................        613,000
2001............................................        583,000
                                                        -------

Total cash payments.............................      1,809,000
Less--amount representing interest..............        357,000
                                                        -------

Present value of notes payable..................    $ 1,452,000
                                                    ===========

Other Lines of Credit                                                           

In December 1998, Allaire obtained a commitment from existing investors to      
provide a $3.0 million working capital line of credit which terminated upon the 
closing of Allaire's initial public offering in January 1999.                   

7. PREFERRED STOCK                                                              

The holders of the Series A, Series B, Series C and Series D preferred stock    
(the "Preferred Stock") are hereinafter referred to collectively as the         
"Preferred Stockholders" and the holders of the Series B, Series C and Series D 
preferred stock (the "Redeemable Preferred Stock") are hereinafter referred to  
collectively as the "Redeemable Preferred Stockholders." The Preferred          
Stockholders have the following rights and privileges:                          

Voting Rights                                                                   

The Preferred Stockholders generally vote together with all other classes and   
series of stock as a single class on all matters and are entitled to a number of
votes equal to the number of shares of common stock into which each share of    
such stock is convertible. With respect to the number of directors, only the    
Redeemable Preferred Stockholders, voting as a single class, may vote on any    
increase of the maximum number of directors constituting the Board of Directors 
to a number in excess of five. With respect to the election of directors, the   
Redeemable Preferred Stockholders, voting as a single class, may elect one      
director and the common stockholders and Preferred Stockholders, voting as a    
single class, may elect two directors. The remaining two directors shall be     
elected by a combined vote of both the common stockholders and the Series A     
preferred stockholders, voting as a single class, and the Redeemable Preferred  
Stockholders, voting as a single class.                                         

Conversion                                                                      

Each share of Series A, Series B and Series C preferred stock is convertible, at
the option of the holder, into two shares of common stock, except for 31,906    
shares of Series A preferred stock, each of which converts into one share of    
common stock, subject to certain anti-dilution adjustments. Each share of Series
D Preferred Stock is convertible, at the option of the holder, into one share of
common stock, subject to certain anti-dilution adjustments. The Series A        
preferred stock will automatically convert into shares of common stock upon the 
closing of an underwritten public offering of Allaire's common stock involving  
aggregate proceeds to Allaire of at least $2,000,000. The Series B, Series C and
Series D preferred stock will automatically convert into shares of common stock 
upon the closing of an underwritten public offering of Allaire's common stock   
involving aggregate proceeds to Allaire of at least $15,000,000 and a per share 
price of not less than $11.30. All shares of Preferred Stock automatically      
converted into 3,848,941 shares of common stock upon the closing of Allaire's   
initial public offering in January 1999.                                        

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Dividend Rights                                                                 

The Preferred Stockholders are not entitled to receive any dividends unless     
declared by Allaire's Board of Directors. In the event that dividends are paid  
on the common stock, the Preferred Stockholders are entitled to receive         
dividends at the same rate and at the same time as the common stockholders, with
each share of preferred stock being treated as equal to the number of shares of 
common stock into which each share of such stock is convertible.                

Liquidation Preferences                                                         

In the event of any liquidation, dissolution or winding up of Allaire, the      
Preferred Stockholders are entitled to receive, in preference to the holders of 
the common stock, an amount equal to the greater of the original purchase price 
per share, respectively, subject to certain anti-dilution adjustments, or such  
amount as would have been payable had such shares been converted to common stock
just prior to liquidation. The original purchase price per share of the Series  
B, Series C and Series D preferred stock was $4.52, $5.91 and $4.00,            
respectively. The original purchase price per share of the Series A preferred   
stock was $4.07, except for 656 and 31,250 shares which had an original purchase
price per share of $8.00 and $16.00, respectively. Any assets remaining         
following the initial distribution to the Preferred Stockholders shall be       
available for distribution ratably among the common stockholders only.          

Redemption                                                                      

At the request of at least 50% of the holders of the Redeemable Preferred Stock 
at any time beginning in June 2002, Allaire shall redeem one-third of the then  
outstanding shares of each series of Redeemable Preferred Stock. Subsequently,  
on the first and third anniversaries of the initial redemption date, Allaire    
shall redeem 50% and 100%, respectively, of the remaining outstanding shares of 
each series. Upon redemption, each holder of the Series B, Series C and Series D
preferred stock will be entitled to receive a cash payment equal to $4.52 per   
share, $5.91 per share and $4.00 per share, respectively, plus any declared but 
unpaid dividends.                                                               

Convertible Notes Payable                                                       

During 1996, Allaire issued 10% convertible notes payable totaling $175,000 to  
two of Allaire's stockholders. All principal and accrued interest of $2,000 on  
these notes was subsequently converted into 43,557 shares of Series A preferred 
stock prior to December 31, 1996.                                               

Preferred Stock Warrants                                                        

Pursuant to the terms of a capital lease line of credit (Note 5), Allaire issued
warrants to purchase 17,699 shares of Series A preferred stock at a price of    
$4.52 per share, subject to certain anti-dilution adjustments. These warrants   
are fully vested, exercisable at the option of the holder, in whole or in part, 
and expire upon the earlier of ten years from the date of grant or five years   
from the effective date of an initial public offering of Allaire's common stock.
The value ascribed to these warrants was not significant.                       

At December 31, 1998, Allaire has reserved 17,699 shares of its Series A        
preferred stock for issuance upon exercise of outstanding warrants. These       
warrants converted to warrants to purchase 35,398 shares of common stock upon   
the closing of Allaire's initial public offering in January 1999.               

Undesignated Preferred Stock                                                    

At December 31, 1998, Allaire has authorized the issuance of up to 1,616,494    
shares of undesignated preferred stock. Issuances of the undesignated preferred 
stock may be made at the discretion of the Board of Directors (without          
stockholder approval) in one or more series and with such designations, rights  
and preferences as determined by the Board. As a result, the undesignated       
preferred stock may have dividend, liquidation, conversion, redemption, voting  
or other rights which may be more expansive than the rights of the holders of   
the Preferred Stock and the common stock.                                       

8. COMMON STOCK                                                                 

Treasury Shares                                                                 

Of the common stock issued, an aggregate of 3,417 shares with a cost of $2,000  
were held by Allaire as treasury shares and were included as a reduction to     
additional paid-in capital at December 31, 1998.                                

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Stock Restriction Agreements                                                    

Allaire has executed stock restriction agreements with its founder and certain  
of its employees. Under the terms of the founder's stock restriction agreement, 
Allaire has the right to repurchase, at a price of $2.26 per share, any unvested
common shares in the event of the founder's voluntary resignation. All other    
restriction agreements give Allaire the right to repurchase, for an amount equal
to the original consideration paid, any unvested common shares in the event of  
voluntary resignation or termination of employment with Allaire for cause.      
Allaire's repurchase rights lapse at various dates through January 31, 2000 or, 
in the case of the founder, upon the closing of an initial public offering of   
Allaire's common stock, which occurred in January 1999. At December 31, 1998, an
aggregate of 170,000 and 138,750 shares of Allaire's outstanding common stock   
were subject to repurchase under the stock restriction agreements, at prices of 
$2.26 and $.025 per share, respectively.                                        

All employees who have been granted options by Allaire under the 1997 Stock     
Incentive Plan are eligible to elect immediate exercise of all such options.    
However, shares obtained by employees who elect to exercise prior to the        
original option vesting schedule are subject to Allaire's right of repurchase,  
at the option exercise price, in the event of termination. Allaire's repurchase 
rights lapse at the same rate as the shares would have become exercisable under 
the original vesting schedule. At December 31, 1998, Allaire had the right to   
repurchase 364,895 shares of common stock issued under the 1997 Stock Incentive 
Plan.                                                                           

Stock Subscriptions Receivable                                                  

Allaire held notes receivable from certain stockholders at December 31, 1998 in 
consideration for the purchase of Allaire common stock. The notes are due       
February 1, 2001 and accrue interest at a rate of 5.61% per annum. These loans  
are secured by the underlying common stock and, consequently, are reflected as  
an offset to stockholders' equity.                                              

Common Stock Warrants                                                           

Pursuant to the issuance of convertible notes payable in 1996 (Note 7), Allaire 
issued warrants to purchase 8,599 shares of its common stock at a price of $2.03
per share, subject to certain anti-dilution adjustments. These warrants are     
fully vested, exercisable at the option of the holders, in whole or in part, and
expire in December 2001. The value ascribed to these warrants was not           
significant.                                                                    

Pursuant to the issuance of convertible notes payable in 1997 (Note 3), Allaire 
issued warrants to purchase 6,300 shares of its common stock at a price of $4.00
per share, subject to certain anti-dilution adjustments. These warrants are     
fully vested, exercisable at the option of the holder, in whole or in part, and 
expire in March 2002. The value ascribed to these warrants was not significant. 

