<PAGE>
 
                       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 October 31, 1996 or

[_]       Transition report pursuant to Section 13 or 15(d) of the
          Securities Act of 1934

COMMISSION FILE NO. 0-17754

                                CONSILIUM, INC.
             (Exact name of Registrant as specified in its charter)

            DELAWARE                                          94-2523965
(State or other jurisdiction of                             (IRS Employer
incorporation or organization)                            Identification No.)

             485 CLYDE AVENUE, MOUNTAIN VIEW, CA            94043
           (Address of principal executive office)        (Zip Code)

      Registrant's telephone number, including area code:  (415) 691-6100

          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

                                         Name of each exchange
                  Title of each class     on which registered
                  -------------------     -------------------
                         None                    None

          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                          COMMON STOCK, $.01 PAR VALUE
                                (Title of Class)

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       [X]          No    [_]

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

The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on January
27, 1997 as reported on the NASDAQ National Market System, was approximately
$24,604,431.  Shares of Common Stock held by each officer and director and
by each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates.  This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.

As of January 27, 1997 Registrant had 7,928,051 shares of Common Stock
outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Annual Meeting to be held on March 11,
1997 are incorporated by reference into Part III.
<PAGE>
 
                                CONSILIUM, INC.
                          1996 FORM 10-K ANNUAL REPORT

                               Table of Contents

                                     PART I
<TABLE>
<CAPTION>
                                                                   Page No.
                                                                   -------
<S>          <C>                                                   <C>
 
Item 1.      Business                                               1
 
Item 2.      Properties                                            18
 
Item 3.      Legal Proceedings                                     19
 
Item 4.      Submission of Matters to a Vote of Security Holders   19
 
</TABLE>

                                    PART II
<TABLE>
<S>          <C>                                                   <C>
 
Item 5.      Market for Registrant's Common Equity and Related
             Stockholder Matters                                   20
 
Item 6.      Selected Financial Data                               21
 
Item 7.      Management's Discussion and Analysis of Financial
             Condition and Results of Operations                   21
 
Item 8.      Financial Statements and Supplementary Data           28
 
Item 9.      Changes in and Disagreements with Accountants on
             Accounting and Financial Disclosure                   44
 
</TABLE>
                                    PART III
<TABLE>
<S>           <C>                                                  <C>
Item 10.     Directors and Executive Officers of the Registrant    46
 
Item 11.     Executive Compensation                                46
 
Item 12.     Security Ownership of Certain Beneficial Owners and
             Management                                            46
 
Item 13.     Certain Relationships and Related Transactions        46
 
</TABLE>
                                    PART IV
<TABLE>
<S>          <C>                                                   <C>
Item 14.     Exhibits, Financial Statements, Schedules, and 
             Reports on Form 8-K                                   47

             Signatures                                            51
</TABLE>
<PAGE>
 
                                    PART I


ITEM 1.     BUSINESS
            --------


   Consilium, FlowStream and WorkStream are registered trademarks, and
----------------------------------------------------------------------
WorkStream DFS and WorkStream Open are trademarks of Consilium, Inc.  All other
-------------------------------------------------------------------------------
brand or product names are trademarks or registered trademarks of their
-----------------------------------------------------------------------
respective holders.
------------------

   Consilium is the leading independent supplier of enterprise-wide, integrated
manufacturing execution systems (MES) software and services, based on its
revenues and installed base.  MES software tracks the five essential elements of
the manufacturing plant floor -- materials, equipment, personnel,
specifications/work instructions and facility conditions -- in real time and
correlates the data for true visibility and control of manufacturing operations.
This access to comprehensive, up-to-date  information about the production
process enables manufacturers to identify and implement manufacturing Best
Practices in the areas of cost, quality, service, compliance and speed.  Such
continuous improvement in the area of production thus enables companies to use
their manufacturing operations for competitive advantage, and to optimize
performance of the business as a whole.

   The Company develops, markets and sells two distinct software product lines,
aimed at different manufacturing industries.  The Company's WorkStream DFS/(TM)/
(Distributed Factory System) product line is targeted at manufacturers who
produce their products in discrete lots or batches, particularly those in the
semiconductor and electronics industries. The Company's FlowStream(R) product
line is targeted at regulated or complex industries that employ batch process
manufacturing such as pharmaceuticals, medical devices and specialty chemicals.
A comprehensive range of services complement these products, including systems
integration, pre- and post-implementation consulting,  a Customer Response
Center and product training .

   Through its direct sales force, the Company markets its WorkStream DFS and
FlowStream product lines in North America, Europe and Asia..  The Company also
markets its products through distributors in Japan, Israel, Italy, and Taiwan.
To date, software from the Company's WorkStream DFS product line has been
purchased by more than 100 companies for 250 sites in 20 countries, and the
Company's FlowStream product has been purchased by 18 companies for more than 30
sites in 8 countries.

   The Company was incorporated in California in October 1978 to provide
consulting services and released its first standard software product in fiscal
1983.  The Company reincorporated in the state of Delaware in March 1991.
Unless the context otherwise requires, "Consilium" and the "Company" refer to
Consilium, Inc. and its subsidiaries.  The Company's executive offices are
located at 485 Clyde Avenue, Mountain View, California 94043.  Its telephone
number is (415) 691-6100 and its facsimile number is (415) 691-6130.  The
Company's address on the Worldwide Web is http:/www.consilium.com.

                                       1
<PAGE>
 
Strategy
--------

   In mid-fiscal 1996, Consilium reorganized its sales and services organization
into two separate groups, in order to better focus on and measure its core
business areas.  The resulting organizations are the Semiconductor and
Electronics Business Group and the Healthcare Products and Process Industries
Business Group.  The Company's two product lines correspond to its core business
areas as follows:  the WorkStream DFS product line is targeted at the
semiconductor and electronics industries, and the FlowStream product line is
targeted at the healthcare products (pharmaceuticals, medical devices and
biotechnology), chemical and other process industries.

   To expand its potential for revenue growth, in fiscal 1996 Consilium
initiated a strategy to offer more comprehensive manufacturing system solutions
in the areas of manufacturing automation and total supply chain management.

   In the second half of fiscal 1996, Consilium expanded its services offerings
to include systems integration for the automation of semiconductor fabrication
facilities.  The automation of systems and equipment within semiconductor
fabrication facilities is increasing, as manufacturers refine their processes to
improve capital equipment utilization and product quality and lower costs.  As
part of its systems integration business, the Company will integrate third-party
automation software with its own proprietary software to offer a more
comprehensive, pre-integrated  solution.  This will require the Company to
resell or acquire such third-party software applications.  In addition, the
Company will utilize both internal and external resources to provide systems
integration services.  In July 1996, the Company acquired the Taiwan operations
of Systematic Designs International, Inc. (SDI), a systems integrator for the
semiconductor industry.  (See Note 2 of Notes to Consolidated Financial
Statements.)  The Company is also utilizing Fuji Research Institute, a Japanese
systems integration firm, to provide both automation software and systems
integration services.

   In early fiscal 1996, Consilium announced its intent to create a total supply
chain management solution for the semiconductor industry.  Total supply chain
management is an initiative adopted by manufactures in multiple industries to
improve the access to and flow of information between receipt of a customer
order and delivery of products.   The first phase of the Company's two-phase
supply chain management solution was completed in 1996, with the integration of
the Company's WorkStream DFS software with Oracle Corporation's order
processing, financial and enterprise resource planning (ERP) systems.  Together,
these systems can provide a comprehensive view of product availability from
sales order through manufacturing.  Such a view enables semiconductor
manufacturers to better meet their customers' requirements for specific product
orders in committed time frames.

   In January 1997, the Company announced a strategic agreement with Paragon
Management Systems, Inc., an advanced planning and scheduling company, to
jointly integrate the companies' respective products. Consilium will also resell
Paragon's product line.  Once completed, the integration of the Company's
WorkStream DFS software with Paragon's advanced planning and scheduling software
will complete the second phase of the Company's solution for total supply chain
management.  The addition of Paragon's software to the Company's total supply
chain management offering will complete the link between real-time status
information of manufacturing capacity, product commitments and inventory status
with corporate systems such as order processing, sales management and financial
applications.

                                       2
<PAGE>
 
Background
----------

   The goal of applying computer automation to the manufacturing environment is
improved efficiency and lowered costs, both direct and indirect.  There are
several different computer software applications which are designed for various
stages of the product life cycle, from computer-aided engineering and design
("CAE/CAD") to computer-assisted production on the plant floor.  The primary
software applications for planning and executing production once a product is
designed include: Enterprise Resource Planning (ERP) systems, manufacturing
execution systems (MES), and control systems for automated equipment and micro-
operations.

   ERP systems help manufacturers translate forecasted demand or order backlog
into a manufacturing plan of raw materials, gross capacity and production orders
for the plant floor.  They also track the associated financial and accounting
paperwork, and in fact are most commonly associated with financial transaction
automation.  Since ERP systems only collect historical yield and cost data and
do not provide real-time information about the complete status of operations,
they do not support the proactive or ongoing management of the actual production
process as it occurs.

   Distributed control systems direct the operation of process equipment,
numerically controlled machines, robots, material transports, vessels, specialty
equipment, sensors, and measurement and inspection devices used in
manufacturing.  Such devices are often grouped in self-contained "work cells."
Control systems regulate the operations of equipment and monitor and control
process parameters.

   Since the 1970s, as the increasing availability of lower cost, higher
performance computer systems made the use of manufacturing software more cost
effective, large numbers of ERP and distributed control systems have been
developed and installed.  The usage of and benefit from using ERP and
distributed control systems is common across many industries.  Increasingly,
manufacturers are recognizing that these tools, while effective in the functions
for which they were designed, do not have adequate capabilities to manage the
critical variables of the dynamic production process on the plant floor.

   Manufacturing execution systems are specifically designed to manage
production operations on the plant floor.  Some industries, such as
semiconductors, have long seen the benefit of using MES software and are
considered to have fully accepted MES as a critical tool for manufacturing.
Companies in other industries, such as pharmaceuticals, are not as familiar with
the benefits of MES, and are therefore slower to adopt what is to them a still
unproven concept.  Across many industries, there is a growing need for tools
that can help improve manufacturing performance, as cost, quality, customer
service and regulatory pressures on manufacturers increase.



Types of Manufacturing
----------------------

   Manufacturing operations can be characterized as either discrete, batch
process, continuous process, or hybrid (combining more than one form).  In
discrete operations, such as electronics manufacturing, raw material is
processed in distinct units.  Work-in-process can be tracked by lot, work order
or batch.  In batch process operations, such as pharmaceutical manufacturing,
material is converted from one form or state to another through various
processing steps and is

                                       3
<PAGE>
 
tracked by batch, lot or mass quantity. Material in batch process-type
operations may be spread across several conversion steps at once. In continuous
process operations, such as oil refining, raw material is processed without
interruption in a continuous flow. Finally, some producers, such as specialty
chemical companies, may require a combination of batch process and discrete
operations to manufacture their products.

   Manufacturers track and control each step of their operations based on
requirements of regulatory compliance, quality control assurance, and cost
reduction goals.  Manufacturers with production processes that are hard to
consistently replicate must be able to ascertain the precise conditions under
which each product was manufactured in order to identify and correct process
variability or other causes of defects.  Other manufacturers must be able to
trace both subassemblies or intermediate products and finished goods due to
product liability concerns or potential product recall, warranty or service
obligations.  In addition, certain manufacturers must certify that their
products have been processed in accordance with regulatory or customer
specifications, or other standards.  Manufacturers faced with these challenges
must be able to follow raw materials through each processing stage
("traceability") and recreate the history of work-in-process from any processing
stage ("genealogy").  The collection of such data serves not only to answer
questions about a particular product or process after the fact, but acts also as
a powerful tool to improve manufacturing performance in real time during the
production process.

   A manufacturing execution system such as the Company's WorkStream DFS product
line provides the tools which discrete, lot-based manufacturers need to execute
their manufacturing plan and collect the data which will enable them to analyze
and control production.  Typical discrete, lot-based industries include
semiconductor; disk drive; and assembly operations in the commercial aircraft,
aerospace and defense industries.  Such industries benefit from MES for
different reasons.  For semiconductor companies, the visibility and control
provided by MES can enable various measurements of efficiency, such as capital
equipment utilization and quality.  For aerospace manufacturers, assurance of
regulatory compliance is key, and MES provides both control mechanisms and
reporting capabilities to address this.  Indirect labor usage is also a critical
measurement for the aerospace and defense industries, and MES provides the tools
to both account for and reduce indirect labor usage.

   Batch process manufacturers such as pharmaceutical and chemical companies
have similar requirements for information collection and analysis.
Pharmaceutical manufacturers must be able to demonstrate compliance with a host
of procedural and environmental regulations before a batch of product can be
approved for shipment to customers.  They must maintain complete and accurate
batch records, detailing the history of all related elements of the
manufacturing process - materials, labor, equipment, procedures, facilities,
etc. - and guaranteeing that all actions taken, both planned and unplanned, were
in line with documented and approved manufacturing practices.  In addition,
pharmaceutical manufacturers increasingly are under pressure to lower costs to
their customers, and are therefore experiencing smaller margins than they had
previously enjoyed.  Manufacturing is a key area in which such companies may
lower costs.

    Today, many pharmaceutical plants use paper-based systems for record
keeping.  Overhead and indirect labor costs associated with the compilation and
maintenance of these records is a large and increasing expense.  Therefore, an
electronic system which automates the data collection process and incorporates
proactive features to prevent deviations from the standard procedures - such as
an MES - can demonstrate value and produce a return on investment  in a very
short time.

                                       4
<PAGE>
 
   Chemical companies confront both an increasingly stringent regulatory
environment and mounting global competition in nearly all segments of the
industry.  In addition, the need to package end products in multiple forms
presents a unique challenge.  Therefore, in addition to tracking precisely all
materials resulting from the manufacturing process - primary products, co- and
by-products, and various forms of waste - chemical manufacturers must also amass
enough detailed information about their operations to discover ways to improve
them from the cost or quality standpoint.  The process control systems currently
used by the majority of these companies cannot provide this higher level
information, nor can their ERP systems provide the detail required to empower
this continuous improvement approach.  Chemical manufacturers' competitive
situation drives them to seek new and more comprehensive tools.

   A manufacturing execution system such as the Company's FlowStream product
provides pharmaceutical and chemical manufacturers with a tool for achieving
both regulatory compliance and manufacturing improvement.


Products
--------

   The Company develops, markets and sells two distinct software product lines,
aimed at different manufacturing industries.  The Company's WorkStream DFS
(Distributed Factory System) product line is targeted at manufacturers who
produce their products in discrete lots or batches, particularly those in the
semiconductor and electronics industries. The Company's FlowStream product line
is targeted at regulated or complex industries that employ batch process
manufacturing such as pharmaceuticals, medical devices and specialty chemicals.
Both the WorkStream DFS and FlowStream product lines monitor and control the
five essential elements of manufacturing -- materials, equipment, personnel,
specifications/work instructions, and facilities-- in real time and correlates
the data for true visibility and control of manufacturing operations.  This
access to comprehensive, up-to-date  information about the production process
enables manufacturers to identify and implement manufacturing Best Practices in
the areas of cost, quality, service, compliance and speed.  Such continuous
improvement in the area of production thus enables companies to use their
manufacturing operations for competitive advantage, and to optimize performance
of the business as a whole.

   In fiscal 1996, the average selling price for a new installation of the
Company's WorkStream DFS product line was $411,000.  Sales of the Company's
FlowStream product vary based on whether the sale is for an initial or follow-on
installation.  The average sales price for FlowStream in 1996 was $114,000 for
an initial "pilot" installation, and  $224,000 for a typical follow-on
installation.


