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

                                   FORM 10-Q


(Mark One)
   [X]       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF       
             THE SECURITIES EXCHANGE ACT OF 1934

             FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998

   [_]       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF       
             THE SECURITIES EXCHANGE ACT OF 1934
 
             FOR THE TRANSITION PERIOD FROM _____ TO _____.

                        Commission file number: 0-27794

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


           Delaware                                  95-4188982
(State or other jurisdiction of                   (I.R.S. Employer
incorporation or organization)                    Identification No.)



                     201 Spring Street Lexington, MA 02421
                   (Address of principal executive offices)

      Registrant's telephone number, including area code: (781) 402-1000


     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 a shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.    YES  [X]    NO  [_]

     The number of shares of Registrant's Common Stock outstanding as of 
August 3, 1998, was 8,203,460.
<PAGE>
 
                              SEGUE SOFTWARE, INC.
                                        
                                     INDEX
<TABLE> 
<CAPTION> 
                                        
                                        
                                                                      Page No.
                                                                      --------
<S>                                                                   <C> 
PART I.    FINANCIAL INFORMATION

Item 1.    Consolidated Financial Statements:
 
           Consolidated Balance Sheets (unaudited)
             June 30, 1998 and December 31, 1997                          2
                                                                                            
           Consolidated Statements of Operations (unaudited)                         
             Three and six months ended June 30, 1998 and 1997            3
                                                                                            
           Consolidated Statements of Cash Flows (unaudited)                         
             Six months ended June 30, 1998 and 1997                      4
                                                                                            
           Notes to Consolidated Financial Statements (unaudited)         5
                                                                                            
Item 2.    Management's Discussion and Analysis of Financial                         
             Condition and Results of Operations                          7
                                                                                            
PART II.   OTHER INFORMATION                                                         
                                                                                            
Item 4.    Submission of Matters to a Vote of Security Holders           12
                                                                                            
Item 6.    Exhibits and Reports on Form 8-K                              12
                                                                                            
Signatures                                                               13
                                                                                            
Exhibits Index                                                           14 
</TABLE>

                                       1
<PAGE>
 
PART I.  FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

                              SEGUE SOFTWARE, INC.
                          CONSOLIDATED BALANCE SHEETS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                       June 30,            December 31,
                                                                         1998                  1997
                                                                    ------------          ------------
<S>                                                                 <C>                   <C>  
ASSETS
Current assets:
   Cash and cash equivalents                                           $ 36,922              $ 22,975 
   Short-term investments                                                     -                14,385               
   Accounts receivable, net of allowances of $415 and $345                7,219                 4,308               
   Other current assets                                                   1,729                   615               
                                                                       --------              --------               
      Total current assets                                               45,870                42,283               
                                                                                                                 
Property and equipment, net                                               1,884                 2,252               
Other assets                                                              1,628                 1,502               
                                                                       --------              --------               
      Total assets                                                     $ 49,382              $ 46,037               
                                                                       ========              ========               
LIABILITIES AND STOCKHOLDERS' EQUITY                                                                             
Current liabilities:                                                                                             
   Short-term subordinated notes payable                               $    883              $    883               
   Accounts payable                                                         906                   860               
   Accrued compensation and benefits                                      1,381                 1,127               
   Accrued expenses                                                       1,185                 1,268               
   Deferred revenue                                                       2,970                 2,477               
   Accrued royalties                                                        347                   147               
                                                                       --------              --------               
      Total current liabilities                                           7,672                 6,762               
                                                                                                                 
Subordinated notes payable                                                3,532                 3,532               
                                                                                                                 
Stockholders' equity:                                                                                            
   Series A Preferred Stock, par value $.01 per share; noncumulative;            
     4,000 shares authorized; no shares issued and outstanding                -                     -
   Common Stock, par value $.01 per share; 30,000 shares                                                         
      authorized; 8,142 and 7,630 shares issued and outstanding              81                    76 
   Additional paid-in capital                                            49,810                48,479               
   Unearned compensation                                                    (33)                 (105)              
   Cumulative translation adjustment                                         (3)                    -               
   Accumulated deficit                                                  (11,677)              (12,707)              
                                                                       --------              --------               
                                                                                                                 
      Total stockholders' equity                                         38,178                35,743               
                                                                       --------              --------               
                                                                                                                 
      Total liabilities and stockholders' equity                       $ 49,382              $ 46,037               
                                                                       ========              ========                
 
</TABLE>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.