Authorized Shares                                                               

On August 10, 1998, Allaire's Board of Directors approved an increase in the    
authorized shares of common stock, $.01 par value, to 35,000,000.               

Reserved Shares                                                                 

At December 31, 1998, Allaire had 5,570,052 shares of common stock reserved for 
issuance upon the exercise of common stock warrants and options and conversion  
of the outstanding preferred stock, including shares issuable upon the exercise 
of preferred stock warrants and subsequent conversion into common stock.        

9. STOCK OPTIONS                                                                

All options issued by Allaire during the year ended December 31, 1996 were      
non-qualified, non-plan stock options issued to employees, advisors and         
consultants of Allaire. All options granted by Allaire during this period of    
time were issued at fair market value at the date of grant, vest either         
immediately or over a four-year period and expire ten years from the date of    
grant.                                                                          

1997 Stock Incentive Plan                                                       

The 1997 Incentive Stock Plan (the "1997 Stock Plan") provides for the granting 
of incentive and non-qualified stock options and stock bonus awards to officers,
directors, employees and consultants of Allaire. The maximum number of common   
shares that may be issued pursuant to the 1997 Stock Plan, as amended, is       
1,726,000.                                                                      

The exercise price of each stock option issued under the 1997 Stock Plan shall  
be specified by the Board of Directors at the time of grant. However, incentive 
stock options may not be granted at less than the fair market value of Allaire's
common stock as determined by the Board of Directors at the date of grant or for
a term in excess of ten years. All options granted under the 1997 Stock Plan    
through December 31, 1998 vest either immediately or over a four-year period for
employees or over the service period for non-employees and expire ten years from
the date of grant.                                                              

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1998 Stock Incentive Plan                                                       

The 1998 Incentive Stock Plan (the "1998 Stock Plan") provides for the issuance 
of up to 1,900,000 shares of Allaire's common stock to eligible employees,      
officers, directors, consultants and advisors of Allaire. Under the 1998 Stock  
Plan, the Board of Directors may award incentive and non-qualified stock        
options, stock appreciation rights, performance shares and restricted and       
unrestricted stock. Incentive stock options may not be granted at less than the 
fair market value of Allaire's common stock at the date of grant and for a term 
not to exceed ten years. The exercise price under each non-qualified stock      
option shall be specified by the Compensation Committee. Grants of stock        
appreciation rights, performance shares, restricted stock and unrestricted stock
may be made at the discretion of the Compensation Committee with terms to be    
defined therein.                                                                

During the years ended December 31, 1996 and 1997 compensation expense          
recognized for stock option grants made by Allaire under APB Opinion No. 25 was 
not significant. For the year ended December 31, 1998, compensation expense     
recognized for stock option grants totaled $413,000. Had compensation cost for  
Allaire's option grants been determined based on the fair value at the date of  
grant consistent with the method prescribed by SFAS No. 123, Allaire's net loss 
and net loss per share would have been increased to the pro forma amounts       
indicated below:                                                                

                                                        [Enlarge/Download Table]

                                                             Year ended December 31,             
                                                 ------------------------------------------------
                                                      1996            1997             1998      
                                                      ----            ----             ----      
                                                                                                 
Net loss:                                                                                        
     As reported................................  $(1,698,000)     $(7,425,000)   $(10,770,000)  
     Pro forma..................................   (1,705,000)      (7,485,000)    (10,885,000)  
Basic and diluted net loss per share:                                                            
     As reported................................       $(0.97)          $(4.40)         $(3.67)  
     Pro forma..................................       $(0.98)          $(4.44)         $(3.70)  

Because the determination of the fair value of all options granted after the    
closing of Allaire's initial public offering will include an expected volatility
factor, because additional option grants are expected to be made subsequent to  
December 31, 1998, and because most options vest over several years, the pro    
forma effects of applying the fair value method may be material to reported net 
income or loss in future years.                                                 

Under SFAS No. 123, the fair value of each employee option grant is estimated on
the date of grant using the Black-Scholes option pricing model to apply the     
minimum value method with the following weighted-average assumptions used for   
grants made during the years ended December 31, 1996, 1997 and 1998: no dividend
yield; risk free interest rates of 5.9%, 6.1% and 5.1%, respectively; no        
volatility; and an expected option term of 5 years.                             

Stock option activity during the years ended December 31, 1996, 1997 and 1998   
was as follows:                                                                 

                                                        [Enlarge/Download Table]

                                                                                Outstanding options            
                                                                                -------------------            

                                                                            Number of          Weighted average
                                                                             shares             exercise price 
                                                                             ------             -------------- 

                                                                                                               
Outstanding--December 31, 1995...........................................          --                 $--      
  Granted (weighted average fair value of $.11)..........................   1,130,000                 .44      
  Exercised..............................................................     (2,500)                 .50      
  Canceled...............................................................     (7,500)                 .50      
                                                                              -------                          

Outstanding--December 31, 1996...........................................   1,120,000                 .44      
  Granted (weighted average fair value of $.17)..........................   1,475,360                 .54      
  Exercised..............................................................          --                  --      
  Canceled...............................................................   (221,260)                 .51      
                                                                            ---------                          

Outstanding--December 31, 1997...........................................   2,374,100                 .50      
  Granted (weighted average fair value of $2.95).........................     558,450                6.73      
  Exercised.............................................................. (1,146,086)                 .47      
  Canceled...............................................................   (113,650)                1.25      
                                                                           ---------                           

Outstanding--December 31, 1998...........................................   1,672,814               $2.53      
                                                                           =========                           

As of December 31, 1998, 184,867 and 1,681,400 shares were available for grant  
under the 1997 Stock Plan and the 1998 Stock Plan, respectively.                

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The following table summarizes information about stock options outstanding at   
December 31, 1998:                                                              

                                                        [Enlarge/Download Table]

                                                              Vested and exercisable     
                                                              ----------------------     

                                      Weighted-average     Number        Weighted-average
                                    remaining contractual    of              exercise    
Exercise price  Number outstanding     life (in years)     shares              price     
--------------  ------------------     ---------------     ------              -----     

                                                                                         
    $.25-.50          1,144,772              8.0           432,927              $.45     
   .75- 1.50            181,492              9.0            18,770               .75     
  4.00- 7.00             81,550              9.3            15,000              4.00     
  9.00-13.60            265,000              9.7                --                --     
                       --------                            -------                       

  $.25-13.60          1,672,814              8.5           466,697              $.57     
                      =========                            =======                       

Deferred Compensation                                                           

During 1998, Allaire granted stock options to purchase 477,950 shares of its    
common stock with exercise prices ranging from $.01 to $13.60. Allaire recorded 
compensation expense and deferred compensation relating to these options        
totaling $413,000 and $997,000, respectively, representing the difference       
between the estimated fair market value of the common stock on the date of grant
and the exercise price. Compensation relating to options which vested           
immediately upon grant was expensed in full at the date of grant, while         
compensation related to options which vest over time was recorded as a component
of stockholders' deficit and is being amortized over the vesting periods of the 
related options.                                                                

1998 Employee Stock Purchase Plan                                               

The 1998 Employee Stock Purchase Plan (the "Purchase Plan") provides for the    
issuance of up to 300,000 shares of Allaire's common stock to eligible          
employees. Under the Purchase Plan, Allaire is authorized to make one or more   
offerings during which employees may purchase shares of common stock through    
payroll deductions made over the term of the offering. The per-share purchase   
price at the end of each offering is equal to 85% of the fair market value of   
the common stock at the beginning or end of the offering period (as defined by  
the Purchase Plan), whichever is lower. Allaire expects that the first offering 
period under the Purchase Plan will commence on July 1, 1999.                   