WorkStream DFS Product Line
---------------------------

WorkStream DFS
--------------

   The Company's WorkStream DFS product line includes WorkStream(R) and
WorkStream Open/(TM)/, as well as a set of application servers and a connecting
"message bus," or network which, when used with either WorkStream or WorkStream
Open, form a WorkStream DFS system.  Within WorkStream DFS, there are available
more than 20 integrated software modules sharing a common database and graphical
user interface, grouped into four benefits or solutions

                                       5
<PAGE>
 
areas: tracking; quality and engineering management; planning; and process
automation. The application servers provide capabilities primarily in the areas
of automation and quality.

   WorkStream DFS monitors and controls discrete manufacturing operations, where
product lots or batches are kept intact throughout the production process.
WorkStream DFS also provides tools to enhance productivity in indirect labor
functions such as quality control, production planning and facilities
maintenance.  Discrete manufacturers most commonly use WorkStream DFS systems
to:

      .   reduce cycle times and meet just-in-time deliveries
      .   lower indirect labor costs
      .   reduce scrap and rework; increase yield
      .   increase utilization of capital equipment
      .   improve quality
      .   reduce regulatory compliance costs
      .   shorten response times to equipment breakdowns and
          other manufacturing problems

   The WorkStream DFS system's modular design allows customers to license only
those functions necessary for their current business needs and to add functions
as their requirements evolve.

   The WorkStream application was initially developed to run on Digital
Equipment Corporation's line of VAX(R) computers, using Digital's proprietary
VMS operating system with Oracle Corporation's CODASYL DBMS database.  In 1992,
WorkStream was ported to Hewlett-Packard Company's HP 9000 computers running
under the HP-UX UNIX operating system and the Informix relational database. The
new product was named WorkStream Open. The development of WorkStream Open
incorporated several technologies, including client/server architecture, X-
windows terminal access, Motif user interface standard, SQL database and POSIX
compliance.  In early fiscal 1997, the Company announced the port of WorkStream
to Digital's Alpha platform running the Open VMS operating system, providing a
migration path for VAX users to Digital's newer technology platform.

   The WorkStream and WorkStream Open systems' modules are integrated through a
common database, permitting all modules to obtain information simultaneously
from a single data source, and through a common user interface. The systems are
designed to allow distributed application processing in the Digital cluster mode
and in client/server mode.  Users can access WorkStream or WorkStream Open
software directly via a terminal or workstation to enter data, view data,
initiate batch reports or analyses and view the results.  Data also can be
entered using bar code wands or can be entered automatically by automated
equipment and work cell controllers.

   The WorkStream DFS servers introduced in 1995 are object-oriented
applications and run in a UNIX-based environment.  They are designed to operate
in a distributed software environment, use the Informix relational database and
connect to a message bus, using standard communication protocols to talk to
either WorkStream or WorkStream Open. WorkStream DFS servers are currently
available to run on Hewlett-Packard's HP 9000 line of computers with the HP-UX
operating system.

                                       6
<PAGE>
 
   In 1995, the Company introduced a next-generation distributed technology
framework for its WorkStream DFS product line, as well as three new application
servers.  The distributed technology framework is based on a software message
bus, which connects applications, software systems and manufacturing equipment
on a network.  The WorkStream DFS application servers include a quality server
for on-line quality analysis and statistical quality control, a recipe
management server for centralized context-sensitive recipe management, and a
station controller for automation implementation.  The next-generation additions
to the WorkStream DFS system extend the capabilities of the current WorkStream
and WorkStream Open products into a distributed, client/server environment.  The
distributed nature of the WorkStream DFS system allows users to add new
functional modules or servers to their existing systems built around either
WorkStream or WorkStream Open, and to more easily integrate software
applications from other sources, as additional servers on the network.  The
overall system is designed to utilize computer resources more efficiently and
operate more effectively as a result.

   In early fiscal 1996, Consilium announced its intent to create a total supply
chain management solution for the semiconductor industry.  Total supply chain
management is an initiative adopted by manufactures in multiple industries to
improve the access to and flow of information between receipt of a customer
order and delivery of products.   The first phase of the Company's two-phase
supply chain management solution was completed in 1996, with the integration of
the Company's WorkStream DFS software with Oracle Corporation's order
processing, financial and enterprise resource planning (ERP) systems.  Together,
these systems can provide a comprehensive view of product availability from
sales order through manufacturing.  Such a view enables semiconductor
manufacturers to better meet their customers' requirements for specific product
orders in committed time frames.

   In January 1997, the Company announced a strategic agreement with Paragon
Management Systems, Inc., an advanced planning and scheduling company, to
jointly integrate the companies' respective products. Consilium will also resell
Paragon's product line.  Once completed, the integration of the Company's
WorkStream DFS software with Paragon's advanced planning and scheduling software
will complete the second phase of the Company's solution for total supply chain
management.  The addition of Paragon's software to the Company's total supply
chain management offering will complete the link between real-time status
information of manufacturing capacity, product commitments and inventory status
with corporate systems such as order processing, sales management and financial
applications.

                                       7
<PAGE>
 
  The following table summarizes the primary functionality of the WorkStream DFS
product family:
                            WorkStream DFS Functions
                            ------------------------
<TABLE>
<S>                      <C>
 Tracking and Control    . Tracks WIP by lot, sub-lot, or serial identifier.
                         . Maintains genealogy and lot traceability.
                         . Tracks manufacturing resources and labor and
                           equipment  states and maintains history.
 
 Quality Management      . Collects quality, test, and environmental data
                           correlated by material, equipment, and operator.
                         . Provides Statistical Quality Control.
                         . Analyzes and charts collected process data and
                           flags anomalous data.
                         . Displays job specifications in both text and
                           graphics at appropriate times and locations.
 
 Planning and Scheduling . Rule-based dispatching.
                         . Finite capacity constraints.
                         . Work scheduling.
                         . Intracompany planning.
 
 Process Automation      . Interfaces to process equipment
                         . Integrates with station controllers
                         . Interfaces to material handling systems
</TABLE>


                                        

FlowStream Product Line
-----------------------

FlowStream
----------

   In early fiscal 1992, the Company introduced and sold the first copy of a
second software product line, called FlowStream, aimed at batch process
manufacturers in highly regulated and/or complex industries. FlowStream is
targeted primarily at the healthcare products (pharmaceutical, medical device
and biotechnology) and chemical industries.  In a batch process manufacturing
environment, product from the same batch may be spread across several operations
at once, thus requiring that different tracking methods be used than those
employed in a discrete lot-based environment.  FlowStream was built specifically
to address the unique requirements of batch process manufacturers, and supports
several critical functions including production, engineering, research and
development, regulatory compliance and reporting, and quality control.
FlowStream addresses six benefits or solutions areas: batch operations tracking
and control; inventory or materials management; quality management; document
management; planning and scheduling; and costing. FlowStream tracks work-in-
process activity by work order down through each operation or step, whether
automated or manual.

                                       8
<PAGE>
 
   Benefits of FlowStream in the batch process industries include:

    .  electronic batch records for regulatory compliance assurance
    .  operational control for regulatory compliance assurance
    .  improved efficiency of data collection
    .  reduced cost of documentation associated with compliance
    .  decreased cycle times
    .  decreased time to market
    .  lowered indirect labor costs
    .  shortened response times to equipment breakdowns and
       other manufacturing problems

   FlowStream software is written in the C++ language, emphasizing an object-
oriented design, and runs on the Rdb and Oracle relational databases.
FlowStream runs on Digital and HP workstations, and features a graphical user
interface geared to the needs of specific users, from planners and engineers to
operators.  FlowStream is based upon industry-standard technologies, including
X-windows, C++ object-oriented programming, an SQL relational database, and
TCP/IP communications, which facilitate ease-of-use of the software and the
transfer of data between FlowStream software and other programs used in the
manufacturing environment. FlowStream is a distributed application that allows
users to access and share real-time information.  FlowStream takes advantage of
certain industry-standard interfaces. Interfacing tools within FlowStream allow
integration with other manufacturing applications such as enterprise resource
planning laboratory information management systems (LIMS) and automation
controllers.

                                       9
<PAGE>
 
The following table summarizes the primary functionality of FlowStream:
<TABLE>
                             FlowStream Functions
                             --------------------
<S>                          <C>
 
Tracking and Control         .  Tracks WIP by work order, batch production
                                run, material, store, container or state.
                             .  Maintains genealogy and lot traceability.
                             .  Tracks manufacturing resources and labor
                                and equipment  states and maintains history.
 
Quality Management           .  Collects quality, test, and environmental data
                                correlated by material, equipment, and operator.
                             .  Provides Statistical Quality Control.
                             .  Analyzes and charts collected process data and
                                flags anomalous data.
                             .  Displays job specifications in both text and
                                graphics at appropriate times and locations.
 
Document Management          .  Documentation and configuration management.
 
Planning and Scheduling      .  Rule-based dispatching.
                             .  Finite capacity constraints.
                             .  Work scheduling.
                             .  Material requirements planning.
                             .  Master production scheduler.
                             .  Capacity planning.
 
Costing                      .  Detailed model costing and reporting.
 
</TABLE>

Markets and Customers
---------------------

   Software in the WorkStream DFS product line was first used primarily by
semiconductor manufacturers whose products were sold directly into the open
market and by electronics systems companies which used the software primarily to
produce semiconductors for use in their own products.  Systems from the
WorkStream DFS product line have now also been installed by many commercial
aircraft, aerospace and defense, and electronics manufacturers for a range of
diverse applications, including electronics assembly; sheet metal fabrication;
disk drive assembly; silicon wafer fabrication; and radar and navigation systems
manufacture and assembly.  Current target industries include manufacturers of
semiconductors and complex electronics such as disk drives and flat panel
displays in both the Company's installed base and new accounts.

   FlowStream software is currently targeted at research and development and
manufacturing operations in the healthcare products (pharmaceutical, medical
device and biotechnology) and specialty chemical (e.g. fibers, paints, resins,
plastics and film) industries.

                                      10
<PAGE>
 
   In fiscal 1996, the Company's ten largest customers accounted for
approximately 42% of revenue.  However, no customer accounted for 10% or more of
total revenue.


Sales
-----

   Consilium markets it WorkStream DFS and FlowStream product lines in North
America, Europe and Asia/Pacific Rim through its direct sales force.  The
Company's 16 sales offices also provide local customer support.  In addition to
its headquarters in Mountain View, California, the Company has North American
sales offices in: Atlanta, Georgia; Bedminster, New Jersey; Chicago, Illinois;
Dallas, Texas; Irvine, California; Manchester, Massachusetts and Nashua, New
Hampshire.  European offices are located in: Munich, Germany; Newbury,
Berkshire, United Kingdom; and Rueil Malmaison, France.  Offices in Asia and the
Pacific Rim are located in: Hsinchu City, Taiwan; Seoul, Korea; Singapore and
Tokyo, Japan.

   The Company's direct sales force and support staff are organized into two
business groups: the Semiconductor and Electronics Group and the Healthcare
Products and Process Industries Group.  As of October 31, 1996, the sales and
marketing organizations consisted of 61 employees.

   The Company also markets and supports its products through other distribution
channels in Israel, Italy, Japan, and Taiwan. The Company's foreign distributors
either sublicense the Company's products directly to end users after acquiring
copies from the Company at a discount from list price, or act as agents and
receive a commission for initiating a license agreement between the Company and
the end user.  Since the Company's foreign distributors are not employees of the
Company and are not required to offer the Company's products exclusively, there
can be no assurance that they will continue to market the Company's products.
Also, despite the Company's substantial dependence in the international market
upon the marketing, sales and customer support of its foreign distributors, the
Company currently has limited control over such distributors.

   Revenues from foreign customers represented 45% of total revenues in fiscal
1996, 34% of total revenues in fiscal 1995 and 31% of total revenues in fiscal
1994. (See Note 8 of Notes to Consolidated Financial Statements.) The majority
of the Company's revenues are denominated in U.S. dollars. Some foreign sales
revenues are denominated in foreign currencies and are subject to currency
fluctuations during the time between revenue recognition and receipt of funds.
To date, the Company has not hedged against such foreign currency 
fluctuations.

   Risks inherent in the Company's international sales may include longer
payment cycles,  greater difficulty in accounts receivable collection,
unexpected changes in regulatory requirements, seasonality due to the slowdown
in European business activity during the summer months, and tariffs and other
trade barriers. In addition, the Company may be unaware of the nature and scope
of the representations made to customers by its distributors.

   Since the Company ships its standard products upon receipt of customer
orders, it generally has no material product backlog.

   As a Digital Cooperative Marketing Partner, Hewlett-Packard Independent
Software Vendor  participant, and Oracle Corporation Cooperative Application
Initiative partner, the

                                      11
<PAGE>
 
Company participates in a variety of cooperative marketing programs including
joint appearances at tradeshows, joint brochures, joint sales seminars and joint
sales calls.

          The sales cycle for a new installation of a WorkStream DFS system
typically ranges from nine to fifteen months from the initial identification of
a qualified potential user to the installation of the software.  Based on the
Company's experience to date, the sales cycle for a pilot installation of
FlowStream typically ranges from six to fifteen months.  Sales cycles for full
roll-out of FlowStream into additional installations can be significantly
longer, due to the early stage of market acceptance for MES products in general
and for FlowStream.  Sales cycles for either product can be extended due to the
nature of the decision-making process for purchasing MES solutions, which
generally involves many individuals from many departments within a manufacturing
company.  In addition, marketing a new product such as FlowStream into new
industries, such as pharmaceuticals and chemicals, contributes to uncertainty
about the timing of future sales order closures.

   Implementation of a WorkStream DFS system, including customer training,
typically takes between four and six months.  Implementation of a FlowStream
pilot installation typically takes between six and twelve months to complete and
may take longer, depending on the size, scope and complexity of the project.  In
regulated industries, validation of the use of the software for the customer's
manufacturing processes typically accounts for 40% of the total implementation
time.  Implementation of follow-on FlowStream sites typically take less time to
complete than initial pilots, as much of the work involved can be reused from
the pilot site. Follow-on orders for additional modules, servers, and/or sites
typically are not received until successful implementation  and validation at
the initial site.


Product Development
-------------------

   Consilium has invested significant development resources to create, enhance
and extend the functionality of its WorkStream DFS and FlowStream software
product lines. Research and development expenses were 33%, 31% and 31% of total
revenues in fiscal 1996, 1995 and 1994, respectively.

   The Company expects to continue to incur development expenses to maintain and
augment its current products in fiscal 1997. Development plans include the
creation of additional WorkStream DFS servers, the extension of availability of
its WorkStream and WorkStream Open software to additional platforms and
operating environments, and the enhancement of functionality of its FlowStream
product for the batch process industries.

   The Company capitalizes and amortizes eligible computer software development
costs in accordance with Statement of Financial Accounting Standards No. 86 (see
Note 1 of Notes to Consolidated Financial Statements).  For the fiscal years
1996, 1995 and 1994, the Company capitalized $886,000, $1,460,000 and
$1,662,000, respectively, which represented approximately 7%, 12% and 16% of
total spending on research and development in such periods.  For the fiscal
years 1996, 1995 and 1994, the Company amortized $1,725,000, $1,863,000 and
$1,809,000, respectively.

                                      12
<PAGE>
 
Services and Support
--------------------

   The Company offers product support to its customers through comprehensive
maintenance agreements.  The majority of the Company's customers purchase and
renew product support pursuant to the Company's standard maintenance agreement.
Maintenance, which consists of product enhancements and technical support, may
be purchased 30 days after the product order is delivered.   Once purchased,
maintenance support is  automatically renewable annually.  Annual maintenance
fees are generally 15% of the list price of the modules or servers being
maintained.  Product support services are provided worldwide by a combination of
local office technical support staff and the Company's Customer Response Center.