                                       2
<PAGE>
 
                              SEGUE SOFTWARE, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                  (UNAUDITED)
<TABLE>
<CAPTION>
                                            Three months ended          Six months ended
                                                 June 30,                   June 30,
                                         ------------------------  ---------------------------
                                             1998         1997         1998           1997
                                         ----------  ------------  -----------  --------------
<S>                                      <C>         <C>           <C>          <C>
Revenue:
   Software                                  $6,018       $3,864       $11,697        $ 7,870
   Services                                   2,786        1,488         4,568          2,883
                                             ------       ------       -------        -------
      Total revenue                           8,804        5,352        16,265         10,753
 
Cost of revenue:
   Cost of software                             557          188           979            387
   Cost of services                           1,295          677         2,049          1,221
                                             ------       ------       -------        -------
      Total cost of revenue                   1,852          865         3,028          1,608
 
Gross margin                                  6,952        4,487        13,237          9,145
 
Operating expenses:
   Sales and marketing                        4,149        2,823         8,032          5,400
   Research and development                   1,663        1,288         3,166          2,377
   General and administrative                   905          783         1,767          1,563
                                             ------       ------       -------        -------
      Total operating expenses                6,717        4,894        12,965          9,340
                                             ------       ------       -------        -------
Income (loss) from operations                   235         (407)          272           (195)
Other income, net                               413          546           814          1,080
                                             ------       ------       -------        -------
Income before provision for
   income taxes                                 648          139         1,086            885
Provision for income taxes                       30            8            56             56
                                             ------       ------       -------        -------
Net income                                   $  618       $  131       $ 1,030        $   829
                                             ======       ======       =======        =======
Net income per common share - basic          $  .08       $  .02       $   .13        $   .11
Net income per common share - diluted        $  .07       $  .02       $   .12        $   .10
Weighted average common shares
 outstanding - basic                          8,041        7,299         7,902          7,261
Weighted average common shares
 outstanding - diluted                        8,740        7,883         8,645          7,996
</TABLE> 
 
  The accompanying notes are an integral part of the consolidated financial 
                                  statements.



                                       3
<PAGE>
 
                              SEGUE SOFTWARE, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                  (UNAUDITED)


<TABLE>
<CAPTION>
                                                                Six months ended
                                                                    June 30,
                                                        --------------------------------
                                                            1998                1997
                                                        -----------         ------------
<S>                                                     <C>                 <C>  
Cash flows from operating activities:
   Net income                                             $ 1,030            $    829
   Adjustments to reconcile net income to net cash        
      used in operating activities:                       
         Depreciation and amortization                      1,088                 459
         Noncash compensation charges                          19                  72
         Net changes in operating assets and              
          liabilities:                                    
            Accounts receivable                            (2,911)             (1,173)
            Other current assets                           (1,037)               (617)
            Accounts payable                                   46                 209
            Accrued expenses, compensation and                171                (121)
             benefits                                     
            Accrued royalties                                   -                (100)
            Deferred revenue                                  493                 370
                                                          -------            --------
Net cash used in operating activities                      (1,101)                (72)
                                                          -------            --------
Cash flows from investing activities:                     
   Additions to property and equipment                       (236)             (1,004)
   Increase in other assets                                  (490)                 (1)
   Maturities of short-term investments                    16,200              33,000
   Purchases of short-term investments                     (1,815)            (32,067)
                                                          -------            --------
Net cash provided by (used in) investing activities        13,659                 (72)
                                                          -------            --------
Cash flows from financing activities:                     
   Proceeds from stock options and stock purchase         
      plan                                                  1,389                 465
                                                          -------            --------
Net cash provided by financing activities                   1,389                 465
                                                          -------            --------
Net increase in cash and cash equivalents                  13,947                 321
Cash and cash equivalents, beginning of period             22,975               7,112
                                                          -------            --------
Cash and cash equivalents, end of period                  $36,922            $  7,433
                                                          =======            ========
</TABLE>
   The accompanying notes are an integral part of the consolidated financial
                                  statements.