10. INCOME TAXES                                                                

Deferred tax assets are comprised of the following:                             

                                                        [Enlarge/Download Table]

                                                                          December 31,                        

                                                                     1996               1997        1998      
                                                                     ----               ----        ----      

                                                                                                              
Deferred tax assets:                                                                                          
  Net operating loss carryforwards................................  $583,000          $3,442,000   $7,355,000 
  Reserves not currently deductible...............................    87,000             216,000      248,000 
  Tax credit carryforwards........................................    17,000              95,000      354,000 
  Other...........................................................    29,000              85,000      422,000 
                                                                      ------              ------      ------- 

    Total deferred tax assets.....................................   716,000           3,838,000    8,379,000 
  Deferred tax asset valuation allowance.......................... (716,000)          (3,838,000)  (8,379,000)
                                                                   ---------          -----------  -----------

                                                                         $--                 $--          $-- 
                                                                         ===                 ===          === 

Realization of total deferred tax assets is contingent upon the generation of   
future taxable income. Due to the uncertainty of realization of these tax       
benefits, Allaire has provided a valuation allowance for the full amount of its 
deferred tax assets.                                                            

Income taxes computed using the federal statutory income tax rate differs from  
Allaire's effective tax rate primarily due to the following:                    

                                                        [Enlarge/Download Table]

                                                                                    Year ended                
                                                                                    December 31,              
                                                                                    ------------              

                                                                        1996         1997             1998    
                                                                        ----         ----             ----    

                                                                                                              
Income tax benefit at U.S. federal statutory tax rate                $(594,000)  $(2,599,000)     $(3,770,000)
State taxes, net of federal tax impact..............................  (105,000)     (455,000)        (665,000)
Permanent differences...............................................     2,000        18,000           38,000 
Tax credit carryforwards............................................   (18,000)      (91,000)        (195,000)
Other...............................................................    (1,000)        5,000           51,000 
Change in valuation allowance.......................................   716,000      3,122,000       4,541,000 
                                                                       -------      ---------       --------- 

  Provision for income taxes........................................       $--           $--              $-- 
                                                                           ===           ===              === 

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At December 31, 1998, Allaire had federal and state net operating losses of     
approximately $18.1 million and $17.0 million, respectively, and federal and    
state tax credit carryforwards of approximately $178,000 and $176,000,          
respectively, available to reduce future taxable income and future tax          
liabilities. If not utilized, these carryforwards will expire at various dates  
ranging from 2001 to 2018. Under the provisions of the Internal Revenue Code,   
certain substantial changes in Allaire's ownership may be limited, or may limit 
in the future, the amount of net operating loss and research and development tax
credit carryforwards which could be utilized annually to offset future taxable  
income and income tax liability. The amount of any annual limitation is         
determined based upon Allaire's value prior to an ownership change.             

11. SEGMENT INFORMATION                                                         

Operating in one industry segment, Allaire develops, markets and supports       
software for a wide range of Web development.                                   

Revenue was distributed geographically as follows:                              

                                                                [Download Table]

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

                                                                                
North America ...............      $ 1,953,000      $ 6,153,000      $17,870,000
Europe ......................          197,000          822,000        1,741,000
Other international .........          208,000          675,000          901,000
                                   -----------      -----------      -----------

                                   $ 2,358,000      $ 7,650,000      $20,512,000
                                   ===========      ===========      ===========

All of Allaire's sales to Europe and other international geographies are export 
sales from the United States. Substantially all of Allaire's services revenue   
for the years ended December 31, 1996, 1997 and 1998 was generated in North     
America. All long-lived assets were located in North America at December 31,    
1997 and 1998.                                                                  

12. EMPLOYEE SAVINGS PLAN                                                       

During 1997, Allaire adopted an employee retirement savings plan under Section  
401(k) of the Internal Revenue Code which covers substantially all employees.   
Under the terms of the 401(k) Plan, employees may contribute a percentage of    
their salary, up to a maximum of 15%. Allaire did not make any contributions to 
the 401(k) Plan on behalf of its employees for the years ended December 31, 1997
or 1998.                                                                        

13. COMMITMENTS AND CONTINGENCIES                                               

Allaire leases its facilities and certain office equipment under noncancelable  
operating lease agreements. Rent expense under these leases for the years ended 
December 31, 1996, 1997 and 1998, totaled $163,000, $372,000 and $1,230,000,    
respectively. In addition, Allaire also leases certain fixed assets under       
capital leases, which expire at various dates through October 2000.             

Future minimum commitments under noncancelable operating and capital leases at  
December 31, 1998 are as follows:                                               

                                                                [Download Table]

                                                         Operating      Capital
                                                           leases       leases 
                                                           ------       ------ 
                                                                               
1999.............................................        2,454,000      366,000
2000.............................................        2,393,000      163,000
2001.............................................        2,381,000           --
2002.............................................        2,379,000           --
2003.............................................        1,166,000           --
                                                         ---------     --------

 Total minimum lease payments....................      $10,773,000      529,000
                                                       ===========             

 Less--amount representing interest...................................   30,000
                                                                         ------

 Present value of capital lease obligations........................... $499,000
                                                                       ========

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Letter of Credit                                                                

In connection with a facility lease Allaire is required to maintain, on behalf  
of the landlord, an irrevocable letter of credit with a bank over the term of   
the lease. As of December 31, 1998, letters of credit totaling $487,000 had been
issued against the line of credit (Note 6).                                     

Legal Proceedings                                                               

In 1996, a wrongful termination action was brought against Allaire and its      
founder by a former employee under which the plaintiff sought severance pay and 
the right to 400,000 shares of Allaire's common stock which were canceled upon  
termination. Although Allaire continues to deny any liability in this matter,   
Allaire determined during 1997 that it was in the best interest of its          
shareholders to settle this dispute out of court due to the rising legal costs, 
distraction of management and uncertainty present in this litigation. As a      
result, Allaire agreed to pay the plaintiff a cash settlement totaling $285,000 
in exchange for the termination of all legal action against Allaire and its     
founder. This amount was fully accrued at the time of the settlement.           

In addition to the matter noted above, Allaire is from time to time subject to  
legal proceedings and claims which arise in the normal course of its business.  
In the opinion of management, the amount of ultimate liability with respect to  
these actions will not have a material adverse effect on Allaire's financial    
position or results of operations.                                              

14. SUBSEQUENT EVENT                                                            

In January 1999, Allaire sold 2,875,000 shares of its common stock through an   
initial public offering. Net proceeds from the offering were approximately $52.3
million after deducting the underwriting discount and offering expenses. At     
December 31, 1998, Allaire's prepaid expenses and other current assets included 
$639,000 of prepaid offering expenses. At the time of the initial public        
offering, all of Allaire's outstanding preferred stock automatically converted  
into 3,848,941 shares of common stock. These conversions and net offering       
proceeds have been reflected in the unaudited pro forma balance sheet as of     
December 31, 1998.                                                              

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Item 9. Changes in and Disagreements with Accountants on Accounting and         
Financial Disclosure                                            

None                                                                            

Item 10. Directors and Executive Officers of the Registrant                     

The executive officers and directors of Allaire, and their ages and positions,  
are as follows:                                                                 

                                                        [Enlarge/Download Table]

                 Name                        Age              Position                     
                 ----                        ---              --------                     