   The Company offers a variety of training and consulting services through its
Professional Services organization. Training classes are regularly scheduled at
regional centers or customer locations.  Consulting services cover pre-selling
analysis, installation, project management, customization and application
integration. These services are offered as consulting products with defined
deliverables in order to facilitate the customers' planning and budgeting.
Time-and-material-based services are also offered to augment the Company's
consulting products and to meet specialized requirements.

   In the second half of fiscal 1996, Consilium expanded its services offerings
to include systems integration for the automation of semiconductor fabrication
facilities. In order to provide systems integration services in Taiwan, in July
1996, the Company acquired the Taiwan operations of Systematic Designs
International, Inc. (SDI), a systems integrator for the semiconductor industry.
(See Note 2 of Notes to Consolidated Financial Statements.) Including the
increase in headcount from the acquisition,  the Company had 32 employees in its
Consilium Taiwan office as of October 31, 1996.  The Company is also utilizing
Fuji Research Institute, a Japanese systems integration firm, to provide both
automation software and systems integration services in other areas of Asia and
the Pacific Rim.

   The Company is increasing its allocation of resources to its Professional
Services organization because it believes that this function is key to
satisfying its customers' requirements for implementation and consulting
assistance. Satisfying its customers' requirements is, in turn, critical for
maintaining a positive image in the marketplace as a successful provider of MES
solutions.

   To complement its own products and services offerings, the Company believes
that the ability to identify and work with qualified systems integration firms
which integrate various manufacturing and other systems together is an important
component to its success.  In fiscal 1996, the Company announced a certification
program to train and certify systems integration firms to integrate the
Company's WorkStream DFS and FlowStream product lines in customer
implementations.


Competition
-----------

   The Company believes that the primary competitive factors in the market for
MES software are size of installed base and product functionality, and that
additional factors include price/performance for its WorkStream DFS product
line, ease of use, hardware and software platform, vendor reputation, and
financial stability.  The Company believes that its products currently compete
favorably with other systems on the primary factors listed above, although it

                                      13
<PAGE>
 
may be at a competitive disadvantage against companies with greater financial,
marketing, services and support, and technological resources than the Company.
The Company also believes that the relative importance of these competitive
factors may change over time.

   The Company continues to experience competition primarily from the management
information systems departments of its largest potential customers, which have
the capability to develop software internally.  The Company believes that
acquisition of MES products will increasingly shift to external vendors as
packages, services and expertise become more widely available from third
parties.  The Company continues to experience direct competition primarily in
the semiconductor and pharmaceutical industries from various competitors,
including Andersen Consulting, Base-10, FASTech, ICC, Incode, International
Business Machines, Promis, and SAP.

   The Company anticipates increased competition from other manufacturing
execution system companies.  In addition, ERP system vendors are beginning to
compete with the Company.  The first such offering was released by SAP in mid-
1995. The Company believes that the development effort required for producing an
MES comparable to the Company's WorkStream DFS and FlowStream product lines
presents a significant barrier to the entrance of new competitors.


Proprietary Rights
------------------

   The Company's success and ability to compete is dependent in part upon its
proprietary technology.  The Company generally provides its products to end
users under a non-exclusive, non-transferable license which typically has a
perpetual term unless terminated for breach.  Under the Company's current form
of license agreement, the licensed software may be used solely for internal
operations at specified sites.  In certain instances, the Company has granted a
customer licensed rights to any modifications made to the licensed software by
or for such a customer.  The Company protects the human readable, source code
version of its WorkStream Open and FlowStream products as a trade secret and an
unpublished copyrighted work.

   The Company has registered "CONSILIUM," "WorkStream" and "FlowStream" as
trademarks in the United States and several foreign jurisdictions and has
received trademark designation for "CONSILIUM," "WorkStream" and "FlowStream" in
several other foreign jurisdictions.

   The Company holds three patents, and also relies on a combination of trade
secret, copyright and trademark laws and license agreements to protect its
proprietary rights in its products.  While the Company intends to protect its
patent rights vigorously, there can be no assurance that any patents held by the
Company will not be challenged, invalidated or circumvented, or that the rights
granted thereunder will provide competitive advantages to the Company.  The
Company generally enters into confidentiality or license agreements with
employees, distributors and customers, and limits access to and distribution of
its software, documentation and other proprietary information.  Despite these
precautions, there can be no assurance that these agreements will not be
breached, that the Company will have adequate remedies for any breach, or that
the Company's trade secrets will not otherwise become known to or independently
developed by others.  In addition, the laws of some foreign countries do not
protect proprietary rights to as great an extent as do the laws of the United
States.  There can be no assurance that the Company's competitors will not
independently develop similar technology,

                                      14
<PAGE>
 
duplicate the Company's product or design around patents issued to the Company
or other intellectual property rights of the Company. In addition, effective
copyright and trade secret protection may be unavailable or limited in certain
foreign countries.

   The Company believes that, because of the rapid pace of technological change
in the computer software industry, patent, trade secret and copyright protection
are important to support the continued building up of knowledge, ability and
experience of the Company's employees.  This in turn supports the ability of the
Company to provide frequent product enhancements, and deliver quality support
services in a timely manner.

   There has been substantial industry litigation regarding patent and other
intellectual property rights involving technology companies.  In the future,
litigation may be necessary to protect and enforce the Company's intellectual
property rights, to defend the Company against claimed infringement of the
rights of others and to determine the scope and validity of the proprietary
rights of others.  Any such litigation could be costly and could divert
management's attention, which could have a material adverse effect on the
Company's business, results of operations or financial condition regardless of
the outcome of the litigation.  In addition, third parties making claims against
the Company with respect to intellectual property infringement may be able to
obtain injunctive or other equitable relief that could effectively block the
Company's ability to sell its products in the United States and abroad, and
could result in an award of substantial damages. In the event of a claim of
infringement, the Company and its customers may be required to obtain one or
more licenses from third parties.  There can be no assurance that the Company or
its customers could obtain necessary licenses from third parties at a reasonable
cost or at all.

   Certain technology used by the Company's products is licensed from third
parties, generally on a non-exclusive basis. The Company believes that there are
alternative sources for each of the material components of technology licensed
by the Company from third parties. However, the termination of any of such
licenses, or the failure of the third party licensors to adequately maintain or
update their products, could result in a delay in the Company's ability to
deliver certain of its products while it seeks to implement technology offered
by alternative sources. While it may be necessary or desirable in the future to
obtain other licenses relating to one or more of the Company's products or
relating to current or future technologies, there can be no assurance that the
Company will be able to do so on commercially reasonable terms or at all.


Employees
---------

   As of October 31, 1996, the Company had a total of 237 full-time employees,
including 61 in sales, marketing and related activities, 71 in product
development and maintenance, 82 in services and support, and 23 in management,
administration and finance. The Company also regularly utilizes a significant
number of contract personnel, primarily to assist with software development and
to staff the Company's internal computer information services department.  At
October 31, 1996, the Company utilized approximately 57 contracted personnel.
None of the Company's employees is represented by a labor union.  The Company
has experienced no work stoppages and believes that employee relations are good.

Competition in the recruitment of personnel in the computer software industry is
intense.  The Company believes that its future success will depend in part on
its continued ability to hire

                                      15
<PAGE>
 
and retain qualified sales, customer support, technical and management employees
and consultants.


Executive Officers of the Registrant
------------------------------------

   As of December 31, 1996, the executive officers of the Company, who are
appointed  by and serve at the discretion of the Board of Directors, are as
follows:
<TABLE>
<CAPTION>
 
Name                      Age                                     Position
-----------------------   ---   ----------------------------------------------------------------------------
<S>                       <C>   <C>

Jonathan J. Golovin        46   Chairman of the Board of Directors and Chief Technical Officer 
Laurence R. Hootnick       54   President, Chief Executive Officer and Director
Wynn Bowman                49   Vice President, Systems Integration
Michael J. Field           47   Senior Vice President, General Counsel and Corporate Secretary
Frank Kaplan               54   Senior Vice President, Software Development and Quality Assurance
Linda Kato Ujihara         37   Director, Human Resources and Administration
Edward Norton              52   Senior Vice President and President, Semiconductor and Electronics Group -
Lloyd Payton               56   Senior Vice President and President, Healthcare and Process Industries Group
Clifton Wong               35   Vice President, Finance and Chief Financial Officer
Ralph Zak                  47   Vice President, Marketing
 
</TABLE>

   Dr. Golovin, the founder of Consilium, was President of the Company from 1978
to 1987 and has served as a director of the Company since its inception and as
Secretary from January 1989 to August 1996.  In April 1992, he was named Chief
Technical Officer.  Dr. Golovin has taught both graduate and undergraduate
courses in operations management and production planning at the Massachusetts
Institute of Technology and the University of California at Berkeley.  He holds
a Ph.D. in Operations Management from the Massachusetts Institute of Technology
and a B.S. degree from Cornell University.

   Mr. Bowman joined the Company in September 1996 as Vice President, Systems
Integration.  From November 1995 to August 1996, Mr. Bowman was Chief Operating
Officer for Star Associates International, an ISO 9000 and management systems
consulting firm.  From October 1994 to November 1995, he was Vice President,
Worldwide Customer Services at Digidesign, a digital audio workstation
development firm. From December 1990 to April 1994,  Mr. Bowman held several
senior management positions in customer support at Pyramid Technology, a
computer company, most recently as Senior Director, Customer Service Division
Operations.  Prior to that, he held various positions in customer service
operations at various high technology firms.

   Mr. Field joined the Company is August 1996 as Senior Vice President, General
Counsel and Corporate Secretary. From April 1996 to August 1996, Mr. Field held
the position of Senior Vice President, General Counsel and Corporate Secretary
at Syquest Technology, Inc., a removable disk drive and cartridge manufacturer.
From August 1992 to
                                      16
<PAGE>
 
March 1996, Mr. Field held various executive positions at First Pacific
Networks, Inc., a telecommunications networking company, including the positions
of Vice President of Business Development, Chief Legal Officer and Corporate
Secretary. Prior to that, Mr. Field was a partner in various Silicon Valley law
firms. He holds a B.A. in Psychology from San Jose State College and a J.D. from
Santa Clara University.

   Mr. Hootnick was appointed as a Director of the Company in January 1996.  In
June 1996, he was appointed President and Chief Executive Officer.  Mr. Hootnick
was Senior Vice President, Finance and Operations at Power Computing
Corporation, a computer manufacturer, from December 1995 to June 1996.  From
August 1994 to May 1995, he was Executive Vice President and Chief Operating
Officer at NetManage Inc., a software company.  From May 1991 to June 1994, he
was President and Chief Executive Officer of Maxtor Corporation, a disk drive
manufacturer.  Prior to Maxtor, Mr. Hootnick spent more than eighteen years at
Intel Corporation with responsibilities ranging from Finance and Operations to
Sales and Marketing. Mr. Hootnick holds a B.S. in Industrial Management from the
Massachusetts Institute of Technology and an M.B.A. in Finance from the
University of Maryland.  He also serves on the Board of Directors of Network
General Corporation and Wildflower Productions.

   Mr. Kaplan joined the Company in May 1994 as Vice President of Software
Development and was promoted to Senior Vice President, Software Development and
Quality Assurance in August 1996.  From 1987 to 1994, he held various high level
software development positions with NEC America, Inc., a communications
technology company, including Assistant General Manager, Software Development
and Director, Software Development.  Prior to NEC, Mr. Kaplan was with AT&T Bell
Laboratories, a communications technology research firm, where he was Department
Head for Operations Systems Development.  Mr. Kaplan holds two Masters degrees
in Mathematics from Yale University and a B.S. in Mathematics from City College
of New York.

   Ms. Kato Ujihara joined the Company in July 1985 as Executive Assistant to
Dr. Golovin. She was promoted to Personnel Manager in February 1987. In July
1990, she was promoted to Director, Human Resources. Prior to joining the
Company, Ms. Kato Ujihara worked in various customer service and personnel
positions in the Silicon Valley. She holds a B.S. in Business Administration
from San Jose State University.

   Mr. Norton joined the Company in September 1994 as Vice President of
Consulting and Services.  In April 1995, he was promoted to Vice President,
International Sales and Worldwide Services.  As a result of reorganization by
the Company, in January 1996 his title was changed to International Field
Operations and Worldwide Services.  In August 1996 following a reorganization of
the Company's sales and services organization into two business units, he was
promoted to Senior Vice President and President, Semiconductor and Electronics
Group.  Mr. Norton was with Industrial Resources, Inc. from 1993 to 1994, a
company he founded to provide investment and development services for companies
and government organizations in Asia.  From 1989 to 1993, Mr. Norton held the
positions of Vice President of Asia Pacific and Vice President, Worldwide
Customer Services Division with Pyramid Technology, a computer company.  Mr.
Norton's prior experience includes senior management assignments with Tolerant
Systems (now Veritas), a computer systems company, from 1983 to 1989 and
Burroughs Corporation, a computer systems company (now Unisys).  He holds a B.S.
in Chemistry from Sussex University in England.

                                      17
<PAGE>
 
   Mr. Payton joined the Company in 1993 as Western Region Sales Manager and was
promoted to Vice President, North American Sales in April 1995. As a result of
reorganization by the Company, in January 1996 his title was changed to Vice
President, American Field Operations.  In August 1996 following a reorganization
of the Company's sales and services organization into two business units, he was
promoted to Senior Vice President and President, Healthcare and Process
Industries Group.  From 1990 to 1993, he was an independent consultant in
factory automation and business planning.  From 1984 to 1990, Mr. Payton was
Chief Executive Officer of WSI Corporation, a specialty hardware company.  From
1970 to 1983, he held a variety of executive sales management positions with
Parallex Corporation, an on-line data processing services company, Xerox
Corporation, a multi-technology company, and Telecom Midwest Corporation, a
provider of on-line accounting and control systems for manufacturers.  He holds
B.A. degrees in Business and English from Murray State University in Kentucky
and an M.B.A. from Wake Forest University.

   Mr. Wong joined the Company as Controller in May 1995.  In August 1996 he was
promoted to Vice President, Finance and Chief Financial Officer.  From 1990 to
1995, he was Director of Finance at Kubota Graphics Corporation, a computer
hardware company, which was previously known as Kubota Pacific Computer, Inc.
From 1986 to 1990, he held various positions in finance with Stardent Computer,
a computer hardware company, which was previously known as Ardent Computer, most
recently serving as Operations Controller.  He holds a B.A. in Accounting from
Golden Gate University in California and is a Certified Public Accountant in the
state of California.

   Mr. Zak joined the Company as Vice President, Marketing in May 1995.  From
1992 to May 1995 he was with Quickturn Design Systems, an electronic design
automation company, where he held the positions of Vice President, Business
Development and Communications and Vice President, Marketing.  From 1989 to
1992, he was Director of Marketing for the printed circuit board division of
Mentor Graphics Corporation, an electronic design automation company.  From 1970
to 1989, Mr. Zak held various executive marketing, business development and
strategic planning positions with HHB Systems, Quadtree Corporation and Calma
Company, all design automation companies, and Bechtel Corporation, an
engineering construction firm. He holds a B.S. in Mechanical Engineering from
the University of California at Berkeley and an M.B.A. from Stanford University.