                                       4
<PAGE>
 
                              SEGUE SOFTWARE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

1.   The financial statements included herein have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission.  Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations.  The Company believes that the disclosures are adequate to make the
information presented not misleading.  However, it is suggested that these
financial statements be read in conjunction with the Company's audited financial
statements for the year ended December 31, 1997, included in its 1997 Annual
Report on Form 10-K.

     This financial information reflects, in the opinion of management, all
adjustments of a normal recurring nature necessary to present fairly the results
for the interim periods.  Results of interim periods may not be indicative of
results for the full year.

2.   The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):


<TABLE>
<CAPTION>
 
                                                   Three months ended          Six months ended  
                                                         June 30,                  June 30,      
                                                   -------------------        ------------------- 
                                                     1998         1997         1998          1997  
                                                   ------       ------       ------        ------   
<S>                                               <C>           <C>         <C>           <C>
Net income                                         $  618       $  131       $1,030        $  829

Weighted average shares used in net                                                              
   income per share - basic                         8,041        7,299        7,902         7,261
                                                                                                 
Effect of dilutive securities:                                                                   
   Employee and director stock           
   options                                            699          584          743           735
                                                   ------       ------       ------        ------   
                                                                                                 
Weighted average shares used in net                 8,740        7,883        8,645         7,996
   income per share - diluted                      ======       ======       ======        ======

Net income per common share - basic                $  .08       $  .02       $  .13        $  .11
Net income per common share - diluted              $  .07       $  .02       $  .12        $  .10 
</TABLE>

     Options to purchase 174,000 and 664,000 shares of common stock outstanding
at June 30, 1998 and 1997, respectively, were excluded from the calculation of
diluted earnings per share because the exercise prices of those options exceeded
the average market price of common stock for the three month periods ended June
30, 1998 and 1997, respectively.  Options to purchase 415,000 and 629,000 shares
of common stock outstanding at June 30, 1998 and 1997, respectively, were
excluded from the calculation of diluted earnings per share because the exercise
prices of those options exceeded the average market price of common stock for 
the six month periods ended June 30, 1998 and 1997, respectively.

                                       5
<PAGE>
 
3.   In March 1998, the Company entered into an agreement with a vendor whereby
the vendor licensed specific software to the Company for purposes of marketing
and distribution.  Under the terms of the agreement, the Company paid a
nonrefundable non-recurring engineering and initial license fee ("NRE") of
$480,000 during the second quarter of 1998 and $300,000 of the guaranteed
$500,000 royalties, the remainder of which will be paid by September 30, 1998.
The NRE fee is being amortized into cost of software revenue over two years,
beginning in the second quarter of 1998, and the royalty expense will be
recognized as cost of software revenue based upon sales of the related product.
As of June 30, 1998, there were minimal sales of the related product.

4.   In April 1998, the Company entered into a nine year lease commitment for
40,500 to 67,500 square feet, effective August 1, 1998, which expires in October
2007.  The Company has the right to terminate the lease on September 30, 2004
for a fee of approximately $2.2 million.

     Future minimum payments under the lease are as follows (in thousands):

<TABLE>

<S>                                                  <C>

                August 1, 1998 - December 31, 1998    $   523
                1999                                    1,860
                2000                                    2,093
                2001                                    2,093
                2002                                    2,093
                Thereafter                             10,406
                                                      -------
                                                      $19,068
                                                      ======= 
</TABLE>

5.   The Company recorded provisions for state income taxes of $30,000 and
$8,000 for the second quarter of 1998 and 1997, respectively, and a total of
$56,000 for the six month periods ended June 30, 1998 and 1997, but no
provisions for federal income taxes due to utilization of net operating loss
carryforwards.