                                                                                           
David J. Orfao..............................  39  President, Chief Executive Officer and   
                                                  Director                                 
Joseph J. Allaire...........................  29  Chairman of the Board of Directors, Chief
                                                  Technology Officer and Executive Vice    
                                                  President, Products                      
David A. Gerth..............................  47  Vice President, Finance and Operations,  
                                                  Chief Financial Officer and Treasurer    
Amy E. Lewis................................  41  Vice President, Worldwide Sales          
Stephen F. Clark............................  33  Vice President, Marketing                
Jack P. Lull................................  40  Vice President, Engineering and          
                                                  Development                              
Maria Morrissey.............................  41  Vice President, Worldwide Services and   
                                                  Support                                  
Jonathan A. Flint...........................  47  Director                                 
John J. Gannon..............................  44  Director                                 
Thomas A. Herring...........................  48  Director                                 
Mitchell Kapor..............................  48  Director                                 

David J. Orfao has served as Allaire's President and Chief Executive Officer and
as a director since February 1997. From November 1995 until December 1996, Mr.  
Orfao served as Senior Vice President, Worldwide Sales, Marketing and Service   
for SQA, Inc. From August 1993 until October 1995, he served as Senior Vice     
President, Worldwide Sales, Support and Channel Marketing for Claris            
Corporation. Prior to that, Mr. Orfao held a series of sales and operational    
positions of increasing responsibility at Frame Technology Corporation since    
1988.                                                                           

Joseph J. Allaire founded Allaire in May 1995 and served as Chairman of the     
Board of Directors, Chief Executive Officer and President from inception to     
January 1997. Since January 1997, Mr. Allaire has continued to serve as Chairman
of the Board of Directors, as well as Chief Technology Officer and Executive    
Vice President, Products. From September 1993 to June 1995, Mr. Allaire         
performed software engineering services for several private companies.          

David A. Gerth has served as Allaire's Vice President, Finance and Operations,  
Chief Financial Officer and Treasurer since April 1997. From November 1995 to   
April 1997, Mr. Gerth served as Chief Financial Officer for Visibility Software,
Inc., a software company. From July 1995 to November 1995, he served as Chief   
Financial Officer for Computron Software, Inc., a software company. From April  
1994 to July 1995, Mr. Gerth served as Director of Finance for Powersoft. Prior 
to that, Mr. Gerth served in a number of financial roles of increasing          
responsibility for Computervision Corporation since 1981.                       

Amy E. Lewis has served as Allaire's Vice President, Worldwide Sales since April
1997. From June 1995 to March 1997, Ms. Lewis served as Director, North America 
Field Sales for Claris Corporation. Prior to that, Ms. Lewis served as Manager, 
North America Channel Sales for Apple Computer since April 1994. From February  
1987 to December 1993, she was Director of Sales for Farallon Communications,   
Inc., a networking hardware and software company.                               

Stephen F. Clark has served as Allaire's Vice President, Marketing since        
September 1998. From January 1996 through September 1998, Mr. Clark held a      
number of marketing positions of increasing responsibility at Sybase, a computer
software company, including Vice President, Tools and Application Servers and   
Vice President and General Manager, Design Tools. From June 1993 to December    
1995, Mr. Clark was a Product Marketing Manager for Powersoft.                  

Jack P. Lull has served as Allaire's Vice President, Engineering and Development
since December 1996. From January 1996 to                                       

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August 1996, Mr. Lull served as Director of Development for Integrated          
Industrial Information, Inc., a computer consulting company. From January 1993  
to December 1995, Mr. Lull served as Director of Development for Powersoft.     

Maria Morrissey has served as Allaire's Vice President, Worldwide Services and  
Support since September 1996. From February 1996 to July 1996, Ms. Morrissey    
served as Vice President, Product Development for Computer Channel, Inc., an    
education software company. From December 1992 to January 1996, she served as   
Director, Professional Services for Powersoft.                                  

Jonathan A. Flint has served as a director of Allaire since June 1996. Since May
1995, Mr. Flint has been a founder and a General Partner of Polaris Venture     
Partners, a management company affiliated with the Polaris entities. Prior to   
that, Mr. Flint was a General Partner of certain funds managed by Burr, Egan,   
Deleage & Co., a venture capital firm and the lead venture investor in          
Powersoft, a leading provider of application development tools. Mr. Flint served
as a director of Powersoft from 1991 to 1995.                                   

John J. Gannon has served as a director of Allaire since December 1996. Since   
June 1998, Mr. Gannon has served as a General Partner and Chief Financial       
Officer of Polaris Venture Partners, a management company affiliated with the   
Polaris entities. From June 1996 to April 1998, Mr. Gannon served as the Chief  
Financial Officer for Firefly Network, Inc., an Internet software company. From 
October 1992 to June 1996, Mr. Gannon worked for Powersoft, where he held       
several positions including Chief Financial Officer and Vice President of       
Finance and Administration.                                                     

Thomas A. Herring has served as a director of Allaire since June 1997. In       
October 1998, Mr. Herring joined Polaris Venture Partners, a management company 
affiliated with the Polaris entities, as a Venture Partner. From December 1997  
until October 1998, Mr. Herring served as Senior Vice President of Compuware    
Corporation, which acquired Nu-Mega Technologies, Inc. in December 1997. From   
May 1996 to December 1997, Mr. Herring was the President and Chief Executive    
Officer of Nu-Mega Technologies. From July 1995 to June 1996, Mr. Herring was   
Vice President of Corporate Marketing for Sybase. Prior to that, he was Vice    
President, Worldwide Marketing and Business Development for Powersoft since June
1990. Mr. Herring also serves as a director of PSW Technologies, Inc.           

Mitchell Kapor has served as a director of Allaire since March 1997. Mr. Kapor  
co-founded the Electronic Frontier Foundation, a nonprofit Internet             
organization, in 1990, and served as its Chairman from 1993 to 1995 and as a    
director from 1995 to 1996. Mr. Kapor designed Lotus 1-2-3, and founded Lotus   
Development Corporation in 1982 and served as its President and Chief Executive 
Officer from 1982 to 1986. Mr. Kapor also serves as a director of RealNetworks, 
Inc.                                                                            

Executive officers of Allaire are appointed by and serve at the discretion of   
the Board of Directors. There are no family relationships among any of the      
executive officers or directors of Allaire.                                     

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Item 11. Executive Compensation                                                 

The following table sets forth the total compensation paid or accrued for 1998  
for Allaire's Chief Executive Officer and the four other most highly compensated
executive officers who were employed by Allaire at December 31, 1998            
(collectively, the "Named Executive Officers"). For Mr. Orfao, the number of    
securities underlying options excludes 50,000 shares of common stock underlying 
a below-market option granted in 1998 in lieu of a cash bonus for services      
rendered in 1997. Ms. Lewis' bonus of $84,533 represents commissions earned.    

Summary Compensation Table

                                                        [Enlarge/Download Table]

                                                                                        Long-Term      
                                                                                       Compensation    
                                                          Annual Compensation              Awards      
                                                          -------------------              ------      

                                                                                   Number of Securities
         Name and Principal Position                    Salary             Bonus    Underlying Options 
         ---------------------------                    ------             -----    ------------------ 

                                                                                                       
David J. Orfao........................................ $167,355           $58,800           0          
  President, Chief Executive Officer                                                                   
  and Director                                                                                         
Joseph J. Allaire..................................... $162,124           $59,963           0          
  Chairman of the Board of Directors,                                                                  
  Chief Technology Officer and                                                                         
  Executive Vice President, Products                                                                   
Amy E. Lewis.......................................... $114,636           $84,533           0          
  Vice President, Worldwide Sales                                                                      
David A. Gerth........................................ $151,159           $30,329           0          
  Vice President, Finance and Operations                                                               
  Chief Financial Officer and Treasurer                                                                
Jack P. Lull.......................................... $133,033           $26,400           0          
  Vice President, Engineering and                                                                      
  Development                                                                                          

 Option Grants in Last Fiscal Year

The following table sets forth grants of stock options to each of the Named     
Executive Officers during 1998. No stock appreciation rights were granted during
1998. The amounts reported as the potential realizable values for Mr. Orfao's   
option grant represent hypothetical values that may be realized upon exercise of
the options immediately prior to the expiration of their term assuming the      
specified compound rates of appreciation (5% and 10%) compounded annually over  
the term of the option. These numbers are calculated based on rules promulgated 
by the Securities and Exchange Commission. Actual gains, if any, on stock option
exercises and common stock holdings are dependent on the timing of such exercise
and the future performance of the common stock. There can be no assurance that  
the rates of appreciation assumed in this table can be achieved or that the     
amounts reflected will be received by the individuals.                          