ITEM 2.     PROPERTIES
            ----------

   The Company's principal administrative, marketing and product development and
support facilities are located in a building totaling 61,600 square feet in
Mountain View, California.  The Company occupies this space under a lease
agreement which expires January 31, 2003. The annual base rent payment (not
including operating expenses, insurance, property taxes, and assessments) is
approximately $665,280, and is subject to further adjustments annually in
accordance with the Consumer Price Index.  The Company must also pay operating
expenses, taxes and assessments.

   In addition, the Company leases sales and service office space in
Atlanta, Georgia; Bedminster, New Jersey; Chicago, Illinois; Dallas, Texas;
Irvine, California; Manchester, Massachusetts; and Nashua, New Hampshire, as
well as in, France, Germany, Japan, Singapore, South Korea, Taiwan and the
United Kingdom.

                                      18
<PAGE>
 
   The Company believes that its current facilities are adequate for its
current needs and that suitable additional space will be available as required.
See Note 5 of Notes to Consolidated Financial Statements for information
regarding the Company's obligations under its facilities leases.



ITEM 3.     LEGAL PROCEEDINGS
            -----------------

In a letter dated May 6, 1996, Honeywell Inc. ("Honeywell") informed the Company
that Honeywell believed it had claims against the Company for misrepresentation,
breach of contract and fraud.  The contract involved was entered into in April
of 1993, and is a distribution and license agreement under which Honeywell paid
the Company $4,000,000 as a non-refundable pre-paid license fee in the Company's
1993 fiscal year. The Company filed a lawsuit against Honeywell, Inc. for breach
of contract, unfair competition and defamation on September 18, 1996.  After a
full investigation, neither party felt that the dispute warranted further
action.  Honeywell has retracted all allegations made, including
misrepresentation, breach of contract and fraud.  The Company has dismissed its
lawsuit, dropping claims of breach of contract, unfair competition and
defamation.


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

   Not applicable.

                                      19
<PAGE>
 
                                    PART II
                                        

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


Market Price of Common Stock
----------------------------

Consilium, Inc.'s Common Stock is traded on the Nasdaq National Market under the
symbol "CSIM." The high and low sales prices for the Company's Common Stock are
as reported by Nasdaq. Consilium's Initial Public Offering of Common Stock was
May 9, 1989 at $9.00 per share.
<TABLE>
<CAPTION>
 
                   Quarter     Quarter    Quarter    Quarter
                    Ended       Ended      Ended      Ended
Fiscal year:      January 31   April 30   July 31   October 31
                  ----------   --------   -------   ----------
<S>               <C>          <C>        <C>       <C>
 
1996
  High            14 15/16     11 1/8      9 3/8            7
  Low              8 3/8        7 3/8          5            5
1995
  High             8 1/4        8 7/8     12 5/8       15 1/8
  Low              5 5/8        7 1/8      7 3/8        9 5/8
1994
  High             9 5/8       10 1/2      8 1/2        6 1/2
  Low              6 1/4        7 1/2      4 3/4        3 3/4
1993
  High                11        9 1/4      7 1/2        7 1/4
  Low              7 1/4        6 1/2      5 1/2        5 7/8
 
</TABLE>

Holders of Company Stock
------------------------

As of December 31, 1996, the Company had 190 stockholders of record and believes
it had at least 1700 beneficial holders.


Dividends
---------

The Company has not paid cash dividends on its Common Stock and does not plan to
pay cash dividends to its stockholders in the near future.  The Company's right
to declare dividends is restricted under its bank agreements.  The Company
presently intends to retain its earnings to finance further growth of its
business.

                                      20
<PAGE>
 
ITEM 6.  SELECTED FINANCIAL DATA
         -----------------------

(In thousands, except net income (loss) per share amounts)

Consolidated Statement of Operations Data:
<TABLE>
<CAPTION>
 
Years ended October 31:                      1996      1995       1994       1993       1992
                                           --------   -------   --------   --------   --------
<S>                                        <C>        <C>       <C>        <C>        <C>
 
Total revenues                             $38,147    $33,125   $27,944    $28,475    $27,558
Income (loss) before taxes                  (2,485)       664    (5,523)    (4,973)    (5,161)
Provision for income taxes                     974        523       725        310        162
Net income (loss)                           (3,459)       141    (6,248)    (5,283)    (5,323)
Net income (loss) per share                 $(0.44)     $0.02    $(0.85)    $(0.75)    $(0.77)
Shares used in per share calculations        7,804      7,912     7,362      7,025      6,915
 
Consolidated Balance Sheet Data:
At October 31:                              1996       1995      1994       1993       1992
                                           -------    -------   -------    -------    -------
Working capital                            $ 3,732    $ 9,012   $ 7,345    $12,571    $17,354
Total assets                                28,993     28,668    26,998     31,643     34,506
Long-term debt, less current portion            --         --        --        313        464
Stockholders' equity                        13,337     15,383    13,646     18,836     23,192
 
</TABLE>
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
         ------------------------------------------------------------
         AND RESULTS OF OPERATIONS
         -------------------------

The discussion in this report contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties, including
statements regarding expected maintenance revenue growth, incurrence of research
and development expenses, expected development revenues, expected revenue from
systems integration projects, plans to integrate the Company's products with
third party products, expected revenue from resale of third party products,
market acceptance of the Company's products, demand for the Company's products
in its target industries, and competition.  The Company's actual results could
differ significantly from the results discussed in the forward-looking
statements in the section entitled "Potential Fluctuations in Quarterly
Results".  Factors that could cause or contribute to such differences include,
among others, those discussed below as well as those discussed elsewhere in this
report.  The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto.

Results of Operations
---------------------

Revenues.  Total revenues increased 15% to $38,147,000 in fiscal 1996 compared
--------
with $33,125,000 in fiscal 1995, which were up 19% from revenues of $27,944,000
in fiscal 1994.

     Total revenues for the past three fiscal years by geographic region were as
follows:
<TABLE>
<CAPTION>
 
                                       Years ended October 31,
                                        1996    1995    1994
                                        ----    ----    ----
<S>                                     <C>     <C>     <C>
North America                           55%     66%     69%
Europe                                  16%     18%     17%
Asia/Pacific                            29%     16%     14%
</TABLE>

                                       21
<PAGE>
 
      International sales accounted for 45%, 34% and 31% of total revenues in
fiscal 1996, 1995 and 1994, respectively.  Increased international sales were
primarily attributable to the higher level of sales in the Company's WorkStream
DFS product line in the Asia/Pacific region.

      Total revenues for the past three fiscal years by product line were as
follows:
<TABLE>
<CAPTION>
                                                   Years ended October 31,
                                                    1996     1995    1994
                                                    ----     ----    ----
<S>                                                 <C>      <C>     <C>
WorkStream DFS                                       
(Semiconductor and Electronics industries)           82%     76%     83%
FlowStream                                           
(Healthcare Products and Process industries)         18%     24%     17%
</TABLE>

      The Company's WorkStream DFS product line is targeted at manufacturers who
produce their products in discrete lots or batches, particularly those in the
semiconductor and electronics industries.  The Company's FlowStream product line
is targeted at regulated or complex industries that employ batch process
manufacturing, particularly those in the healthcare products (pharmaceutical,
medical device and biotechnology), chemical and other process industries.

Product Revenues.  Product revenues increased 18% to $19,073,000 in fiscal 1996
----------------
compared with $16,115,000 in fiscal 1995, which were up 52% from product
revenues of $10,588,000 in fiscal 1994.  The fiscal 1996 increase was due
primarily to higher levels of sales in the Company's WorkStream DFS product line
in the Asia/Pacific region.  The fiscal 1995 increase was due to higher levels
of sales in both of the Company's product lines.

      Product revenues attributable to products in the Company's WorkStream DFS
product line increased 32% to $16,439,000 in fiscal 1996 compared with
$12,436,000 in fiscal 1995, which were up 36% from revenues of $9,153,000 in
fiscal 1994.  The fiscal 1996 increase was due primarily to an increase in
demand in the semiconductor and electronics industries for the Company's
WorkStream Open applications and related third party products in the
Asia/Pacific region.  The fiscal 1995 increase was due to a resurgence in demand
in the semiconductor and electronics industries for the Company's WorkStream and
WorkStream Open products, as well as commercial availability of the Company's
new WorkStream DFS application servers during fiscal 1995.

      Product revenues attributable to the FlowStream product line in fiscal
1996 were $2,634,000, a decrease of 28% from revenues of $3,679,000 in fiscal
1995, which were up 156% from revenues of $1,435,000 in fiscal 1994. The
decrease in fiscal 1996 from fiscal 1995 and the increase in fiscal 1995 from
fiscal 1994 were due to fluctuations in the size and timing of orders for
FlowStream software from the healthcare products and process industries.  The
Company expects to continue to see such fluctuations in revenue until there is a
higher level of acceptance of the FlowStream product.
 
      The Company's product revenues historically have been concentrated in a
relatively small number of customers and its products have a high average
selling price. (See "Potential Fluctuations in Quarterly Results.") During
fiscal 1996, the percentage of product license revenue derived from the
Company's ten largest customers was approximately 75% compared with 60% in
fiscal 1995 and 69% in fiscal 1994. Product license fees cover the customer's
use of the software for the entire term of the license agreement, which is
generally perpetual.

Services Revenues.  Services revenues in fiscal 1996 were $17,268,000, an
-----------------
increase of 8% over $15,979,000 in fiscal 1995, which were up 10% from
$14,589,000 in fiscal 1994. Services revenues are derived primarily from annual
software maintenance fees, specialized programming services, resident and
application consulting services and customer training.  In late fiscal 1996, the
Company commenced a new systems integration services business relating to its
WorkStream DFS product line.  Revenues associated with systems integration
services in fiscal 1996 were minimal.  The increase in services revenues in both
fiscal 1996 and fiscal 1995 was primarily due to a higher installed base of the
Company's WorkStream DFS product line and to an increase in revenues from
consulting services.  The 

                                       22
<PAGE>
 
Company expects that maintenance revenues will continue to increase in the near
term due to a higher volume of product licenses.

Development Revenues.  Development revenues increased 75% in fiscal 1996 to
--------------------
$1,806,000 from $1,031,000 in fiscal 1995, which were down 63% from $2,767,000
in fiscal 1994.  Development revenues include work associated with porting
agreements and development contract work for third parties.  Under these
contracts and agreements, the Company earns development and porting revenues,
with third parties having the right to license and use the software, often
sooner than otherwise would have occurred.  Development revenues can vary
significantly from period to period, depending upon the number of contracts
which have been entered into.  It is difficult to accurately forecast the level
of development revenues beyond the near term due to the timing and scope of
development projects that may be changed during the period of development.
Based on current internal development resource allocations and projects planned,
the Company expects that development revenues in fiscal 1997 will decrease
significantly, although the Company may take on additional development projects
in the future if business and strategic objectives of the Company are met by
such projects.


Costs and Expenses.
------------------

Cost of Product Revenues.  Cost of product revenues increased 48% to $4,461,000
------------------------
in fiscal 1996, from $3,022,000 in fiscal 1995, which was up 9% from $2,763,000
in fiscal 1994.  Product costs as a percent of product revenue were 23%, 19%,
and 26% for fiscal years 1996, 1995, and 1994, respectively.  The increase in
cost of product revenues in fiscal 1996 was due to higher product revenues
recorded during the year and higher third party product costs associated with
two system integration projects.  The increase in cost of product revenues in
fiscal 1995 was due to higher product license revenues recorded during the year.
Cost of product revenues includes amortization of capitalized software
development costs, royalties, and purchased software which is resold to the end-
customer, typically along with the Company's own software.  Depending on the mix
of sales of proprietary software (and the variance in associated third party
royalties) and additional third party software relating to specific orders, the
associated costs of product revenue can vary significantly.

Cost of Services Revenues.  Cost of services revenues was 39% of total services
-------------------------
revenues in fiscal 1996, compared with 30% and 31% in fiscal 1995 and 1994,
respectively.  The increase in cost of services as a percentage of services
revenues from fiscal 1995 to fiscal 1996 was due to the increased usage of third
party consultants and the hiring of additional services personnel.  The decrease
in cost of services as a percentage of service revenues from fiscal 1994 to
fiscal 1995 was due to an increase in services revenues combined with a
relatively slight increase in cost of services.  Services costs include expenses
for the customer response center, resident and application consulting services,
specialized programming services, and training groups within the Company.  The
absolute dollar increase in cost of services from fiscal 1994 through fiscal
1996 was primarily due to the hiring of additional services personnel, both
permanent and sub-contracted, to enhance the Company's ability to meet customer
requirements for maintenance, support and consulting services.  In late fiscal
1996, the Company commenced a new systems integration services business relating
to its WorkStream DFS product line.  Cost of services revenues associated with
systems integration services in fiscal 1996 was minimal.

Cost of Development Revenues.  Cost of development revenues was 70% of total
----------------------------
development revenues in fiscal 1996, compared with 61% and 79% in fiscal 1995
and 1994, respectively.  The increase in cost of development as a percentage of
development revenues in fiscal 1996 was due primarily to relatively high
development costs associated with two development projects during the fiscal
year. The decrease in fiscal 1995 was due to the then current development
projects having lower associated costs. Development costs include direct labor
costs associated with development contracts and porting projects as well as
third party consulting expenses. Development costs increased 100% from fiscal
1995 to fiscal 1996 and decreased 71% from fiscal 1994 to fiscal 1995. The
significant increase in fiscal 1996 and decrease in fiscal 1995 were due
primarily to fluctuations in the timing and scope of development projects during
the years.

                                       23
<PAGE>
 
Research and Development Expenses.  Research and development expenses
---------------------------------
represented 33% of total revenues in fiscal year 1996, 31% in fiscal 1995 and
31% in fiscal 1994.  These expenses increased to $12,402,000 in fiscal 1996
compared with $10,248,000 in fiscal 1995 and $8,669,000 in fiscal 1994.
Included in research and development expenses are costs associated with the
development of new products and the costs of enhancing and maintaining existing
products.  The increase in research and developmental expense as a percentage of
total revenues and in absolute dollars from fiscal 1994 through fiscal 1996 was
due to a higher level of overall research and development activity primarily to
add computing platform options and functional enhancements for the Company's
products.

      Software development expenditures of $886,000, $1,460,000, and $1,662,000
were capitalized under Statement of Financial Accounting Standards ("SFAS") No.
86 in fiscal 1996, 1995 and 1994, respectively.  The amounts capitalized
represented approximately 7%, 12% and 16%, respectively, of total research and
development expenditures during such periods.  The percentage decreases were due
to a decline in the absolute dollar amount of software costs capitalized during
these periods coupled with a higher level of overall research and development
expenditures.  In accordance with SFAS No. 86, the amount of research and
development expenditures capitalized in a given time period depends upon the
nature of the development work performed subsequent to the establishment of
technological feasibility.  Accordingly, amounts capitalized may vary from
period to period.  See Notes 1 and 3  of Notes to Consolidated Financial
Statements.

Selling and Marketing Expenses.  Selling and marketing expenses represented 32%
------------------------------
of total revenues in fiscal 1996, compared with 36% and 41% in fiscal 1995 and
1994, respectively.  Selling and marketing expenses increased to $12,361,000 in
fiscal 1996 from $11,812,000 in fiscal 1995 and $11,519,000 in fiscal 1994.  The
increase in absolute dollars in fiscal 1996 was due primarily to an increase in
commission expenses, related travel expenses, advertising and promotion
expenses.  The fiscal 1995 increase in absolute dollars was due primarily to an
increase in the commission expense for the period resulting from the higher
level of sales for the year, partially offset by a lower headcount from 1994.
The decrease in sales and marketing expense as a percentage of total revenues in
fiscal 1996 and fiscal 1995 was due to the increase in revenue while holding
headcount and other costs relatively stable.