6.   Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income".
SFAS 130 requires the reporting of comprehensive income in addition to net
income from operations.  Comprehensive income is a more inclusive reporting
methodology that includes disclosure of certain financial information that
historically has not been recognized in the calculation of net income.  The
adoption of SFAS 130 had no impact on the Company's net income or stockholders'
equity.  Total comprehensive income, net of taxes, for the three and six months
ended June 30, 1998, was $610,000 and $1,027,000, respectively, which consists
of net income and the net changes in foreign currency translation adjustment.
For the three and six months ended June 30, 1997, comprehensive income equaled
net income.

                                       6
<PAGE>
 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

REVENUE

     Revenue from Software.  Software revenue increased 56% to $6.0 million
during the second quarter of 1998 from $3.9 million in the second quarter of
1997.  For the six month period ended June 30, 1998, software revenue increased
49% to $11.7 million from $7.9 million for the first six months of 1997.  The
increases in software revenue are primarily the result of increased unit
shipments due to an increase in the demand for automated testing products; the
introduction of new and upgraded products; increased market acceptance of the
families of products including Web application testing and load testing products
introduced in 1997; and expansion of sales and marketing activities.  The
absolute dollar increase in software revenue came largely through the direct
domestic channel.  International revenue accounted for 13% and 11% of total
software revenue in the second quarter of 1998 and 1997, respectively.  For the
six months ended June 30, 1998 and 1997 respectively, international revenue
accounted for 13% and 10% of total software revenue.

     In addition, the mix of software revenue changed during the three and six
months ended June 30, 1998 from the three and six months ended June 30, 1997.
SilkTest and SilkPerformer, which target the e-commerce testing markets, were
not available until May 1997 and September 1997, respectively.  SilkTest and
SilkPerformer represented 52% and 47% of total software revenue in the three and
six months ended June 30, 1998, respectively.  SilkTest represented 18% and 9%
of total software revenue in the three and six months ended June 30, 1997,
respectively.  QA Performer and SilkPerformer, which target the load testing
markets, in total represented 19% and 18% of total software revenue in the three
and six months ended June 30, 1998, respectively.  QA Performer represented 2%
of total software revenue in the three and six months ended June 30, 1997,
respectively.

     Revenue from Services. Service revenue increased 87% to $2.8 million during
the second quarter of 1998 from $1.5 million in the second quarter of 1997
driven by the increase in maintenance revenue and training and consulting
revenue related to the increase in software licenses sold. For the three month
period ended June 30, 1998, training and consulting revenue increased 200% and
maintenance revenue increased 35% over the comparable period in 1997. For the
six month period ended June 30, 1998, service revenue increased 58% to $4.6
million from $2.9 million for the corresponding prior year period. For the six
month period ended June 30, 1998, training and consulting revenue increased
101%, while maintenance revenue increased 36% over the comparable period in
1997. These increases were driven largely by an increase in software licenses
sold. The increase in training and consulting revenue is also due to the
introduction of the LiveQuality scenario testing solutions, which consist of a
combination of product and consulting services, in the second quarter of 1998.


                                       7
<PAGE>
 
COST OF REVENUE

     Cost of Software.  Cost of software increased 196% to $557,000 during the
second quarter of 1998 from $188,000 in the second quarter of 1997.  For the six
month period ended June 30, 1998, cost of software increased 153% to $979,000
from $387,000 for the six month period ended June 30, 1997.  As a percent of
software revenue, costs in the current quarter increased to 9% from 5% in the
corresponding prior year period.  For the six month period ended June 30, 1998,
cost of software as a percent of software revenue increased to 8% from 5% in the
corresponding prior year period.  These increases are due to the amortization of
intangible assets primarily related to the SQLBench acquisition, the
internationalization of QA Partner, and the NRE fee noted below.  These
increases are also attributable to the cost of upgrading the installed base with
new versions of various products as well as royalties payable to third parties.