                                                        [Enlarge/Download Table]

                                                  Individual Grants                                            
                                                  -----------------                                            

                                                                                        Potential Realizable   
                                   Number of    Percent of                                Value at Assumed     
                                  Securities  Total Options       Exercise                 Annual Rates of     
                                  Underlying    Granted to        or Base                    Stock Price       
                                    Options    Employees in        Price    Expiration    Appreciation for     
                                    Granted    Fiscal Year       Per Share      Date         Option Term       
                                    -------    -----------       ---------      ----         -----------       

                                                                                           5%           10%    
                                                                                           --           ---    
                                                                                                               
David J. Orfao...................   50,000          9.0%            $0.01     1/15/08    $243,834      $388,561
Joseph J. Allaire................        0            --               --          --          --            --
Amy E. Lewis.....................        0            --               --          --          --            --
David A. Gerth...................        0            --               --          --          --            --
Jack P. Lull.....................        0            --               --          --          --            --

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 Option Exercises and Fiscal Year-End Values

The following table sets forth certain information regarding stock options      
exercised by Named Executive Officers in 1998, and exercisable and unexercisable
stock options held as of December 31, 1998 by each of the Named Executive       
Officers. Certain of the shares acquired on exercise listed below remained      
subject to Allaire's right to repurchase as of December 31, 1998. Although the  
options listed as unexercisable were in fact exercisable at December 31, 1998,  
the shares of common stock issuable upon exercise of these options would be     
subject to Allaire's right to repurchase at the option exercise price. Such     
right of repurchase expires according to the original option vesting schedule.  
The value of unexercised in-the-money options has been calculated by determining
the difference between the exercise price per share payable upon exercise of    
such options and the initial public offering price of $20.00.                   

                                                        [Enlarge/Download Table]

                                                       Number of Securities           Value of Unexercised     
                                                      Underlying Unexercised          In-the-Money Options     
                               Shares                   Options at Year-End              at Fiscal Year-End    
                              Acquired     Value        -------------------              ------------------    
                            on Exercise  Realized  Exercisable     Unexercisable  Exercisable     Unexercisable
                            -----------  --------  -----------     -------------  -----------     -------------

                                                                                                               
David J. Orfao.............   305,000    $787,000         --          255,000            --        $4,972,500  
Joseph J. Allaire..........        --          --         --               --            --               --   
Amy E. Lewis...............   105,000    $262,500         --               --            --               --   
David A. Gerth.............   105,000    $262,500         --               --            --               --   
Jack P. Lull...............        --          --    129,375          100,625     $2,522,813       $1,962,188  

Director Compensation                                                           

Directors of Allaire are reimbursed for expenses incurred in attending meetings 
of the Board of Directors. Directors of Allaire generally are not paid any      
separate fees for serving as directors. On December 31, 1996, Allaire granted to
Mr. Gannon an option to purchase 25,000 shares of common stock at an exercise   
price of $.50 per share. On March 21, 1997, Allaire granted to Mr. Kapor an     
option to purchase 35,000 shares of common stock at an exercise price of $.50   
per share. On June 18, 1997, Allaire granted to Mr. Herring an option to        
purchase 25,000 shares of common stock at an exercise price of $.50 per share.  
These options become exercisable for shares of common stock not subject to      
repurchase by Allaire according to the following schedule: 25% of the option    
shares one year from the grant date, and 1/36 of the remaining shares on the    
first of each month thereafter for 36 months. These options have maximum terms  
of 10 years measured from the grant date, subject to earlier termination        
following the cessation of the respective director's Board service.             

Severance Arrangement; Change in Control Arrangements                           

Mr. Orfao is entitled to continue to receive his base salary and benefits for 12
months in the event he is involuntarily terminated for reasons other than cause.
Additionally, Mr. Orfao is entitled to accelerated vesting of his unvested      
options to purchase common stock in the event there is a change in control, as  
defined in Mr. Orfao's option agreement, of Allaire and                         

o he is terminated without cause within six months of the change in control;    

o he is not offered a position with the successor comparable to his current     
position with Allaire after the change in control; or                       

o he is removed from a comparable position within six months of the change in   
control.                                                                    

The 1997 plan and the underlying option agreements provide for the accelerated  
vesting of all unvested options and other rights granted pursuant to the plan in
the event there is a merger or consolidation involving Allaire, unless          
appropriate provision shall be made for outstanding options and other rights by 
the substitution of options, stock appreciation rights and appropriate voting   
common stock of the corporation surviving any such merger or consolidation (or  
the parent of such surviving corporation).                                      

Benefit Plans                                                                   

1997 Stock Incentive Plan                                                       
In 1997, the Board of Directors adopted and Allaire's stockholders approved the 
1997 Stock Incentive Plan. A total of 1,726,000 shares of common stock have been
reserved for issuance under the 1997 plan. The 1997 plan authorizes the grant of
options to purchase common stock intended to qualify as incentive stock options,
as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the 
"Code"), and the grant of options that do not so qualify. The exercise price of 
incentive options granted under the 1997 plan must be at least equal to the fair
market value of the common stock on the date of grant. The exercise price of    
incentive options granted to an optionee who owns stock possessing more than 10%
of the voting power of Allaire's outstanding capital stock must be at least     
equal to 110% of the fair market value of the common stock on the date of grant,
and such optionee must exercise his or her option within five years from the    
date of the grant of such option. The exercise price of nonqualified options    
granted under the 1997 plan must be at least equal to 50% of the fair market    
value of the common stock on the date of grant. The 1997 plan provides,         

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that, upon a merger or consolidation of Allaire, all outstanding plan options   
and other awards must be substituted for with similar options or awards of the  
corporation surviving any such merger or consolidation, or such options or      
awards shall become immediately exercisable in full. The 1997 plan also provides
for awards of stock appreciation rights, performance shares, restricted stock   
and other stock-based awards.                                                   

The 1997 plan is administered by the Compensation Committee. The Compensation   
Committee selects the individuals to whom options will be granted and determines
the option exercise price and other terms of each award, subject to the         
provisions of the 1997 plan. Incentive options may be granted under the 1997    
plan to key employees of Allaire and its affiliates within the meaning of the   
Code, including officers and directors of Allaire and its affiliates who are    
also employees. Nonqualified options may be granted under the 1997 plan to      
officers and other employees and to directors and other individuals providing   
services to Allaire, whether or not they are employees of Allaire.              

1998 Stock Incentive Plan                                                       
The Board of Directors has adopted and Allaire's stockholders have approved the 
1998 Stock Incentive Plan. A total of 1,900,000 shares of common stock have been
reserved for issuance under the 1998 plan. The 1998 plan authorizes the grant of
incentive options and nonqualified options. The exercise price of incentive     
options granted under the 1998 plan must be at least equal to the fair market   
value of the common stock of Allaire on the date of grant. The exercise price of
incentive options granted to an optionee who owns stock possessing more than 10%
of the voting power of Allaire's outstanding capital stock must be at least     
equal to 110% of the fair market value of the common stock on the date of grant,
and such optionee must exercise his or her option within five years from the    
date of the grant of such option. There are no limits on the exercise price of  
nonqualified options granted under the 1998 plan. The 1998 plan provides, that, 
upon a change in control of Allaire, all outstanding plan options and other     
awards may be substituted for similar options or awards of the corporation      
surviving any such change in control, may become immediately exercisable in full
or terminate as of the effective date of such change in control, provided that  
the holders of such options or awards have the right to exercise such options or
awards to the extent the same are then exercisable. The 1998 plan also provides 
for awards of stock appreciation rights, performance shares, restricted stock   
and other stock-based awards.                                                   