General and Administrative Expenses.   General and administrative expenses
-----------------------------------
include the costs of the finance, accounting, purchasing and administrative
operations of the Company.  General and administrative expenses as a percent of
total revenues were 10%, 8% and 10% for fiscal years 1996, 1995 and 1994,
respectively.  General and administrative expenses increased to $3,711,000 in
fiscal 1996 from $2,802,000 in fiscal 1995 and $2,828,000 in fiscal 1994.  The
increase from fiscal 1995 to fiscal 1996 was due to an increase in headcount, an
increase in legal and accounting related expenses primarily related to the costs
of the fiscal year 1995 restatement which occurred during fiscal 1996 and costs
associated with a relocation of the Company's headquarters in February 1996.
The decrease from fiscal 1994 to fiscal 1995 was primarily due to higher levels
of sales over the comparable periods while holding costs relatively stable.

Restructuring Charge.  During the third quarter of fiscal 1994, the Company
--------------------
announced a worldwide consolidation of its operations and recorded a
restructuring charge of $1,407,000.  The consolidation primarily affected
several field offices.  Major cost components associated with the restructuring
were severance pay amounts for terminated employees, lease and rental costs
associated with the consolidation of sales offices and the consolidation of
operations at the Company's headquarters.  The balance was comprised of fixed
asset write-offs in the offices affected, as well as travel and legal fees.  The
consolidation was designed to improve efficiencies and bring operational
expenses in line with revenues.

      Between the third quarter of fiscal 1994 and the second quarter of fiscal
1995, the Company utilized $1,196,000 for various restructuring activities.
During the third quarter of fiscal 1995, the Company reevaluated the status of
its restructuring activities in light of results of operations that had improved
substantially since the commencement of the restructuring.  As a result of that
reevaluation, the Company decided to discontinue subsequent restructuring
activities and reversed the remaining restructuring reserve of $211,000.

                                       24
<PAGE>
 
Interest Income and Expense.  For fiscal 1996, interest income was $425,000,
---------------------------
compared with $588,000 for fiscal 1995 and $442,000 for fiscal 1994.  Lower
invested cash balances and slightly lower interest rate levels accounted for the
decrease from fiscal 1995 to fiscal 1996.  Higher invested cash balances  and
higher interest rate levels accounted for the increase from fiscal 1994 to
fiscal 1995. Interest expense was $81,000, $10,000 and $35,000 in fiscal 1996,
1995 and 1994, respectively.  The increase in interest expense in fiscal 1996
was primarily due to interest on a  $2,000,000 promissory note obtained with a
bank in April 1996.  The decrease in interest expense in fiscal 1995 was
primarily due to the payoff of capital leases during the year which had been
outstanding in prior years.

Provision for Income Taxes.  The Company's income tax provision for fiscal years
--------------------------
1996, 1995 and 1994 principally relates to withholding taxes on sales made in
foreign jurisdictions.  The Company has not incurred domestic income tax charges
due to net losses in fiscal years 1996 and 1994 and utilization of net operating
loss carryforwards in fiscal year 1995.  The Company has established a valuation
allowance against its deferred tax assets and periodically reviews this
allowance.  At such time that the Company believes that is it more likely than
not that the deferred tax asset will be realized, the valuation allowance will
be reduced.

Net Income (Loss).  The Company had a net loss of $3,459,000, or $.44 per share,
-----------------
in fiscal 1996 compared with net income of $141,000, or $.02 per share, in
fiscal 1995 and a net loss of $6,248,000, or $.85 per share, in fiscal 1994.


Quarterly Financial Information
-------------------------------

Potential Fluctuations in Quarterly Results.  The Company's results of
-------------------------------------------
operations historically have fluctuated on a quarterly basis due to numerous
factors.  These factors may include: the relatively high average selling price
of the Company's products; a relatively small number of transactions; the size
and timing of new orders; market acceptance of new products; introduction of
competitive product offerings and subsequent deferrals in sales orders as
competitive products are evaluated by prospective customers;  the timing of co-
development projects with customers; expense levels; pricing changes; gain or
loss of significant customers or distributors; and the general economic
conditions in the Company's primary markets.  Results could be negatively
affected if the semiconductor industry slowed its expansion, or if the
healthcare products and process industries, which have not yet adopted computer
automated manufacturing on a wide scale, do not develop into a strong market for
the Company's FlowStream product line, or if the Company is unsuccessful in
managing system integration projects profitably.  Any unfavorable change in
these or other factors could have a material adverse effect on the Company's
operating results for a particular quarter.  The operating results in any
quarter are not necessarily indicative of results for future financial periods.

                                       25
<PAGE>
 
      The following table sets forth unaudited quarterly financial information
for the Company's last eight quarters.  This unaudited information has been
prepared on the same basis as the audited consolidated financial statements and,
in the opinion of management, includes all adjustments necessary for the fair
presentation of the information for the periods presented.

      The Company believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as any
indication of future performance.
<TABLE>
<CAPTION>
 
                                                                               QUARTER ENDED
                                                              1995                                      1996
                                             --------------------------------------    ----------------------------------------
(In thousands, except per share amounts)      JAN. 31   APR. 30   JUL. 31   OCT. 30    JAN. 31   APR. 30    JUL. 31     OCT. 30
<S>                                           <C>       <C>       <C>       <C>        <C>       <C>        <C>        <C>
 
Revenues                                       $7,619    $8,111    $8,852    $8,543     $9,159   $ 7,779    $10,715     $10,494
Cost of revenues                                2,024     1,876     2,043     2,445      2,264     2,577      3,830       3,831
                                               ------    ------    ------    ------     ------   -------    -------     -------
Gross margin                                    5,595     6,235     6,809     6,098      6,895     5,202      6,885       6,663
Operating expenses                              5,451     6,108     6,621     6,471      6,571     7,434      7,262       7,207
Income (loss) before income taxes                 280       275       344      (235)       470    (2,152)      (326)       (477)
Provision for income taxes                        182       109       129       103        248       124        207         395
                                               ------    ------    ------    ------     ------   -------    -------     -------
Net income (loss)                                  98       166       215      (338)       222    (2,276)      (533)       (872)
                                               ======    ======    ======    ======     ======   =======    =======     =======
Net income (loss) per share                     $0.01     $0.02     $0.03    $(0.04)     $0.03    $(0.29)    $(0.07)     $(0.11)
                                               ======    ======    ======    ======     ======   =======    =======     =======
Shares used in per share calculation            7,621     7,728     8,072     7,691      8,260     7,773      7,838       7,895
 
</TABLE>

Liquidity and Capital Resources
-------------------------------

As of October 31, 1996, the Company had working capital of $3,732,000, compared
with $9,012,000 at October 31, 1995.  The fiscal 1996 decrease was due primarily
to the use of cash to fund operations, increased capital expenditures related to
the relocation of the Company's headquarters and the purchase of the Taiwan
operations of Systematic Designs International, Inc. in July of fiscal 1996.
(See Note 2 of Notes to Consolidated Financial Statements.)

      Net cash used for operating activities in fiscal 1996 was $797,000,
compared with net cash provided by operating activities of $1,702,000 in fiscal
1995.  Net cash used for operations in fiscal 1996 primarily consisted of  a net
loss in fiscal 1996 of $3,459,000, combined with an increase in accounts
receivable and other assets and a decrease in other liabilities and accrued
expenses, partially offset by non-cash charges for depreciation and amortization
and an increase in accounts payable. Higher levels of sales contributed to the
increase in accounts receivable and accounts payable and the purchase of the
Taiwan operation of Systematic Designs International, Inc. (see Note 2 of Notes
to Consolidated Financial Statements) accounted for the increase in other
assets.  Lower accrued compensation levels contributed to the decrease in other
liabilities and accrued expenses.  Net cash provided by operating activities in
fiscal 1995 was due primarily to fiscal 1995 net income of $141,000, combined
with an increase in non-cash charges for depreciation and amortization, offset
by an increase in accounts receivable and a decrease in other liabilities and
accrued expenses.  Higher levels of sales contributed to the increase in
accounts receivable, and the utilization of the restructuring charge recorded in
the third quarter of fiscal 1994 and deferred income taxes accounted for the
decrease in other liabilities and accrued expenses.  Net cash used for operating
activities in fiscal 1994 was primarily due to the fiscal 1994 net loss of
$6,248,000, combined with an increase in other assets and a decrease in accounts
payable, partially offset by non-cash charges for depreciation and amortization,
a decrease in accounts receivable and an increase in other liabilities and
accrued expenses.  Improved collections contributed to the decrease in accounts
receivable.  Higher accrued compensation levels and expenses associated with the
restructuring charge recorded in the third quarter of fiscal 1994 contributed to
the increase in other liabilities and accrued expenses.

      Net cash used for investing activities was $5,000,000 in fiscal 1996 and
$981,000 in fiscal 1995, as compared to net cash provided by investing
activities of  $1,377,000 in fiscal 1994.  The change from fiscal 1995 to 1996
was due to an increase in investments in capital equipment of $2,179,000
relating to the Company's relocation to its new facility, offset by a decrease
in short-term investments of $478,000 and a decrease in expenditures on
capitalized software development costs of $574,000. The change from fiscal 1994
to 1995 was due to a decrease in short-term 

                                       26
<PAGE>
 
investments of $2,022,000 and a decrease in capitalized software development
costs of $202,000, offset by an increase in investments in capital equipment of
$880,000.

      Net cash provided by financing activities was $3,251,000, $1,283,000 and
$676,000 in fiscal years 1996, 1995 and 1994, respectively.  The change from
fiscal 1995 to fiscal 1996 was primarily due to cash received from a $2,000,000
promissory note obtained in fiscal 1996.  The change from fiscal 1994 to fiscal
1995 was primarily due to cash proceeds received from  sales of common stock
under the employee stock purchase and stock option plans.

      The Company's promissory note with a bank requires the maintenance of
certain financial covenants, including minimum net worth and profitability
requirements.  At October 31, 1996, the Company was not in compliance with the
minimum profitability requirements.  The Company has not obtained a wavier from
the bank and, as such, the loan is immediately callable by the bank.
Accordingly, the Company has classified the remaining balance on the note
payable as a current liability.  On January 28, 1997, the Company obtained a
commitment letter from another bank,  subject to the execution of definitive
agreements, for a secured  line of  credit of  $6 million and an additional loan
of approximately $2 million.  The $2 million will be utilized to retire the
above mentioned promissory note.

      Under the asset purchase agreement of the Taiwan operations of Systematic
Designs International, Inc., the Company may be required to make additional
performance-based payments (in cash or stock) over a two-year period ending on
July 8, 1998.  Such performance-based payments will be based upon a specified
percentage, ranging from 17.5% to 50.0%, of certain revenues, as defined in the
purchase agreement of Consilium, Inc. and Consilium Taiwan, Inc.

      At October 31, 1996, the Company had $8,094,000 in cash and cash
equivalents and $1,000,000 in short-term investments.  Management believes the
existing cash and cash equivalents, including short-term investments, will be
sufficient to meet the Company's currently anticipated working capital and
capital expenditure requirements in fiscal 1997.

Recent Accounting Pronouncements
--------------------------------

During March 1995, the Financial Accounting Standards Board issued Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to be Disposed Of."  This standard is effective for the Company's 1997 fiscal
year and its adoption is not expected to have a material effect on the financial
statements of the Company.

      During October 1995, the Financial Accounting Standards Board issued
Statement No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation."
This standard, which established a fair value based method of accounting for
stock-based compensation plans, also permits an election to continue following
the requirements of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees" with disclosures of pro forma net
income and earnings per share under the new method.  The disclosure requirements
of SFAS No. 123 are effective as of the beginning of the Company's 1997 fiscal
year.  The Company does not expect the new pronouncement to have an impact on
its results of operations since the intrinsic value-based method prescribed by
APB Opinion No. 25 and also allowed by SFAS No. 123 will continue to be used for
the valuation of stock-based compensation plans.

                                       27
<PAGE>
 
ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
            -------------------------------------------


Report of Independent Accountants


Board of Directors and Stockholders
Consilium, Inc.

          We have audited the accompanying consolidated balance sheet of
Consilium, Inc. and subsidiaries as of October 31, 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the two years in the period ended October 31, 1995.  These financial
statements are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

          In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Consilium, Inc. and subsidiaries as of October 31, 1995 , and the consolidated
results of their operations and their cash flows for each of the two years in
the period ended October 31, 1995 in conformity with generally accepted
accounting principles.
 
 
 
 
 
                                      /s/ Coopers & Lybrand L.L.P.
                                      ----------------------------
                                      Coopers & Lybrand L.L.P.

San Jose, California
December 6, 1995, except for Note 9,
for which the date is May 6, 1996

                                       28
<PAGE>
 
Report of Independent Public Accountants


To the Board of Directors and Stockholders of
Consilium, Inc.:

          We have audited the accompanying consolidated balance sheet of
Consilium, Inc. (a Delaware Corporation) and subsidiaries as of October 31,
1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for the year  then ended.  These financial statements and
the schedule referred to below are the responsibility of the Company's
management.  Our responsibility is to express an opinion on these financial
statements and schedule based on our audit.

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

          In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Consilium, Inc. and
subsidiaries as of October 31, 1996 and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.

          Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole.  The schedule listed under Item 14(a) is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a required part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in our audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
 
 
 
 
                                      /s/ Arthur Andersen LLP
                                      -----------------------
                                      Arthur Andersen LLP

San Jose, California
December 4, 1996
(except with respect to the matter
discussed in Note 11, as to which
the date is January 28, 1997)

                                       29
<PAGE>
 
Consolidated Statements of Operations
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
                                                           Years ended October 31,
                                               ---------------------------------------------
                                                 1996              1995               1994
                                               -------           -------             -------
<S>                                            <C>               <C>                 <C>
                                                                               
REVENUES:                                                                      
 Product                                       $19,073           $16,115             $10,588
 Services                                       17,268            15,979              14,589
 Development                                     1,806             1,031               2,767
                                               -------           -------             -------
Total revenues                                  38,147            33,125              27,944
                                               -------           -------             -------
                                                                               
COST OF REVENUES:                                                              
 Product                                         4,461             3,022               2,763
 Services                                        6,778             4,734               4,497
 Development                                     1,263               632               2,191
                                               -------           -------             -------
Total cost of revenues                          12,502             8,388               9,451
                                               -------           -------             -------
                                                                               
GROSS MARGIN                                    25,645            24,737              18,493
                                               -------           -------             -------
                                                                               
OPERATING EXPENSES:                                                            
 Research and development                       12,402            10,248               8,669
 Selling and marketing                          12,361            11,812              11,519
 General and administrative                      3,711             2,802               2,828
 Restructuring charge                               --              (211)              1,407
                                               -------           -------             -------
Total operating expenses                        28,474            24,651              24,423
                                               -------           -------             -------
                                                                               
INCOME (LOSS) FROM OPERATIONS                   (2,829)               86              (5,930)
                                               -------           -------             -------
                                                                               
Interest income                                    425               588                 442
Interest expense                                   (81)              (10)                (35)
                                               -------           -------             -------
                                                                               
INCOME (LOSS) BEFORE INCOME                                                    
 TAX PROVISION                                  (2,485)              664              (5,523)
                                               -------           -------             -------
                                                                               
PROVISION FOR INCOME TAXES                         974               523                 725
                                               -------           -------             -------
                                                                               
NET INCOME (LOSS)                              $(3,459)          $   141             $(6,248)
                                               =======           =======             =======
                                                                               
NET INCOME (LOSS) PER SHARE                    $ (0.44)          $  0.02             $ (0.85)
                                               =======           =======             =======

SHARES USED IN                                                                 
 PER SHARE CALCULATIONS                          7,804             7,912               7,362
                                               =======           =======             =======
</TABLE>

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

                                       30
<PAGE>
 
<TABLE>
<CAPTION>
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
                                                          October 31,
                                                       ------------------
                                                        1996       1995
                                                       -------    -------
<S>                                                    <C>        <C>
 
          Assets
Current assets:
   Cash and cash equivalents                           $ 8,094    $10,686
   Short-term investments                                1,000      1,478
   Accounts receivable, net of allowance
     for doubtful accounts of $705 and
     $650 in 1996 and 1995, respectively                 9,139      7,578
   Other current assets                                  1,114      1,055
                                                       -------    -------
 
     Total current assets                               19,347     20,797
 
Property & equipment, net                                4,827      2,425
Software development costs, net                          3,094      5,121
Goodwill, net                                            1,345        ---
Other assets                                               380        325
                                                       -------    -------
 
     Total assets                                      $28,993    $28,668
                                                       =======    =======
 
          Liabilities and Stockholders' Equity
Current liabilities:
   Note payable                                        $ 1,792    $   ---
   Accounts payable                                      4,114      1,800
   Other current liabilities and accrued expenses        4,015      4,364
   Deferred revenue                                      5,694      5,621
                                                       -------    -------
 
     Total current liabilities                          15,615     11,785
 
Long-term liabilities:
   Deferred revenue                                         41      1,325
   Deferred income taxes                                   ---        158
   Accrued lease obligation                                ---         17
                                                       -------    -------
 
     Total liabilities                                  15,656     13,285
                                                       -------    -------
 
Commitments and contingencies (Notes 2, 5 and 9)
 
Stockholders' equity:
   Common stock, $.01 par value:
     Authorized: 25,000,000 shares
     Issued and outstanding: 7,928,051 shares
     in 1996 and 7,695,655 shares in 1995                   79         77
   Additional paid-in capital                           24,794     23,337
   Accumulated deficit                                 (11,490)    (8,031)
   Cumulative translation adjustment                       (46)       ---
                                                       -------    -------
 
     Total stockholders' equity                         13,337     15,383
                                                       -------    -------
 
     Total liabilities and
       stockholders' equity                            $28,993    $28,668
                                                       =======    =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.