     In March 1998, the Company entered into an agreement with a vendor whereby
the vendor licensed specific software to the Company for purposes of marketing
and distribution.  Under the terms of the agreement, the Company paid a
nonrefundable non-recurring engineering and initial license fee ("NRE") of
$480,000 during the second quarter of 1998 and $300,000 of the guaranteed
$500,000 royalties, the remainder of which will be paid by September 30, 1998.
The NRE fee is being amortized into cost of software revenue over two years,
beginning in the second quarter of 1998, and the royalty expense will be
recognized as cost of software revenue based upon sales of the related product.
As of June 30, 1998, there were minimal sales of the related product. The
amortization and the guaranteed royalty payments may cause the cost of software
to increase as a percentage of revenue.

     Cost of Services.  Cost of services increased 91% to $1.3 million during
the second quarter of 1998 from $677,000 in the second quarter of 1997.  For the
six month period ended June 30, 1998, cost of services increased 68% to $2.0
million from $1.2 million for the six months ended June 30, 1997.  For the three
months ended June 30, 1998 and 1997, cost of services as a percent of services
revenue was 46%.  For the six months ended June 30, 1998, cost of services as a
percent of services revenue increased to 45% from 42% in the corresponding prior
year period.  The increases, in absolute dollars, in the current quarter over
the prior year and for the current six months over the comparable six month
period in the prior year are largely due to the fact that the Company began to
use third party consultants to assist in LiveQuality solution implementations in
the second quarter of 1998.  The Company expects to continue using third party
consultants in the future.  The increases are also due to the increase in the
number of employees in both the training and consulting and technical support
groups.

OPERATING EXPENSES

     Sales and Marketing. Sales and marketing expenses increased 47% to $4.2
million during the second quarter of 1998 from $2.8 million in the second
quarter of 1997.  For the six months ended June 30, 1998, sales and marketing
expenses increased 49% to $8.0 million from $5.4 million for the first six
months of 1997.  Sales and marketing expenses were 47% and 53% of total revenue
in the second quarter of 1998 and 1997, respectively, and 49% and 50% of total

                                       8
<PAGE>
 
revenue during the six month periods ended June 30, 1998 and 1997, respectively.
The absolute dollar increases in the current quarter over the prior year and for
the current six months over the comparable six month period in the prior year
are largely due to increases in the number of sales personnel, commissions as a
result of higher revenue levels, and travel costs.

     Research and Development.  Research and development expenses increased 29%
to $1.7 million during the second quarter of 1998 from $1.3 million in the
second quarter of 1997.  For the six months ended June 30, 1998, research and
development expenses increased 33% to $3.2 million from $2.4 million for the
first six months of 1997.  Research and development expenses were 19% and 24% of
total revenue in the second quarter of 1998 and 1997, respectively, and 20% and
22% of total revenue during the six month periods ended June 30, 1998 and 1997,
respectively.  The absolute dollar increases in the current quarter over the
prior year and for the current six months over the comparable six month period
in the prior year are largely due to the increase in the number of employees,
including employees from the December 1997 SQLBench acquisition.

     General and Administrative.  General and administrative expenses increased
16% to $905,000 during the second quarter of 1998 from $783,000 in the second
quarter of 1997.  For the six months ended June 30, 1998, general and
administrative expenses increased 13% to $1.8 million from $1.6 million for the
first six months of 1997.  General and administrative expenses were 10% and 15%
of total revenue during the second quarter of 1998 and 1997, respectively, and
11% and 15% of total revenue during the six month periods ended June 30, 1998
and 1997, respectively.  The absolute dollar increases in the current quarter
over the prior year and for the current six months over the comparable six month
period in the prior year are largely attributable to increased employment of
both executive and administrative personnel and increased professional fees
associated with the growth of the Company.