The 1998 plan is administered by the Compensation Committee. The Compensation   
Committee selects the individuals to whom options will be granted and determines
the option exercise price and other terms of each award, subject to the         
provisions of the 1998 plan. Incentive options may be granted under the 1998    
plan to key employees of Allaire and its affiliates within the meaning of the   
Code, including officers and directors of Allaire and its affiliates who are    
also employees. Nonqualified options may be granted under the 1998 plan to      
directors, officers and employees of Allaire and other individuals providing    
services to Allaire.                                                            

1998 Employee Stock Purchase Plan                                               
The Board of Directors has adopted and Allaire's stockholders have approved the 
1998 Employee Stock Purchase Plan. The stock purchase plan authorizes the       
issuance of up to an aggregate of 300,000 shares of common stock to             
participating employees. The stock purchase plan will be administered by the    
Compensation Committee.                                                         

Under the terms of the stock purchase plan, all employees of Allaire (other than
seasonal employees) who have completed three months of employment with Allaire  
and whose customary employment is more than part-time (i.e. more than 20 hours  
per week and more than five months in the calendar year) will be eligible to    
participate in the stock purchase plan. Employees who own stock, and/or hold    
outstanding options to purchase stock, representing 5% or more of the total     
combined voting power or value of all classes of stock of Allaire will not be   
eligible to participate in the stock purchase plan.                             

The right to purchase common stock under the stock purchase plan will be made   
available through a series of offerings. On the first day of an offering period,
Allaire will grant to each eligible employee who has elected in writing to      
participate in the stock purchase plan an option to purchase shares of common   
stock. The employee will be required to authorize an amount (between 1% and 10% 
of the employee's compensation) to be deducted from the employee's pay during   
the offering period. On the last day of the offering period, the employee will  
be deemed to have exercised the option, at the option exercise price, to the    
extent of accumulated payroll deductions. Under the terms of the stock purchase 
plan, the option exercise price is an amount equal to 85% of the fair market    
value of one share of common stock on either the first or last day of the       
offering period, whichever is lower.                                            

No employee may be granted an option that would permit the employee's rights to 
purchase common stock to accrue at a rate in excess of $25,000 of the fair      
market value of the common stock, determined as of the date the option is       
granted, in any calendar year.                                                  

Allaire expects that the first offering period under the stock purchase plan    
will commence on July 1, 1999.                                                  

Allaire Corporation 401(k) Plan                                                 
Allaire maintains a 401(k) plan, qualified under Section 401(k) of the Code. All
employees of Allaire who are at least 21 years of age are eligible to make      
salary reduction contributions pursuant to the 401(k) plan. A participant may   
contribute a maximum of 15% of his or her pre-tax salary, commissions and       
bonuses through payroll deductions (up to the statutorily prescribed annual     
limit of $10,000 in                                                             

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1998) to the 401(k) plan. The percentage elected by more highly compensated     
participants may be required to be lower. Allaire may also make discretionary   
profit-sharing contributions on behalf of participants who are at least 21 years
of age and who either have completed at least 500 hours of service during the   
fiscal year or are employed by Allaire on the last day of the fiscal year. Any  
profit-sharing contribution is allocated to eligible participants as a          
percentage of their total compensation (up to the statutorily prescribed maximum
of $160,000 in 1998). While a participant's contribution amount is always 100%  
vested, the amount attributable to profit sharing contributions is not fully    
vested until the participant has three full years of service with Allaire.      
Allaire determines the level of the discretionary contributions on an annual    
basis. Through December 31, 1998, Allaire made no profit-sharing contributions  
to the 401(k) plan.                                                             

Compensation Committee Interlocks and Insider Participation                     
The Compensation Committee takes recommendations concerning salaries and        
incentive compensation for employees of and consultants to Allaire and          
administers and grants stock options pursuant to Allaire's stock option plans.  
No executive officer of Allaire has served as a director or member of the       
compensation committee (or other committee serving an equivalent function) of   
any other entity, whose executive officers served as a director of or member of 
the Compensation Committee of Allaire.                                          

Item 12. Security Ownership of Certain Beneficial Owners and Management         

The following table sets forth certain information regarding beneficial         
ownership of Allaire's common stock as of March 2, 1999 by: (a) each person     
known by Allaire to be the beneficial owner of more than 5% of its common stock;
(b) each Named Executive Officer; (c) each of Allaire's directors; and (d) all  
executive officers and directors as a group. Unless otherwise noted below, the  
address of each person listed on the table is c/o Allaire Corporation, One      
Alewife Center, Cambridge, MA 02140.                                            

Beneficial ownership is determined in accordance with the rules of the          
Securities and Exchange Commission. The following are deemed to be beneficially 
owned and outstanding for purposes of calculating the number of shares and the  
percentage beneficially owned by that person or entity:                         

o shares of common stock issuable by Allaire pursuant to options which may be   
 exercised within 60 days after March 2, 1999 and not subject to repurchase by
Allaire; and                                                                

o shares of common stock issuable by Allaire pursuant to warrants which may be  
exercised within 60 days after March 2, 1999.                               

However, these shares are not deemed to be beneficially owned and outstanding   
for purposes of computing the percentage beneficially owned by any other person 
or entity.                                                                      

Except as otherwise indicated, each stockholder named in the table has sole     
voting and investment power with respect to the shares set forth opposite such  
stockholder's name. For purposes of calculating the percentage beneficially     
owned, the number of shares deemed outstanding: (a) 10,875,877 shares of common 
stock outstanding as of March 2, 1999 and the presently exercisable options and 
presently exercisable warrants held by that person.                             

                                                        [Enlarge/Download Table]

                                                           Number of Shares   Percentage of Common
        Name of Beneficial Owner                          Beneficially Owned   Stock Outstanding  
        ------------------------                          ------------------   -----------------  

                                                                                                  
Joseph J. Allaire.......................................      2,005,000               18.4%       
Entities affiliated with Polaris Venture                                                          
  Management Co., LLC (1)...............................      1,390,836               12.8%       
  1000 Winter Street, Suite 3350                                                                  
  Waltham, MA 02154                                                                               
Jonathan A. Flint (2)...................................      1,390,836               12.8%       
  1000 Winter Street, Suite 3350                                                                  
  Waltham, MA 02154                                                                               
BancBoston Ventures Inc. (3)............................      1,010,500               9.3%        
  175 Federal Street                                                                              
  Boston, MA 02110                                                                                
Peter R. Roberts (4)....................................      1,010,500               9.3%        
  175 Federal Street                                                                              
  Boston, MA 02110                                                                                
David J. Orfao..........................................        305,500                2.8%       
Amy E. Lewis.............................................       105,500                1.0%       
David A. Gerth...........................................       105,500                1.0%       
Jack P. Lull.............................................       151,042                1.4%       

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John J. Gannon...........................................        18,578                 *         
  1000 Winter Street, Suite 3350                                                                  
  Waltham, MA 02154                                                                               
Thomas A. Herring........................................        25,500                 *         
  1000 Winter Street, Suite 3350                                                                  
  Waltham, MA 02154                                                                               
Mitchell Kapor...........................................       216,675               2.0%        
  One Broadway                                                                                    
  Cambridge, MA 02142                                                                             
All executive officers and directors as a                                                         
  group (12 persons).....................................       5,391,631           48.8%         

* Represents beneficial ownership of less than 1%.                              

(1) Polaris Venture Management Co., LLC manages Polaris Venture Partners L.P.   
and Polaris Founders' Fund. Mr. Flint, a director of Allaire, is a General      
Partner of Polaris Venture Management Co., LLC and has shared voting and        
investment power with respect to the shares held by the Polaris entities.       
However, Mr. Flint disclaims his beneficial ownership of all such shares, except
to the extent of his pecuniary interest therein.                                

(2) Includes shares owned beneficially by Polaris Venture Management Co., LLC   
(see note 1).                                                                   

(3) Mr. Roberts, a director of Allaire at March 2, 1999, is a managing director 
of BancBoston Ventures and has shared voting and investment power with respect  
to the shares held by BancBoston Ventures. However, Mr. Roberts disclaims       
beneficial ownership of all such shares, except to the extent of his pecuniary  
interest therein. Mr. Roberts resigned from the Board of Directors on March 19, 
1999.                                                                           

(4) Includes shares owned beneficially by BancBoston Ventures (see note 3).     