                                       31
<PAGE>
 
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
 
                                                                Additional                Cumulative
                                             Common Stock       Paid-in     Accumulated   Translation
(In thousands)                              Shares   Amount     Capital     Deficit       Adjustment    Total
<S>                                         <C>      <C>       <C>          <C>           <C>           <C>
--------------------------------------------------------------------------------------------------------------- 
BALANCES, OCTOBER 31, 1993                   7,220   $72       $20,688       $(1,924)     $    ---      $18,836
--------------------------------------------------------------------------------------------------------------- 
Issuance of stock pursuant to employee                                    
   stock purchase plan                         142     1           738           ---           ---          739
Exercise of common stock options                67     1           318           ---           ---          319
Net loss                                       ---   ---           ---        (6,248)          ---       (6,248)
                                                                                                    
--------------------------------------------------------------------------------------------------------------- 
BALANCES, OCTOBER 31, 1994                   7,429    74        21,744        (8,172)          ---       13,646
--------------------------------------------------------------------------------------------------------------- 
Issuance of stock pursuant to employee                                                              
   stock purchase plan                         136     1           708           ---           ---          709
Exercise of common stock options               131     2           885           ---           ---          887
Net income                                     ---   ---           ---           141           ---          141
                                                                                                    
--------------------------------------------------------------------------------------------------------------- 
BALANCES, OCTOBER 31, 1995                   7,696    77        23,337        (8,031)          ---       15,383
--------------------------------------------------------------------------------------------------------------- 
Issuance of stock pursuant to employee                                                              
   stock purchase plan                         145     1           934          ---            ---          935
Exercise of common stock options                87     1           523          ---            ---          524
Translation adjustment                        ---    ---           ---          ---            (46)         (46)
Net loss                                      ---    ---           ---        (3,459)          ---       (3,459)
                                                                                                    
--------------------------------------------------------------------------------------------------------------- 
BALANCES, OCTOBER 31, 1996                   7,928   $79       $24,794      $(11,490)         $(46)     $13,337
--------------------------------------------------------------------------------------------------------------- 
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.

                                       32
<PAGE>
 
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
                                                                                               Years ended October 31,
                                                                                             -----------------------------
                                                                                              1996       1995       1994
(In thousands)
---------------------------------                                                            -------    -------    -------
<S>                                                                                          <C>        <C>        <C>      
 
Cash flows from operating activities:
  Net income (loss)                                                                          $(3,459)   $   141    $(6,248)
                                                                                             -------    -------    -------
  Adjustments to reconcile net income (loss) to net cash (used for)
     provided by operating activities:
   Depreciation and amortization                                                               3,083      3,332      3,162
   Provision for doubtful accounts receivable                                                     55        324        188
   Changes in assets and liabilities, net of acquisition:
    Accounts receivable                                                                       (1,616)    (2,721)     1,085
    Other assets                                                                                (589)       190       (654)
    Accounts payable                                                                           2,314        591       (321)
    Deferred revenue                                                                             (61)       138        714
    Other liabilities and accrued expenses                                                      (524)      (293)     1,550
                                                                                             -------    -------    -------
     Total adjustments                                                                         2,662      1,561      5,724
                                                                                             -------    -------    -------
 
      Net cash (used for) provided by operating activities                                      (797)     1,702       (524)
                                                                                             -------    -------    -------
 
Cash flows from investing activities:
  Capital expenditures                                                                        (3,722)    (1,543)      (663)
  Capitalized software development costs                                                        (886)    (1,460)    (1,662)
  Purchases of short-term investments                                                         (2,000)    (1,708)    (3,502)
  Sales of short-term investments                                                              2,478      3,730      7,204
  Cash paid for acquisition of the Taiwan operations of SDI                                     (870)       ---        ---
                                                                                             -------    -------    -------
 
      Net cash (used for) provided by investing activities                                    (5,000)      (981)     1,377
                                                                                             -------    -------    -------
 
Cash flows from financing activities:
  Proceeds from issuance of common stock and exercise of options                               1,459      1,596      1,058
  Proceeds from issuance of note payable                                                       2,000        ---        ---
  Principal payments on note payable                                                            (208)       ---        ---
  Principal payments on capital leases                                                           ---       (313)      (382)
                                                                                             -------    -------    -------
 
      Net cash provided by financing activities                                                3,251      1,283        676
                                                                                             -------    -------    -------
Effect of exchange rate changes on cash                                                          (46)       ---        ---
                                                                                             -------    -------    -------
Net (decrease) increase in cash and cash equivalents                                          (2,592)     2,004      1,529
                                                                                             -------    -------    -------
Cash and cash equivalents at beginning of year                                                10,686      8,682      7,153
                                                                                             -------    -------    -------
Cash and cash equivalents at end of year                                                     $ 8,094    $10,686    $ 8,682
                                                                                             =======    =======    =======
Supplemental cash flow information:
  Cash paid for:
   Interest                                                                                  $    81    $    10    $    35
   Income taxes                                                                              $    43    $    13    $    12
</TABLE> 
The accompanying notes are an integral part of these consolidated financial 
statements.

                                       33
<PAGE>
 
Notes to Consolidated Financial Statements
------------------------------------------
Note 1:     Summary of Significant Accounting Policies:
            ------------------------------------------

Consilium, Inc. was incorporated in October 1978 and designs and licenses
integrated manufacturing execution systems (MES) software for the manufacturing
plant floor.  The Company also provides consulting, implementation and training
services for its software products as well as system integration services for
plant automation.  The Company markets its products worldwide to the
semiconductor, electronics, healthcare products and process industries.

Principles of Consolidation and Basis of Preparation:  The consolidated
----------------------------------------------------
financial statements include the accounts of Consilium, Inc. and its wholly
owned subsidiaries after elimination of intercompany accounts and transactions.
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 may differ from those estimates.

Cash and Cash Equivalents:  The Company considers all highly liquid investments
-------------------------
purchased with a maturity of three months or less to be cash equivalents.

Short-Term Investments:  The  Company accounts for its investments under the
----------------------
provisions of Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."  Under SFAS
No. 115, the Company's investments are classified as available-for-sale and are
recorded at fair market value with any unrealized holding gains or losses
recorded directly in stockholders' equity.  At October 31, 1996 and 1995, the
fair value of the investments approximated amortized cost and, as such, gross
unrealized holding gains and losses were not material.  The fair value of the
investments was determined based on quoted market prices at the reporting dates
for those instruments.  Upon the sale of the investments, any previously
unrealized gains or losses are recognized in results of operations.  Realized
gains and losses have not been material to date.  The Company's investments
mature at various dates through December 1996.  The carrying value of the
Company's investments by major security type consisted of the following as of
October 31, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
 
DESCRIPTION                        1996      1995
-------------------------------   -------   -------
<S>                               <C>       <C>
Preferred Auction Securities      $ 1,000   $ 1,000
Commercial Paper                    1,000     6,500
Municipal Bonds                     3,500     4,000
                                  -------    ------
                                  $ 5,500   $11,500
                                  =======   =======
</TABLE>

          Approximately $4,500,000 and $10,000,000 of the total investments in
debt securities as of October 31, 1996 and 1995, respectively, are included in
cash and cash equivalents.  The remaining balance is classified as short-term
investments.

Depreciation and Amortization:  Property and equipment are stated at cost and
-----------------------------
depreciated on a straight-line basis over estimated useful lives of three to
five years.  Leasehold improvements are amortized over their estimated useful
lives or the remaining term of the related lease, if shorter.

Goodwill:   Goodwill arising from the Company's acquisition of the Taiwan
--------
operations of Systematic Designs International, Inc. (see Note 2) is amortized
on a straight-line basis over five years.  Accumulated amortization was $65,000
at October 31, 1996.

                                       34
<PAGE>
 
Software Development Costs:  In accordance with SFAS No. 86, "Accounting for the
--------------------------
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed," the
Company capitalizes eligible computer software development costs upon
establishment of technological feasibility.  The establishment of technological
feasibility and the ongoing assessment of the recoverability of these costs
requires considerable judgment by management with respect to certain external
factors including, but not limited to, anticipated future gross product revenue,
estimated economic life and changes in software and hardware technology.
Amortization of capitalized software development costs begins when the products
are available for general release to customers and is generally computed on
license revenues recognized during the year in relation to total anticipated
license revenues; however, the annual amortization expense, at a minimum, will
not be less than 20% of the capitalized costs.  Amortization of capitalized
software development costs was approximately $1,725,000, $1,863,000 and
$1,809,000 for the years ended October 31, 1996, 1995, and 1994, respectively.

Revenue Recognition and Deferred Revenue:  Product revenues consist principally
----------------------------------------
of revenues earned under software license agreements and is generally recognized
when the software has been shipped, the Company has a right to invoice the
customer, collection of the receivable is probable and there are no significant
obligations remaining.  If significant post-delivery obligations exist, revenue
is deferred until no significant obligations remain.  With respect to sales made
through foreign distributors or systems integrators, revenue is recognized
either upon verification of receipt of a firm purchase order between the
distributor and the end user or upon installation of the software at the end
user's facility.

          Service revenue primarily consists of software maintenance revenue and
revenue earned for software installation and integration, as well as for
providing customer training.  Software maintenance revenue consists of fees for
providing system upgrades, user documentation and technical support for software
products.  Maintenance revenue is recognized ratably over the term of the
maintenance period.  All other service revenue is either recognized as the
services are performed or on the percentage-of-completion method of accounting,
depending upon the nature of the project.  If a transaction includes both
license and service elements, license revenue is recognized upon shipment of the
software, provided services do not include significant customization or
modification of the base product and payment terms for the license fee are not
subject to acceptance criteria for the service element, as well as having met
all other product revenue recognition criteria.  If these criteria are not met,
the license and service fees are both recognized on the percentage-of-completion
method of accounting.

          Deferred revenue consists primarily of the unrecognized portion of
revenue under maintenance and support contracts and advance payment of software
development fees and license fees.

Advertising Costs:  Advertising costs are charged to operations as incurred.
-----------------
Advertising costs were $588,000, $470,000, and $503,000 in fiscal years 1996,
1995 and 1994, respectively.

Foreign Currencies:  The functional currency of the Company's wholly-owned
------------------
German subsidiary is the local currency.  Gains and losses resulting from the
translation of the subsidiary's financial statements are reported as a separate
component of stockholders' equity.    The functional currency of the Company's
other wholly-owned foreign subsidiaries is the U.S. dollar.  Accordingly,
foreign translation gains and losses, which have not been material, are
reflected in the accompanying statements of operations.  Additionally, exchange
gains and losses arising from transactions denominated in foreign currency have
not been material to date and are recorded in results of operations.

                                       35
<PAGE>
 
Concentrations of Credit Risk:  Financial instruments which potentially subject
-----------------------------
the Company to concentrations of credit risk consist principally of cash
investments and trade receivables.  The Company has cash investment policies
that limit cash investments to short-term low risk investments.  With respect to
trade receivables, the Company generally does not require collateral as the
majority  of the Company's customers are large, well established companies in
the semiconductor, electronics, healthcare products and process industries.  The
Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific customers, historical trends and other
information.

Computation of Net Income (Loss) per Share:  Net income per common share is
------------------------------------------
computed using the weighted average number of common and dilutive common
equivalent shares outstanding during the period.  Dilutive common equivalent
shares consist of the dilutive effect of stock options as computed using the
treasury stock method.  Net loss per share is based on the weighted average
number of common shares outstanding during the period.  Common equivalent shares
have not been included in the calculation of loss per share as their inclusion
would be antidilutive.

Recent Accounting Pronouncements:  During March 1995, the Financial Accounting
--------------------------------
Standards Board issued SFAS No. 121, "Accounting for the Impairment of Long-
Lived Assets and Long-Lived Assets to Be Disposed Of."  This standard is
effective for the Company's 1997 fiscal year and its adoption is not expected to
have a material effect on the financial statements of the Company.

          During October 1995, the Financial Accounting Standards Board issued
Statement No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation."
This standard, which established a fair value based method of accounting for
stock-based compensation plans, also permits an election to continue following
the requirements of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees" with disclosures of pro forma net
income and earnings per share under the new method.  The disclosure requirements
of SFAS No. 123 are effective as of the beginning of the Company's 1997 fiscal
year.  The Company does not expect the new pronouncement to have an impact on
its results of operations since the intrinsic value-based method prescribed by
APB Opinion No. 25 and also allowed by SFAS No. 123 will continue to be used for
the valuation of stock-based compensation plans.

Reclassifications:  Certain reclassifications were made to prior year amounts to
-----------------
conform to the 1996 presentation.  These reclassifications did not change the
previously reported net income (loss),  total assets or total cash flows of the
Company for prior years.