OTHER INCOME, NET

     Other income, net decreased 24% to $413,000 during the second quarter of
1998 from $546,000 in the second quarter of 1997.  For the six months ended June
30, 1998, other income, net decreased 25% to $814,000 from $1.1 million for the
first six months of 1997.  These decreases are largely due to interest expense
of $97,000 and $191,000 recognized in the second quarter of 1998 and the six
month period ended June 30, 1998, respectively, related to the subordinated
notes payable which were issued in December 1997.

PROVISION FOR INCOME TAXES

     The Company recorded provisions for state income taxes of $30,000 and
$8,000 for the second quarter of 1998 and 1997, respectively, and a total of
$56,000 for the six month periods ended June 30, 1998 and 1997, but no
provisions for federal income taxes due to utilization of net operating loss
carryforwards.

                                       9
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

     In the first six months of 1998, the Company used $1.1 million for
operating activities, resulting from the growth in accounts receivable and other
current assets, offset by net income and deferred revenue.

     The Company generated $13.7 million from investing activities in the first
six months of 1998, mainly as a result of maturities of short-term investments.

     The Company generated funds from financing activities of $1.4 million in
the first six months of 1998, related to the exercise of stock options and
issuance of stock pursuant to the employee stock purchase plan.

     In April 1998, the Company entered into a nine year lease commitment for
40,500 to 67,500 square feet, effective August 1, 1998, which expires in October
2007.  The Company has the right to terminate the lease on September 30, 2004
for a fee of approximately $2.2 million.

     Future minimum payments under the lease are as follows (in thousands):

<TABLE>

<S>                                                   <C>

                 August 1, 1998 - December 31, 1998    $   523
                 1999                                    1,860
                 2000                                    2,093
                 2001                                    2,093
                 2002                                    2,093
                 Thereafter                             10,406
                                                       -------
                                                       $19,068
                                                       ======= 
</TABLE>


     Long-term cash requirements, other than normal operating expenses, are
anticipated for the completion of the new corporate headquarters facility, the
development of new software products and enhancements of existing products, the
opening of additional international offices, and the possible acquisition of
software products or technologies complementary to the Company's business.

     Assuming there is no significant change in the Company's business, the
Company believes that the existing cash and short-term investments as well as
cash flows from operations will be sufficient to meet its working capital
requirements for at least the next twelve months.

YEAR 2000 COMPLIANCE

     The Company recognizes that it must ensure that its products and operations
will not be adversely impacted by year 2000 software failures (the "Year 2000
issue") which can arise in time-sensitive software applications which utilize a
field of two digits to define the applicable year. In such applications, a date
using "00" as the year may be recognized as the year 1900 rather than the year
2000. In general, the Company expects to resolve Year 2000 issues through
planned replacement or upgrades. In addition, the Company expects that any costs
incurred to modify its internal systems will not be material. Although
management does not expect Year 2000 issues to have a material impact on its
business or future results of operations, there can be no assurance that there
will not be interruptions of operations or other limitations of system
functionality or that the Company will not incur significant costs to avoid such
interruptions or limitations.




















                                       10
<PAGE>
 
IMPORTANT FACTORS RELATED TO FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS