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Item 13. Certain Relationships and Related Transactions                         

Organization of Allaire                                                         

In connection with its formation, Allaire issued 2,040,000 shares of common     
stock to founder Joseph J. Allaire for cash consideration of $51,000, and 40,000
shares to Jeremy D. Allaire, the brother of Joseph J. Allaire, for cash         
consideration of $1,000. Prior to the closing of the initial public offering,   
Joseph J. Allaire's shares were subject to a stock restriction agreement.       

Sales of Stock                                                                  

Beginning in June 1996, Allaire issued an aggregate of 514,306 shares of its    
Series B Redeemable Convertible Preferred Stock ("Series B Preferred Stock") to 
private investors for aggregate consideration of $2,324,664. Allaire issued     
364,684 shares of Series B Preferred Stock to Polaris Venture Partners Limited  
Partnership ("Polaris Venture Partners L.P.") for $1,648,372, and 22,484 shares 
of Series B Preferred Stock to Polaris Venture Partners Founders' Fund Limited  
Partnership ("Polaris Founders' Fund"; and together with Polaris Venture        
Partners L.P., the "Polaris entities") for $101,628. The Polaris entities own   
beneficially more than 5% of the outstanding shares of stock of Allaire. In     
addition, Jonathan A. Flint, John Gannon and Thomas Herring, who are directors  
of Allaire, are affiliated with the Polaris entities. Pursuant to Allaire's     
Certificate of Incorporation, each share of Series B Preferred Stock            
automatically converted into two shares of common stock upon the closing of the 
initial public offering in January 1999.                                        

Beginning in June 1996, Allaire issued an aggregate of 169,200 shares of its    
Series C Redeemable Convertible Preferred Stock ("Series C Preferred Stock") to 
private investors for aggregate consideration of $999,972. Allaire issued 79,687
shares of Series C Preferred Stock for $470,950 to Polaris Venture Partners L.P.
and 4,913 shares of Series C Preferred Stock for $29,036 to Polaris Founders'   
Fund. Allaire also issued 84,600 shares of Series C Preferred Stock in April    
1997 for $499,986 to Mitchell Kapor, a director of Allaire. Pursuant to         
Allaire's Certificate of Incorporation, each share of Series C Preferred Stock  
automatically converted into two shares of common stock upon the closing of the 
initial public offering in January 1999.                                        

In May and June 1997, Allaire issued an aggregate of 2,336,909 shares of its    
Series D Redeemable Convertible Preferred Stock ("Series D Preferred Stock") to 
private investors for aggregate consideration of $9,347,636. In this            
transaction, Allaire issued 57,894 shares of Series D Preferred Stock for       
$231,576 to Mitchell Kapor, 413,910 shares of Series D Preferred Stock for      
$1,655,640 to Polaris Venture Partners L.P., 23,590 shares of Series D Preferred
Stock for $94,360 to Polaris Founders' Fund, and 1,000,000 shares of Series D   
Preferred Stock for $4,000,000 to BancBoston Ventures Inc. ("BancBoston").      
BancBoston owns beneficially more than 5% of the outstanding shares of stock of 
Allaire, and Peter R. Roberts, a director of Allaire until March 19, 1999, is a 
managing director of BancBoston. Pursuant to Allaire's Certificate of           
Incorporation, each share of Series D Preferred Stock will automatically convert
into one share of common stock upon the closing of the offering. Two months     
prior to the issuance of the Series D Preferred Stock, Polaris Venture Partners 
L.P. lent Allaire $238,412 pursuant to a Promissory Note at an interest rate of 
10%, and Polaris Founders' Fund lent Allaire $13,588 pursuant to a Promissory   
Note at an interest rate of 10% (collectively, the "Polaris Notes"). The Polaris
Notes were converted in connection with the issuance of Series D Preferred Stock
to the Polaris entities.                                                        

Issuance of Warrants                                                            

In connection with the issuance of the Polaris Notes, in March 1997 Allaire     
issued a warrant to Polaris Venture Partners L.P. to purchase 5,960 shares of   
common stock at an exercise price of $4.00 per share, and a warrant to Polaris  
Founders' Fund to purchase 340 shares of common stock at an exercise price of   
$4.00 per share. Both warrants are currently exercisable in whole or in part, at
any time or from time to time, until March 7, 2002, and both contain certain    
protections against dilution resulting from stock splits, stock dividends and   
similar events.                                                                 

Stock Restriction Agreement                                                     

In May 1997, Allaire entered into an amended and restated stock restriction     
agreement with the Polaris entities, BancBoston and certain other stockholders  
(collectively, the "Holders"), and Joseph J. Allaire. Pursuant to this          
agreement, Allaire and the Holders have a right of participation in and a right 
of first refusal with respect to certain sales of shares of common stock by Mr. 
Allaire. The agreement also grants Allaire the right to purchase a certain      
number of Mr. Allaire's shares, at a price of $2.26 per share, in the event he  
ceases to be affiliated with Allaire. In addition, the parties agreed to fix the
number of directors of Allaire at seven and to elect to the Board of Directors  
the following individuals:                                                      

o Mr. Allaire, for as long as he is affiliated with Allaire;                    

o one member designated by Polaris Venture Partners L.P.;                       

o one member designated by BancBoston;                                          

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o Allaire's Chief Executive Officer;                                            

o John J. Gannon; and                                                           

o Mitchell Kapor.                                                               

The directors designa                                                           
ted pursuant to this agreement were Joseph J. Allaire,                          
Jonathan A. Flint, Peter R. Roberts, David J. Orfao, John J. Gannon and Mitchell
Kapor. This agreement automatically terminated upon the closing of Allaire's    
initial public offering in January 1999. This termination eliminated Allaire's  
right to purchase any of Mr. Allaire's shares of common stock.                  

Working Capital Line of Credit                                                  

In December 1998, the Polaris entities provided Allaire with a commitment to    
provide a working capital line of credit in the event Allaire had not completed 
its initial public offering or obtained other financing in excess of $3.0       
million by February 28, 1999. The line of credit would have allowed Allaire to  
borrow up to $3.0 million and would bear interest at a mutually agreed upon rate
between 5% and 20%. The line of credit commitment expired upon the closing of   
Allaire's initial public offering in January 1999.                              

Yesler Software, Inc.                                                           

Allaire is a party to certain agreements with Yesler Software, Inc. Initially   
capitalized in July 1998, Yesler was created to develop, market and sell a      
commercial software application, conceived by Allaire, and designed for use by  
end-users to create multimedia web-based presentations (the "Yesler Software"). 
The principal stockholders of Yesler are Allaire, Weld, Brown LLC and the       
Polaris entities.                                                               

Allaire acquired its ownership interest in Yesler pursuant to a Contribution and
Restricted Stock Purchase Agreement dated July 14, 1998, between Allaire and    
Yesler. Pursuant to this agreement, Allaire acquired 907,591 shares of Yesler   
common stock, representing on that date approximately 34% of the outstanding    
shares of capital stock of Yesler. The stock acquired by Allaire is subject to  
vesting requirements, a right of repurchase by Yesler and certain transfer      
restrictions. In exchange for the shares of Yesler common stock, Allaire        
assigned its rights to the Yesler Software source code to Yesler, agreed to     
provide Yesler with technical, sales and marketing support and agreed not to    
compete with Yesler. Also in connection with its acquisition of the Yesler      
common stock, Allaire entered into an original equipment manufacturer agreement 
with Yesler whereby Allaire granted Yesler the right to obtain, at a 95%        
discount, certain of Allaire's commercial software products for distribution    
together with the Yesler Software as a single commercial unit. In addition,     
Allaire entered into a Voting Agreement with Weld Brown and the Polaris entities
which grants Allaire the right to designate one member of Yesler's four-person  
board of directors. Allaire's designee to the Yesler board is Joseph J. Allaire.
Yesler also granted Allaire registration, information and certain other rights  
pursuant to an Investor Rights Agreement among Yesler, Allaire, Weld Brown and  
the Polaris entities. In August 1998, Allaire transferred 76,903 shares of      
Yesler common stock owned by Allaire to three of its employees, including 38,451
shares of Yesler common stock to Maria Morrissey, Vice President, Worldwide     
Services and Support. The fair value of the shares transferred was not material 
at the time of transfer.                                                        

On the date Allaire entered into the Yesler Agreement, the Polaris entities     
purchased for $750,000 preferred stock of Yesler representing approximately 33% 
of the outstanding shares of capital stock of Yesler on that date. Jonathan A.  
Flint and Thomas Herring, who are directors of Allaire, are directors of Yesler.
See Note 4 of Notes to Financial Statements.                                    

