<PAGE>
 
                                   FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


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

For the quarterly period ended:   September 30, 1996
                                  ------------------

                                       OR

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

For the transition period from __________ to __________

Commission file number  0-26540
                        -------

                               DESKTOP DATA, INC.
             (Exact name of registrant as specified in its charter)

           DELAWARE                         04-3016142
     (State or other jurisdiction of        (I.R.S. Employer
     incorporation or organization)         Identification Number)

                               80 Blanchard Road
                        Burlington, Massachusetts 01803
                    (Address of principal executive offices)

                                 (617) 229-3000
              (Registrant's telephone number, including area code)

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 60 days.  Yes   X  .  No ___.
                                        -----          

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

Title of each class                     Outstanding at October 31, 1996
-------------------                     ---------------------------------

Common Stock, par value $.01            8,598,788

                                       1
<PAGE>
 
                      DESKTOP DATA, INC. AND SUBSIDIARIES

                               TABLE OF CONTENTS




PART I - FINANCIAL INFORMATION                                  Page Number
<TABLE>
<CAPTION>
 
Item 1 - Financial Statements
<S>                                                                  <C>
 
         Condensed Consolidated Balance Sheets
              September 30, 1996 and December 31, 1995.................   3
 
         Condensed Consolidated Statements of Income for the
              three and nine months ended September 30, 1996 and 1995..   4
 
         Condensed Consolidated Statements of Cash Flows for the
              nine months ended September 30, 1996 and 1995............   5
 
         Notes to the Condensed Consolidated Financial Statements......   6
 
Item 2 - Management's Discussion and Analysis of
         Financial Condition and Results of Operations.................   8
 
PART II - OTHER INFORMATION
 
Item 6(a) - Exhibits...................................................  13
 
Signature..............................................................  14
 
Exhibit Index..........................................................  15
 
Exhibits...............................................................  16
</TABLE>

                                       2
<PAGE>
 
<TABLE>
<CAPTION>
 
ITEM 1                DESKTOP DATA, INC. AND SUBSIDIARIES
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                  (UNAUDITED)
                                (IN THOUSANDS)
 
 
                                                    SEPTEMBER 30,   DECEMBER 31,
                                                        1996           1995
                                                      -------        -------
ASSETS
<S>                                               <C>             <C>    
Current assets:
        Cash and cash equivalents                      $ 8,707        $19,301
        Short-term investments                          20,269         13,117
        Accounts receivable                              4,048          3,164
        Prepaid expenses and deposits                    1,871          1,184
                                                    ----------     ----------
                  Total current assets                  34,895         36,766
                                                    ----------     ----------
 
Long-term investments                                    7,899              -
                                                    ----------     ----------
 
Property and equipment, net                              4,191          1,991
                                                    ----------     ----------
 
Other assets                                               271            122
                                                    ----------     ----------
                  Total assets                         $47,256        $38,879
                                                    ==========     ==========
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current liabilities:
        Accounts payable                               $ 1,314        $   974
        Accrued expenses                                 3,739          3,126
        Deferred revenue, current                       14,128         10,063
        Obligation under capital leases, current            34             25
                                                    ----------     ----------
                  Total current liabilities             19,215         14,188
                                                    ----------     ---------- 
Obligation under capital leases, noncurrent                 46             53
                                                    ----------     ----------
 
Deferred revenue, nonc urrent                               47             33
                                                    ----------     ----------
 
Stockholders' equity:
        Common stock                                        86             85
        Additional paid-in capital                      31,266         30,989
        Accumulated deficit                             (3,404)        (6,469)
                                                    ----------     ----------
Total stockholders' equity                              27,948         24,605
                                                    ----------     ----------
                  Total liabilities &
                  stockholders' equity                 $47,256        $38,879
                                                    ==========     ==========
 
 
</TABLE>
              The accompanying notes are an integral part of these
                  condensed consolidated financial statements.

                                       3
<PAGE>
 
<TABLE>
<CAPTION>
                                DESKTOP DATA, INC. AND SUBSIDIARIES
                            CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                                            (UNAUDITED)
                               (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
 
 
                                                                                    THREE MONTHS ENDED         NINE MONTHS ENDED
                                                                                      SEPTEMBER 30,               SEPTEMBER 30,
                                                                                    1996         1995         1996          1995
                                                                                   ------       ------      -------        -------
<S>                                                                            <C>          <C>           <C>            <C>  
Subscription and royalty revenues                                                  $8,062       $5,609      $22,457         $15,430
Other revenues                                                                        690          334        1,645           1,012
                                                                                   ------       ------      -------         -------
                     Total revenues                                                 8,752        5,943       24,102          16,442
 
Cost of revenues                                                                    2,409        1,631        6,519           4,534
Customer support expenses                                                             898          683        2,547           1,813
Development expenses                                                                1,024          747        3,184           2,036
Sales and marketing expenses                                                        3,199        2,271        8,649           6,416
General and admini strative expenses                                                  359          281        1,124             835
                                                                                   ------       ------      -------         -------
                     Total costs and expenses                                       7,889        5,613       22,023          15,634
                                                                                   ------       ------      -------         -------
 
                     Income from operations                                           863          330        2,079             808
 
Interest income, net                                                                  490          283        1,370             440
                                                                                   ------       ------      -------         -------
 
Income before provision for income taxes                                            1,353          613        3,449           1,248
 