Note 2:     Acquisition of the Taiwan Operations of Systematic Designs
            ----------------------------------------------------------
            International, Inc. ("SDI"):
            ---------------------------

In July 1996, the Company acquired the Taiwan operations of Systematic Designs
International, Inc. ("SDI"), a privately-held Washington corporation
specializing in the development of factory automation products and systems
integration services for the semiconductor industry.  The Company purchased two
existing semiconductor plant automation contracts and certain tangible and
intangible assets and assumed certain liabilities of SDI.  The total purchase
price of the acquisition was $1,305,000 to be  paid in cash, of which $870,000
had been paid as of October 31, 1996.  In addition, the Company may be required
to make additional performance-based payments (in cash or stock) over a two-year
period ending on July 8, 1998.  Such performance-based payments will be based
upon a specified percentage, ranging from 17.5% to 50.0%, of certain revenues,
as defined in the purchase agreement, of Consilium, Inc. and Consilium 

                                       36
<PAGE>
 
Taiwan, Inc. To the extent such performance-based payments are made, such
amounts will be recorded as additional goodwill. As of October 31, 1996,
performance-based payments of $105,000 had been earned. The acquisition was
accounted for using the purchase method of accounting and, accordingly, the
results of the Taiwan operations of SDI since the date of acquisition are
included in the accompanying consolidated financial statements. The excess of
the purchase price over the estimated fair value of the net assets acquired of
$1,410,000 has been recorded as goodwill and will be amortized on a straight-
line basis over five years. Comparative pro forma information has not been
presented because the Taiwan operations of SDI are not material to the Company's
consolidated financial statements.
  
Note 3:   Balance Sheet Detail:
          --------------------
 
Property and Equipment:
<TABLE>
<CAPTION>
                                                                      October 31,
(In thousands)                                                      1996       1995
                                                                  -------    --------
<S>                                                               <C>        <C>
Computer equipment                                                $ 8,475    $  9,076
Office equipment                                                    1,527       1,419
Purchased software                                                  1,906       1,643
Leasehold improvements                                              1,000         739
                                                                  -------    --------
                                                                   12,908      12,877
Less accumulated depreciation and amortization                     (8,081)    (10,452)
                                                                  -------    --------
                                                                  $ 4,827    $  2,425
                                                                  =======    ========
</TABLE>

          The Company disposed of $3,607,000 of assets during its move to a new
office building in February 1996.  Such assets were fully depreciated at the
time of disposal and the resulting gains or losses on disposal were immaterial.

          Property and equipment at October 31, 1996 and 1995 includes computer
equipment acquired under capital leases valued at $1,131,000.  Such equipment
was fully depreciated as of October 31, 1996 and 1995.
 
Software Development Costs:
<TABLE>
<CAPTION>
                                         October 31,
(In thousands)                       1996        1995
                                   --------    --------
<S>                                <C>         <C>
Software development costs         $ 16,061    $ 16,325
Less accumulated amortization       (12,967)    (11,204)
                                   --------    --------
                                   $  3,094    $  5,121
                                   ========    ========
</TABLE>

Other Current Liabilities and Accrued Expenses:
<TABLE>
<CAPTION>
                                                      October 31,
(In thousands)                                       1996     1995
                                                    ------   ------
<S>                                                 <C>      <C>
Accrued compensation                                $1,567   $2,023
Employee stock purchase plan withholdings               91      326
Accrued income taxes                                   955    1,006
Other                                                1,402    1,009
                                                    ------   ------
                                                    $4,015   $4,364
                                                    ======   ======
</TABLE>

                                       37
<PAGE>
 
Note 4:     Note Payable
            ------------

In April 1996, the Company signed a four-year $2.0 million promissory note,
payable to a bank in equal monthly installments of approximately $41,667 plus
interest.  This note is secured by certain assets of the Company.  The
promissory note bears interest at the bank's prime rate (8.25% at October 31,
1996).  The agreement requires the Company to maintain certain financial
covenants, including minimum net worth and profitability requirements.  At
October 31, 1996, the Company was not in compliance with the minimum
profitability requirements.  The Company has not obtained a wavier from the bank
and, as such, the loan is immediately callable by the bank.  Accordingly, the
Company has reclassified the remaining outstanding balance to current
liabilities on the accompanying consolidated balance sheet.


Note 5:     Commitments:
            -----------

The Company leases its headquarters, research and development facility, sales
offices and certain equipment under noncancelable operating leases.  The major
facility leases expire at various dates from 1997 through 2009.

          Future minimum lease payments under operating leases at October 31,
1996, are as follows:
<TABLE>
<CAPTION>
 
Year Ending October 31,
-------------------------------
<S>                               <C>
(in thousands)
 
1997                              $1,035
1998                                 944
1999                                 933
2000                                 828
2001                                 857
Thereafter                         1,887
                                  ------
Total minimum lease payments      $6,484
                                  ======
</TABLE>
          Rental expense was approximately $1,256,000, $1,245,000, and
$1,577,000 for the years ended October 31, 1996, 1995, and 1994, respectively.

          On December 15, 1995, the Company entered into an agreement with
Electronic Data Systems Corporation to out-source the Company's computer data
center and telecommunication services.  The contract has a 10-year term
beginning December 1995.  In the event the Company decides to terminate the
contract before the expiration of the term, the Company will be required to pay
a termination fee depending on the termination date, as stated in the agreement.

                                       38
<PAGE>
 
          Future minimum obligations under this contract are as follows:
<TABLE>
<CAPTION>
 
Year Ending October 31,
-----------------------
(in thousands)
                               Service      Termination
                               Obligation       Fee
                               ----------   -----------
<S>                            <C>          <C>
1997                              $ 3,265          $900
1998                                3,496           800
1999                                3,596           600
2000                                3,705           500
2001                                3,820           300
Thereafter                         16,761           150
                                  -------
Total service obligations         $34,643
                                  =======
</TABLE>

Note 6:     Capital Stock:
            -------------

Employee Stock Purchase Plan:  Under the Company's 1989 Employee Stock Purchase
----------------------------
Plan (the "Purchase Plan"), 880,000 shares of Common Stock of the Company have
been reserved for issuance.  Under the Plan, employees may purchase common stock
through payroll deductions at 85% of the lesser of the fair market value on the
first or last day of six-month offering periods.  At October 31, 1996, a total
of 165,979 shares remained available for purchase under the plan.

Employee Stock Option Plans:  Under its 1983 Employee Stock Option Plan, the
---------------------------
Company has reserved 2,320,000 shares for issuance.  Under the Company's 1993
Employee Stock Option Plan, a total of 900,000 shares of Common Stock may be
granted to employees other than executive officers of the Company.  Under the
1983 and 1993 plans, both qualified and non-qualified options may be granted to
employees to purchase Common Stock at prices not less than fair market value at
date of grant.  The exercise period is determined by the Board of Directors at
the date of grant.  All options granted under the 1983 and 1993 Plans are
exercisable immediately and generally expire five years from date of grant.
Options generally vest over four years and, if exercised prior to vesting, are
subject to repurchase at the original purchase price.  At October 31, 1996, a
total of 613,702 options were vested under both plans.

                                       39
<PAGE>
 
          Activity under the 1983 and 1993 Employee Stock Option Plans is as
follows:
<TABLE>
<CAPTION>
 
(In thousands)
                                                        Options Outstanding
                                                        ----------------------------------
                                      Options           Number of     Price
                                      Available         Options       Per Share
                                      ---------         ----------    --------------------
<S>                                   <C>               <C>           <C>          <C>
Balance at November 1, 1993             322                  1,166       $0.750 -  $18.750
Additional shares authorized            320                     --           -- -       --
Granted                                (319)                   319       $4.500 -  $ 8.750
Exercised                                --                    (67)      $0.750 -  $ 7.250
Canceled                                320                   (320)      $6.125 -  $18.750
                                       ----                  -----       -----------------
Balance at October 31, 1994             643                  1,098       $4.500 -  $15.000
Granted                                (438)                   438       $6.375 -  $12.140
Exercised                                --                   (131)      $4.500 -  $ 8.750
Canceled                                215                   (215)      $4.500 -  $12.500
                                       ----                  -----       -----------------
Balance at October 31, 1995             420                  1,190       $4.500 -  $15.000
Additional shares authorized            400                     --           -- -       --
Granted                                (698)                   698       $6.000 -  $12.000
Exercised                                --                    (87)      $4.500 -  $ 8.750
Canceled                                221                   (221)      $4.500 -  $ 8.750
                                       ----                  -----       -----------------
Balance at October 31, 1996             343                  1,580       $4.500 -  $15.000
                                       ====                  =====       ======    =======
</TABLE>

          In addition, the Company has a separate nonqualified stock option
agreement with an employee for 35,000 shares at an exercise price of $6.00 per
share. As of October 31, 1996, none of these shares was vested under the terms
of the option agreement.

Outside Director Stock Option Plan:  In 1990, the Company adopted a stock option
----------------------------------
plan under which options for a total of up to 100,000 shares of Common Stock may
be granted to non-executive directors of the Company (the Outside Director
Plan).  The Outside Director Plan provides for the granting of nonqualified
stock options at the average of the high and low prices on the date of grant.
Options expire 10 years after the date of grant.  At October 31, 1996, a total
of 80,000 options had been granted at exercise prices ranging between $6.125 and
$11.75 per share, of which none were exercised.  In addition, the Company has
separate option agreements with non-executive directors which totaled 27,500
shares at an exercise price of $6.25 per share as of October 31, 1996.  As of
October 31, 1996, a total of 51,250 shares were vested under the terms of the
option agreements.

Shares Reserved for Future Issuance:  As of October 31, 1996, the Company has
-----------------------------------
reserved the following shares of authorized but unissued common stock for future
issuance:
<TABLE>
<CAPTION>
 
<S>                                   <C>
Employee Stock Purchase Plan            165,979
1983 Employee Stock Option Plan       1,080,775
1993 Employee Stock Option Plan         842,503
1990 Directors Stock Option Plan        127,500
Nonqualified stock options               35,000
                                      ---------
                                      2,251,757
                                      =========
</TABLE>

                                       40
<PAGE>
 
Note 7:     Income Taxes:
            ------------

Provision for income taxes consists entirely of currently payable foreign
withholding taxes.

          The reconciliation between the provision for taxes calculated at the
effective tax rate and at the statutory federal income tax rate is as follows:
<TABLE>
<CAPTION>
                                              Years Ended October 31,
                                            1996        1995        1994
                                          -------     -------      ------- 
<S>                                       <C>         <C>          <C>
Federal income tax statutory rate           (34.0%)      34.0%       (34.0%)
Foreign taxes                                39.0%       45.5%        13.1%
Increase in valuation allowance             (34.0%)     (34.0%)       34.0%
                                          -------     -------      -------
Effective tax rate                           39.0%       45.5%        13.1%
                                          =======     =======      =======
</TABLE> 
          The following table shows the major components of the deferred tax
asset and liability as of October 31, 1996 and 1995:
 
(In thousands)
<TABLE>
<CAPTION>
                                                   1996       1995
                                                 -------     -------
<S>                                              <C>           <C>
Current deferred tax asset:                   
Accounts receivable, inventory                
 and other reserves                              $   328       $ 221
Accrued expenses                                     651         184
Deferred revenue                                     156         282
Valuation allowance                               (1,135)       (529)
                                                 -------     -------
                                              
Net current deferred tax asset                   $   --        $ 158
                                                 =======     =======
                                              
Non-current deferred tax asset (liability):   
Net operating loss carryforwards                 $ 4,426      $5,124
Tax credit carryforwards                           6,416       4,515
Depreciation                                        (165)       (357)
Amortization                                      (1,229)     (2,089)
Other                                               (479)        222
Valuation allowance                               (8,969)     (7,573)
                                                 -------     -------
                                              
Net non-current deferred tax liability           $   --      $  (158)
                                                 =======     =======
</TABLE>

          The Company has recorded a valuation allowance against its net
deferred tax assets due to the uncertainty surrounding the realization of such
assets.  Management evaluates on a quarterly basis the recoverability of the
deferred tax assets and the level of the valuation allowance.  At such time as
it is determined that it is more likely than not that the deferred tax assets
are realizable, the valuation allowance will be reduced.

          At October 31, 1996, the Company has federal net operating loss
carryforwards of approximately $11,368,000 and state net operating loss
carryforwards of approximately $4,808,000.  In addition, the Company has
approximately $3,027,000 and $828,000 in general business credit carryforwards
for federal tax and state tax reporting purposes, respectively, as well as
approximately $2,561,000 of foreign tax credits.  These carryforwards and
credits expire between 1997 and 2011 for both federal and state purposes, if not
used before such time to offset future taxable income or taxes payable.

                                       41
<PAGE>
 
Note 8:     Product Line, Export Sales and Significant Customer Information:
            ---------------------------------------------------------------

The Company designs, markets and sells two distinct integrated manufacturing
execution systems (MES) software product lines, aimed at different manufacturing
industries.  The Company's WorkStream DFS (Distributed Factory System) product
line is targeted at manufacturers who produce their products in discrete lots or
batches, primarily those in the semiconductor and electronics industries.  The
Company's FlowStream product line is targeted for industries that employ batch
process manufacturing, primarily those in the healthcare product and process
industries.  Total revenues for each product line for the most recent three
years are as follow:
<TABLE>
<CAPTION>
 
                               Years Ended October 31,
(In thousands)                1996      1995      1994
                             -------   -------   -------
<S>                          <C>       <C>       <C>
WorkStream DFS               $31,300   $25,249   $23,204
FlowStream                     6,847     7,876     4,740
                             -------   -------   -------
Total revenues               $38,147   $33,125   $27,944
                             =======   =======   =======
 
</TABLE>

          The Company markets and services its products in the United States and
foreign countries through its direct sales organization and through distribution
channels.  The Company's foreign operations primarily consist of sales support
and services.  Total export sales were as follows:
<TABLE>
<CAPTION>
 
 
Years Ended October 31,
(In thousands)                 1996      1995      1994
                             --------   -------   -------
<S>                           <C>       <C>       <C>
Asia / Pacific Rim            $11,060   $ 5,147    $3,834
Europe                          6,231     6,059     4,942
                              -------   -------    ------
Total export sales            $17,291   $11,206    $8,776
                              =======   =======    ======
 
</TABLE>

          No customer accounted for more than 10% of total revenue for fiscal
years 1996 and 1995.  Two customers accounted for 11% and 10%, respectively, of
total revenue in fiscal 1994.  During fiscal 1996, the percentage of total
revenue derived from the Company's ten largest customers was approximately 42%
compared with 42% in fiscal 1995 and 47% in fiscal 1994.


Note 9:     Litigation:
            ----------

In a letter dated May 6, 1996, Honeywell Inc. ("Honeywell") informed the Company
that Honeywell believed it had claims against the Company for misrepresentation,
breach of contract and fraud.  The contract involved was entered into in April
of 1993, and is a distribution and license agreement under which Honeywell paid
the Company $4,000,000 as a non-refundable pre-paid license fee in the Company's
1993 fiscal year.  The Company filed a lawsuit against Honeywell, Inc. for
breach of contract, unfair competition and defamation on September 18, 1996.
After a full investigation, neither party felt that the dispute warranted
further action.  Honeywell has retracted all allegations made, including
misrepresentation, breach of contract and fraud.  The Company has dismissed its
lawsuit, dropping claims of breach of contract, unfair competition and
defamation.

          In the ordinary course of business, other legal actions and claims
pending have been filed against the Company.  In the opinion of management, the
ultimate liability, if any, with respect to

                                       42
<PAGE>
 
these matters will not materially affect the results of operations or
financial position of the Company.


Note 10:    Restructuring Charge:
            --------------------

During the third quarter of fiscal 1994, the Company announced a worldwide
consolidation of its operations and recorded a restructuring charge of
$1,407,000.  The consolidation primarily affected several field offices.  Major
cost components associated with the restructuring were severance pay amounts for
terminated employees, lease and rental costs associated with the consolidation
of sales offices and the consolidation of operations at the Company's
headquarters facilities.  The balance was comprised of fixed asset write-offs in
the offices affected, as well as travel and legal fees.  The consolidation was
designed to improve efficiencies and bring operational expenses in line with
revenues.