Allaire believes that all transactions set forth above were made on terms no    
less favorable to it than would have been obtained from unaffiliated third      
parties.                                                                        

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 PART IV

Item 14.  Exhibits and Financial Statement Schedules                            

(a)  The following documents are filed as a part of this report:      

1.   Financial Statements:                                            
       The financial statements filed as part of this report are listed on
the Index to Financial Statements included in Item 8 and are
incorporated herein by reference.                           

2.   Financial Statement Schedules:                                   
      The financial statement schedules filed as part of this report are
          listed on the Index to Financial Statements included in Item 8 and are
incorporated herein by reference.                           

3.   Exhibits                                                         
   The following exhibits are filed as part of, or incorporated by
reference into, this Form 10-K                              

                                                        [Enlarge/Download Table]

Exhibit  Exhibit Title                                                                                               
-------  -------------                                                                                               
Number                                                                                                               
------                                                                                                               

                                                                                                                     
1.1      Form of Underwriting Agreement (1)                                                                          
3.3      Amended and Restated Certificate of Incorporation of Allaire (1)                                            
3.5      Amended and Restated By-Laws of Allaire (1)                                                                 
4.1      Specimen certificate for the Common Stock of Allaire (1)                                                    
10.1     1997 Stock Incentive Plan as amended (1)                                                                    
10.2     1998 Stock Incentive Plan (1)                                                                               
10.3     1998 Employee Stock Purchase Plan (1)                                                                       
10.4     Option Agreement for David J. Orfao (1)                                                                     
10.5     Form of Option Agreement for other executive officers (1)                                                   
10.6     Office Lease Agreement between Allaire and One Alewife Center Realty Trust, dated November 5, 1997 (1)      
10.7     Lease Agreement between Allaire and CambridgePark Two, L.P., dated May 21, 1998 (1)                         
10.8     Loan and Security Agreement between Allaire and Silicon Valley Bank, dated March 26, 1998 (1)               
10.9     Negative Pledge Agreement between Allaire and Silicon Valley Bank, dated March 26, 1998 (1)                 
10.10    Loan Modification Agreement between Allaire and Silicon Valley Bank, dated August 6, 1998 (1)               
10.11    Loan Modification Agreement between Allaire and Silicon Valley Bank, dated December 9, 1998 (1)             
10.12    Senior Loan and Security Agreement between Allaire and Phoenix Leasing Incorporated, dated May 1, 1998 (1)  
10.13    Warrant Agreement between Allaire and Comdisco, Inc., dated August 21, 1998 (1)                             
10.14    Warrant Agreement between Allaire and Gregory Stento, dated August 21, 1998 (1)                             
10.15    Warrant Agreement between Allaire and Polaris Venture Partners, L.P., dated March 7, 1997 (1)               
10.16    Warrant Agreement between Allaire and Polaris Venture Partners Founders' Fund, L.P., dated March 7, 1997 (1)
10.17    Amended and Restated Registration Rights Agreement, dated May 15, 1997 (1)                                  
10.18    Waiver and Amendment No. 1 to Amended and Restated Registration Rights Agreement, dated December 7, 1998 (1)
10.19    Letter of Offer of Employment from Allaire to David J. Orfao, dated December 23, 1996 (1)                   
10.20    Contribution and Restricted Stock Purchase Agreement between Allaire and Yesler Software, Inc., dated July  
         14, 1998 (1)                                                                                                
10.21    Working Capital Line of Credit Letter from Polaris Ventures Partners, L.P., and Polaris Venture Partners    
         Founders' Fund, L.P., dated December 4, 1998 (1)                                                            
11.1     Statement re computation of net loss per share and unaudited pro forma net loss per share                   
27.1     Financial Data Schedule                                                                                     

(1) Previously filed with the Securities and Exchange Commission as the         
identically numbered exhibit to Allaire's Registration Statement on Form S-1    
(File No. 333-68639)                                                            

(b) Reports on Form 8-K:                                              
None                                                          

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SIGNATURES

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

                                       ALLAIRE CORPORATION

                  By:  /s/ DAVID J ORFAO
                                       ---------------------------------
                    David J. Orfao
                                           President and Chief Executive Officer

   Pursuant to the requirements of the Securities 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 indcated.                                       

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

/s/ Joseph J. Allaire                                                           
------------------------    Chairman of the Board                 March 30, 1999
Joseph J. Allaire                                                       

/s/ David J. Orfao          President, Chief Executive Officer                  
------------------------    and Director (principal executive     March 30, 1999
David J. Orfao          officer)                                        

   Vice President, Finance and
/s/ David A. Gerth          Operations, Treasurer and Chief       March 30, 1999
------------------------    Financial Officer (principal                        
David A. Gerth          financial and accounting officer)               

/s/ Jonathan A. Flint                                                           
------------------------    Director                              March 30, 1999
Jonathan A. Flint                                                       

/s/ John J. Gannon                                                              
------------------------    Director                              March 30, 1999
John J. Gannon                                                          

/s/ Thomas A. Herring                                                           
------------------------    Director                              March 30, 1999
Thomas A. Herring                                                       

/s/ Mitchell Kapor                                                              
------------------------    Director                              March 30, 1999
Mitchell Kapor                                                          

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                                                                     Schedule II

 Valuation and Qualifying Accounts

                                                                [Download Table]

        Allowance for Doubtful Accounts and                                      
                   Sales Returns                     Year ended December 31,     
                                              -----------------------------------
                                                 1996       1997        1998     
                                                 ----       ----        ----     
                                                        (in thousands)           

                                                                                 
Balance at beginning of period ..............   $  10      $ 220       $ 487     
Additions:                                                                       
   Charged to expense .......................     165        164          53     
   Charged against other accounts ...........      45        165          38     
Deductions:                                                                      
   Write-offs and returns ...................    --          (62)        (99)    
                                                -----      -----       -----     

Balance at end of period ....................   $ 220      $ 487       $ 479     
                                                =====      =====       =====     

52

Dates Referenced Herein   and   Documents Incorporated by Reference

				Referenced-On Page
This ‘10-K405’ Filing		Date		First		Last			Other Filings
		3/7/02		48
		2/1/01		36
		1/31/00		36
		12/31/99		13					10-K405
		7/1/99		38		45
		6/15/99		23		32			8-K/A,  S-1
Corrected on:		4/8/99
Changed as of:		4/7/99
Filed on:		3/31/99							10-Q
		3/30/99		51
		3/19/99		47		48
		3/15/99		18
		3/2/99		1		47
		2/28/99		49
		2/3/99		25
		1/22/99		16					424B4,  S-1/A
		1/1/99		23		32
For Period End:		12/31/98		6		46			S-1/A
		12/9/98		50					S-1
		12/7/98		16		50
		12/4/98		50
		8/21/98		50
		8/10/98		36
		8/6/98		50
		7/14/98		49		50
		5/21/98		50
		5/1/98		50
		3/26/98		50
		12/31/97		18		39
		11/5/97		50
		6/18/97		44
		5/15/97		50
		4/25/97		2
		3/21/97		44
		3/7/97		50
		12/31/96		21		44
		12/23/96		50
		2/1/96		2
		12/31/95		28		37
		5/5/95		17
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