     This Quarterly Report on Form 10-Q 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.  The Company's actual results could
differ materially from those set forth in the forward-looking statements.
Various important factors, including but not limited to the following, may cause
the Company's future results to differ materially from those set forth in the
forward-looking statements: risks associated with the Company's limited
operating history; the dependence upon license revenues from the Company's
principal products; uncertainties regarding the development of the automated
software testing marketplace; the dependence upon the growth of a viable
commercial marketplace for the Internet's World Wide Web and Internet-related
products; changes in technology and industry standards; the Company's ability to
develop and introduce product enhancements and new products; risks related to
the management of the Company's growth; risks related to the Company's ability
to integrate acquisitions already completed as well as others that may occur;
risks related to the development of the Company's sales and marketing strategy;
risks related to Year 2000 compliance of the Company's internal systems; the
Company's ability to attract, train and retain qualified personnel; the
development of an international market and distribution channel for the
Company's products; the Company's ability to develop strategic partnerships; the
timing of the receipt of orders from major customers; increased competition,
including competition from the recent consolidation in the automated software
quality market; and general economic conditions.  In addition, the Company has
significantly changed the executive management team and the sales management
team under the direction of a new Chief Executive Officer.  In conjunction with
these management changes, the Company has refocused its sales and marketing
approach to focus on e-commerce applications.  There can be no assurance that
the Company will be able to effectively manage such change.  Furthermore, a
significant portion of the Company's revenue within a quarter is typically not
realized until late in that quarter.  As a result, it may be difficult for the
Company to predict its total revenue for a quarter or to quickly adapt its
spending levels within a quarter to reflect changes in demand for its products.
The market price of the Company's common stock has been, and in the future will
likely be, subject to significant fluctuations in response to variations in
quarterly operating results and other factors, such as announcements of
technological innovations or new products by the Company or its competitors, or
other events.  For a more detailed discussion of those factors affecting future
operating results, see the discussion contained in the Company's Annual Report
on Form 10-K for the year ended December 31, 1997, under the heading "Certain
Factors Affecting Future Operating Results".

                                       11
<PAGE>
 
PART II.  OTHER INFORMATION

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

     At the Company's Annual Meeting of Stockholders held on June 5, 1998, the
following individuals were elected to the Board of Directors:

<TABLE>
<CAPTION>
 
                                          Votes For   Votes Withheld 
                                          ---------   -------------- 
<S>                                  <C>              <C>            
             James H. Simons              5,703,086       346,775    
             Stephen B. Butler            5,703,086       346,775    
             Leonard E. Baum              5,703,086       346,775    
             Ronald D. Fisher             5,703,086       346,775    
             John R. Levine               5,703,086       346,775    
             Howard L. Morgan             5,703,086       346,775     

</TABLE> 
 
The following proposals were approved at the Company's Annual Meeting:

<TABLE>  
<CAPTION>

                                                        Votes             Votes            Votes  
                                                         For              Against         Withheld 
                                                        -----             -------         -------- 
<S>                                                  <C>                 <C>             <C> 
1. Amendment of the Company's Amended and              
   Restated Incentive and Non-Qualified                
   Stock Option Plan, increasing the               
   maximum number of shares of common stock        
   available for issuance from 3,000,000 to        
   3,250,000.                                         5,109,671           935,436           4,754
                                                   
2. Amendment to the Company's 1996 Employee        
   Stock Purchase Plan to increase the             
   maximum number of shares of Common Stock        
   that may be purchased from 100,000              
   to 200,000 shares.                                 5,950,333            94,224           5,304
                                                   
3. Ratification of the appointment of              
   PricewaterhouseCoopers LLP as independent       
   public accountants for the fiscal               
   year ending December 31, 1998.                     6,041,223             1,465           7,173
 
</TABLE> 

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K
 
     (a) Exhibits:

            10.14  Sublease Agreement dated March 31, 1998 by and between
                   Media One of Delaware, Inc. and Segue Software, Inc. 
            27.1   Financial Data Schedule

     (b)    Reports on Form 8-K:
            None.

                                       12
<PAGE>
 
                                  SIGNATURES

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

Date: August 14, 1998


                              SEGUE SOFTWARE, INC.
 


                              /s/ STEPHEN B. BUTLER
                              ---------------------
                              Chief Executive Officer


                              /s/ CARL D. BLANDINO
                              --------------------
                              Chief Financial Officer and 
                              Senior Vice President
                              of Administration

<PAGE>
 
                               INDEX TO EXHIBITS

Exhibit

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

10.14     Sublease Agreement dated March 31, 1998 by and between Media One 
          of Delaware, Inc. and Segue Software, Inc.

27.1      Financial Data Schedule