          Between the third quarter of 1994 and the second quarter of 1995, the
Company utilized $1,196,000 for various restructuring activities.  During the
third quarter of fiscal 1995, the Company reevaluated the status of its
restructuring activities in light of results of operations that had improved
substantially since the commencement of the restructuring.  As a result of that
reevaluation, the Company decided to discontinue subsequent restructuring
activities and reversed the remaining restructuring reserve of $211,000.  No
reserve amount remains at October 31, 1996 and 1995.

Note 11:     Subsequent Event:
             ----------------

On January 28, 1997, the Company obtained a commitment letter from a bank, 
subject to the execution of definitive agreements, for a secured line of credit 
of $6 million and for a secured term loan of approximately $2 million. The line 
of credit has a one year term and will be subject to certain debt covenants. 
Borrowings under the agreement will bear interest at the bank's prime rate plus 
0.25% to 1.00%. The proceeds from the term loan will be used to retire the 
Company's existing term loan (See Note 4). The Company will be required to repay
the term loan in monthly principal payments of approximately $40,000, plus 
interest at the bank's prime rate plus 0.25%. The term loan matures in August, 
2000 and will be subject to certain debt covenants.

                                       43
<PAGE>
 
ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
            ------------------------------------------------
            ACCOUNTING AND FINANCIAL DISCLOSURE
            -----------------------------------

On July 12, 1996, Coopers & Lybrand L.L.P. ("Coopers"), the independent
accountant engaged to audit the financial statements of Consilium, Inc.
("Company") during the Company's two most recent fiscal years and prior thereto,
resigned.  The reports of Coopers for the fiscal years ended October 31, 1995
and October 31, 1994, including the restatement reported in the Company's Form
10-K/A for the year ended October 31, 1995, contained no adverse opinion or
disclaimer of opinion, and were not qualified as to other uncertainties, audit
scope, or accounting principles.

          Coopers did not inform the Audit Committee, the Board of Directors or
management of its intent to resign prior to delivery of its resignation.
Accordingly, neither the Audit Committee nor the Board of Directors nor
management made any recommendation with respect to Coopers' resignation.  After
Coopers' resignation, Coopers identified to the Company a disagreement required
to be reported in accordance with Item 304 of Regulation S-K.  This disagreement
identified by Coopers was resolved to the satisfaction of Coopers and was
reflected in the Company's Notes to Consolidated Financial Statements in the
Company's Form 10-Q for the three month period ended April 30, 1996, the
Company's Form 10-K/A for the year ended October 31, 1995 and Form 10-Q/A for
the three month period ended January 31, 1996.  The disagreement was identified
as follows:  During the week of May 13, 1996, the Company received a letter
dated May 6, 1996 from Honeywell, Inc. alleging claims for unidentified breaches
of contract, misrepresentation, and fraud.  The letter did not set forth any
basis for the claims, did not allege an amount at issue, and asserted an intent
to litigate unless satisfactory progress was made toward resolution of the
claim.  In early June 1996, after consulting counsel, who had been unable to
obtain information from Honeywell concerning the materiality of the claim,
management believed that disclosure of the Honeywell letter would be premature
and that the Company should first investigate the matter to determine
materiality and to understand the basis for the claims, and accordingly
considered at that time omitting disclosure from the Company's Form 10-Q, Form
10-K/A and Form 10-Q/A.  On June 11, 1996, Coopers advised the Company's Audit
Committee that Coopers disagreed with management's proposed omission of a
description of such letter in the Company's Form 10-Q for the three month period
ended April 30, 1996.  The Audit Committee and management concurred with
Coopers' recommendation and the Company included disclosure of the receipt of
such letter in the Company's Quarterly Report on Form 10-Q for the three months
ended April 30, 1996 filed on June 14, 1996, and the Company's Form 10-K/A for
the year ended October 31, 1995 and the Company's Form 10-Q/A for the three
month period ended January 31, 1996, each filed July 2, 1996.

          During the Company's two most recent fiscal years and the interim
period preceding resignation, Coopers has not advised management, the Audit
Committee or the Board of Directors of the Company of any issues regarding
significant internal control matters, problems with management's representations
or financial statements, requirements for expanded audit scope or information
that materially impacts the fairness or reliability of the Company's financial
statements.  During the two previous fiscal years and the interim period through
the date of resignation, there were no other disagreements between the Company
and Coopers on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which if not resolved to
the satisfaction of Coopers would have caused it to make reference to the
subject matter of the disagreement in connection with its report.

          On August 2, 1996, the Company engaged Arthur Andersen LLP ("Arthur
Andersen") as its principal accountant to audit the Company's financial
statements for the fiscal year ended October 31, 1996.  The engagement of Arthur
Andersen was approved by the Company's Audit Committee.  The Company has not
consulted with Arthur Andersen during the previous two 

                                       44
<PAGE>
 
fiscal years and the interim period to date on any matter which was the subject
of any disagreement or with respect to any "reportable event" as defined in Item
304 of Regulation S-K or on the application of accounting principles to any
specified transaction, whether completed or proposed, or the type of audit
opinion which might be rendered on the Company's financial statements.

                                       45
<PAGE>
 
                                    PART III


ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
           --------------------------------------------------

          Information required by this item other than information regarding
executive officers is set forth under "Election of Directors" and "Executive
Compensation and Other Matters - Compliance with Section 16(a) of the Securities
Exchange Act of 1934" in the Company's Proxy Statement for the 1997 Annual
Meeting of Stockholders, to be filed within 120 days after the end of the fiscal
year ended October 31, 1996, and is hereby incorporated by reference.
Information regarding executive officers is set forth under "Executive Officers
of the Registrant" in Part I of this 10-K.


ITEM 11.  EXECUTIVE COMPENSATION
          ----------------------

          The information required by this item is set forth under "Executive
Compensation and Other Matters" in the Company's Proxy Statement for the 1997
Annual Meeting of Stockholders and is incorporated herein by reference.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
          --------------------------------------------------------------

          The information required by this item is set forth under "General
Information--Stock Ownership of Certain Beneficial Owners and Management" in the
Company's Proxy Statement for the 1997 Annual Meeting of Stockholders and is
incorporated herein by reference.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
          ----------------------------------------------

          The information required by this item is set forth under "Executive
Compensation and Other Matters - Compensation Committee Interlocks and Insider
Participation" in the Company's Proxy Statement for the 1997 Annual Meeting of
Stockholders and is incorporated herein by reference.

                                       46
<PAGE>
 
                                    PART IV
                                        

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
          ---------------------------------------------------------------
            
     (a)  The following documents are filed as part of this Report:

          1.   Financial Statements.
               --------------------

               Report of Independent Accountants (Coopers & Lybrand L.L.P.)
               dated December 6, 1995, except Note 9, for which the date is May
               6, 1996.

               Report of Independent Public Accountants (Arthur Andersen LLP)
               dated December 4, 1996, except with respect to the matter 
               discussed in Note 11, as to which the date is January 28, 1997.

               Consolidated Statements of Operations - Years Ended October 31,
               1996, 1995 and 1994.

               Consolidated Balance Sheets - October 31, 1996 and 1995.

               Consolidated Statements of Stockholders' Equity - Years Ended
               October 31, 1996, 1995, and 1994.

               Consolidated Statements of Cash Flows - Years Ended October 31,
               1996, 1995 and 1994.

               Notes to Consolidated Financial Statements.

          2.   Financial Statement Schedule.  The following financial statement
               -----------------------------                                   
               schedule of Consilium, Inc. is filed as part of this Report and
               should be read in conjunction with the Consolidated Financial
               Statements of Consilium, Inc.

               Report of Independent Accountants on Financial
                   Statement Schedule                             Page S-1
               Schedule II - Valuation and Qualifying Accounts    Page S-2

               Schedules not listed above have been omitted because the
               information required to be set forth therein is not applicable or
               is shown in the Consolidated Financial Statements or notes
               thereto.

          3.   Exhibits (a)
               --------    
<TABLE>
<CAPTION>
               Exhibit
               Number           Exhibit Title
               -------          -------------
               <S>       <C>
 
               3.1       Certificate of Incorporation of the Company. /3/
                         
               3.2       By-Laws of the Company. /3/

               10.1      Lease agreement dated November 28, 1988, among the Company and John Arrillaga, Trustee of the John
                         Arrillaga Separate Trust and 

</TABLE>

                                       47
<PAGE>
 
<TABLE>
               <S>       <C>
                         Richard T. Peery, Trustee of the Richard T. Peery Separate Property Trust./ 1/
                         
                10.2     Master Lease Agreement, dated December 2, 1988, between the Company and General Electric Capital
                         Corporation, with schedules./ 1/
                         
                10.3     Letter Agreement, dated July 22, 1987, with respect to the employment of Thomas Tomasetti. /1,6/
                         
                10.4     Lease agreement paperwork for the 630 Clyde Court facility, dated March 6, 1990, among the Company
                         and Santa Clara Property Associates. /2/
                         
                10.5     Agreement between the Company and Honeywell, Inc., Industrial Automation and Control, dated April 1,
                         1993. /3,5/
                         
                10.6     Form of Director and Officer Indemnity Agreement. /4,6/

                10.7     Amended and Restated 1983 Stock Option Plan. /6, #/

                10.8     Forms of Stock Option Agreement used in conjunction with the 1983 Stock Option Plan. /6, #/

                10.9     1990 Outside Director's Stock Option Plan. /6, #/

                10.10    Forms of Outside Directors Stock Option Agreement used in conjunction with the 1990 Outside Director's
                         Stock Option Plan. /6, #/

                10.11    Lease agreement for the Company's principal facility, dated August 2, 1995, among the Company and The
                         Prudential Insurance Company of America. /#/
                         
                10.12    Letter Agreement, dated August 5, 1994, with respect to the employment of Edward Norton. /6, #/

                10.13    Letter Agreement, dated September 28, 1994, with respect to the employment of Richard Van Hoesen. /6, #/
                         
                10.14    Letter Agreement, dated July 12, 1996 , with respect to the resignation of Thomas Tomasetti. /6, 7/
                         
                10.15    Letter Agreement dated June 3, 1996, with respect to the employment of Laurence R. Hootnick. /6, 7/
                         
                10.16    Asset Purchase Agreement for the acquisition of the Taiwan operations of Systematic Designs International,
                         Inc. dated July 2, 1996. /8/
                         
                10.17    Letter Agreement dated August 6, 1996, with respect to the employment of Wynn Bowman. /6/
</TABLE>

                                       48
<PAGE>
 
<TABLE> 
                <S>      <C>                        
                10.18    Letter Agreement dated August 6, 1996, with respect to the employment of Michael J. Field. /6/

                21.1     Schedule of Subsidiaries.
                         
                23.1     Consent of Independent Public Accountants (Coopers & Lybrand L.L.P.).
                         
                23.2     Consent of Independent Public Accountants (Arthur Andersen LLP)
                         
                24.1     Power of Attorney.
                         
                27       Financial Data Schedule (available in EDGAR format only).
</TABLE>


         /1/    Incorporated by reference from exhibits of the same number in
                Registrant's Registration Statement on Form S-1 (File No. 33-
                27947), effective May 9, 1989.

         /2/    Incorporated by reference from exhibit 10.3 to Registrant's
                Annual Report on Form 10-K filed for the Year ended October 31,
                1990.

         /3/    Incorporated by reference from exhibits 3.1, 3.2 or 10.19 to
                Registrant's Quarterly Report on Form 10-Q filed for the Quarter
                ended April 30, 1993.

         /4/    Incorporated by reference from exhibit 10.6 to Registrant's
                Quarterly Report on Form 10-Q for the Quarter ended July 31,
                1994.

         /5/    The Securities and Exchange Commission has granted confidential
                treatment for portions of this document.

         /6/    Compensatory or employment arrangement.

         /7/    Incorporated by reference from exhibits of the same number in
                Registrant's Quarterly Report on Form 10-Q for the Quarter ended
                July 31, 1996.

         /8/    Incorporated by reference from exhibits 2.1 to Registrant's Form
                8-K filed on July 26, 1996 for the acquisition of the Taiwan
                operations of Systematic Designs International, Inc.

         /#/    Previously filed with Registrant's Annual Report on Form 10-K
                for the Year ended October 31, 1995.


  (b)  Reports on Form 8-K

       Report under item 9 dated August 2, 1996 on engaging Arthur Andersen LLP
       as the Company's independent accountant.

                                       49
<PAGE>
 
                              FORM S-8 UNDERTAKING


          For the purposes of complying with the amendments to the rules
governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933,
as amended, the undersigned Registrant hereby undertakes as follows, which
undertaking shall be incorporated by reference into the Registrant's
Registration Statements on Form S-8 Nos. 33-30381 (filed August 8, 1989), 33-
30382 (filed August 8, 1989), 33-35363 (filed July 9, 1990), 33-41312 (filed
June 20, 1991), 33-63346 (filed May 27, 1993) 33-63512 (filed May 28, 1993), 33-
79474 (filed May 27, 1994), 33-79458 (filed May 27, 1994), 333-09885 (filed
August 9, 1996) and 333-14347 (filed October 18, 1996).

          Insofar as indemnification for liabilities arising under the
          Securities Act of 1933 may be permitted to directors, officers and
          controlling persons of the Registrant pursuant to the foregoing
          provisions, or otherwise, the Registrant has been advised that in the
          opinion of the Securities and Exchange Commission such indemnification
          is against public policy as expressed in the Securities Act of 1933
          and is, therefore, unenforceable. In the event that a claim for
          indemnification against such liabilities (other than the payment by
          the Registrant of expenses incurred or paid by a director, officer or
          controlling person of the Registrant in the successful defense of any
          action, suit or proceeding) is asserted by such director, officer or
          controlling person in connection with the securities being registered,
          the Registrant will, unless in the opinion of its counsel the matter
          has been settled by controlling precedents, submit to a court of
          appropriate jurisdiction the question whether such indemnification by
          it is against public policy as expressed in the Act and will be
          governed by the final adjudication of such issue.

                                       50
<PAGE>
 
                                   SIGNATURES


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


                                 CONSILIUM, INC.



                                 By:  /s/ Laurence R. Hootnick
                                      ------------------------

                                      Laurence R. Hootnick
                                      President and Chief Executive
                                      Officer


DATED: January 29, 1997

                                       51
<PAGE>
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANT



Board of Directors and Stockholders
Consilium, Inc.

Our report on the consolidated financial statements of Consilium, Inc. is
included on page 28 of this Form 10-K.  In connection with our audits of such
financial statements, we have also audited the related financial statement
schedule listed in the index on page 47 of this Form 10-K.

In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.


                                                /s/ Coopers & Lybrand L.L.P.
                                                ----------------------------
                                                Coopers & Lybrand L.L.P.


San Jose, California
December 6, 1995
<PAGE>
 
                                CONSILIUM, INC.

                SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE> 
<CAPTION>  
 
             Column A                     Column B              Column C               Column D        Column E
----------------------------------    -------------    ------------------------    -------------    ------------
                                          Balance          Charged    Charged                          Balance
                                            at               to          to                             at End
                                         Beginning        Costs and     Other                             of
           Description                   of Period         Expenses    Accounts      Deductions         Period
----------------------------------    -------------      -----------   --------    -------------    ------------
<S>                                   <C>                <C>           <C>         <C>              <C>
Year ended October 31, 1994:
Allowance for doubtful accounts          $550,000          $ 188,400          -       $113,400        $625,000
 
Year ended October 31, 1995:
Allowance for doubtful accounts           625,000          $ 323,873          -       $298,873        $650,000
 
Year ended October 31, 1996:
Allowance for doubtful accounts           650,000          $  59,557          -       $  4,516        $705,041
</TABLE>

                                      S-2