Provision for income taxes                                                            151           49          384              81
                                                                                   ------       ------      -------         -------
 
                     Net income                                                    $1,202       $  564      $ 3,065         $ 1,167
                                                                                   ======       ======      =======         =======
 
Net income per common and common
                     equivalent share for 1996; Pro
                     forma net income per common and
                     common equivalent share for 1995                               $0.14        $0.07       $0.35            $0.15
                                                                                   ======       ======      =======         =======
 
Weighted average number of common and
                     common equivalent shares outstanding for
                     1996; Pro forma weighted average number of common
                     and common equivalent shares outstanding for 1995              8,795        7,935       8,811            7,219
                                                                                   ======       ======      ======           ======
                                                                                       
                                                                                 
 
</TABLE>



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

                                       4
<PAGE>
 
<TABLE>
<CAPTION>
 
 
                                                DESKTOP DATA, INC. AND SUBSIDIARIES
                                          CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                            (UNAUDITED)
                                                          (IN THOUSANDS)
 
                                                      NINE MONTHS                     NINE MONTHS
                                                   ENDED SEPTEMBER  30,           ENDED SEPTEMBER 30,
                                                         1996                           1995
                                                         ----                           ---- 
<S>                                                <C>                            <C>
Cash flows from operating activities:

   Net income                                          $  3,065                       $ 1,167
   Adjustments to reconcile net income to net cash
        provided by operating activities:
     Depreciation                                           664                           371     
     Changes in assets and liabilities:                                                                                  
           Accounts receivable                             (884)                         (218)
           Prepaid expenses and deposits                   (687)                         (273)
           Accounts payable                                 339                         1,040
           Accrued expenses                                 613                           903
           Deferred revenue                               4,078                         2,136
                                                      ---------                     ---------               
     Net cash provided by operating activities            7,188                         5,126
                                                      =========                     ========= 
 
Cash flows from investing activities:
   Purchases of short-term investments                   (7,152)                            -
   Purchases of long-term investments                    (7,899)                            -
   Purchases of property and equipment                   (2,838)                         (881) 
   Increase in other assets                                (149)                          (67)
                                                      ---------                     --------- 
     Net cash used in investing activities              (18,038)                         (948)
                                                      =========                     ========= 
 
Cash flows from financing activities:
   Proceeds from IPO, net of issuance costs                  -                         26,711
   Payments of dividends on Preferred Stock                  -                         (2,638)
   Proceeds from exercise of stock options                 124                             54
   Proceeds from stock issuance under employee 
          stock purchase plan                              154                              -                   
   Purchase of treasury stock                                -                             (2)
   Payments on obligation under capital leases             (22)                           (17)
                                                     ---------                      ---------
     Net cash provided by financing activities             256                         24,108
                                                     =========                      ========= 

(Decrease) increase in cash and cash equivalents       (10,594)                        28,286
Cash and cash equiv alents, beginning of period         19,301                          4,074
                                                     ---------                      ---------
 
Cash and cash equivalents, end of period              $  8,707                        $32,360
                                                     =========                      ========= 
 
Supplemental disclosure of cash flow information
   Cash paid for income taxes                         $    205                        $    19
                                                     ---------                      --------- 
   Cash paid for interest                             $      4                        $     1
                                                     ---------                      --------- 

Supplemental disclosure of noncash transactions
   Equipment acquired under capital lease 
          obligations                                $     25                         $    17
                                                    ---------                       --------- 
   Accretion of dividends on redeemable 
          preferred stock                           $      -                          $   233
                                                   ----------                       --------- 
</TABLE>
              The accompanying notes are an integral part of these
                  condensed consolidated financial statements.

                                       5
<PAGE>
 
                      DESKTOP DATA, INC. AND SUBSIDIARIES
            NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)


I.   OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Presentation

  The condensed consolidated financial statements of Desktop Data, Inc. (the
"Company") presented herein have been prepared pursuant to the rules of the
Securities and Exchange Commission for quarterly reports on Form 10-Q and do not
include all of the information and note disclosures required by generally
accepted accounting principles.  These financial statements should be read in
conjunction with the Company's consolidated financial statements and notes
thereto for the year ended December 31, 1995 included in the Company's Form 10-
K.  In the opinion of management, the accompanying unaudited consolidated
financial statements include all adjustments, consisting of only normal
recurring adjustments, necessary to present fairly the consolidated financial
position, results of operations and cash flows of the Company and its
subsidiaries.  Interim operating results are not necessarily indicative of the
results which would be expected for the full year.

Principles of Consolidation

  The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, Desktop Data Canada, Inc. and Desktop
Data Securities Corporation.  All material intercompany accounts and
transactions have been eliminated in consolidation.

Cash Equivalents and Investments

  Cash equivalents consist of highly liquid investments purchased with an
original maturity of three months or less.  Those securities with maturities of
three months to twelve months as of the balance sheet date are classified as
short term investments and securities with maturities of greater than twelve
months are classified as long term investments.

  At September 30, 1996, cash equivalents included approximately $1.7 million in
money market investments and $5.4 million in U.S. agency discount notes.  At
September 30, 1996, short term investments included approximately $4.3 million
in U.S. Treasury notes, and $16.0 million in U.S. agency discount notes.  Long
term investments at September 30, 1996, were comprised of $7.9 million in U.S.
Treasury notes.

Net Income and Pro Forma Net Income Per Common and Common Equivalent Share

  For the three and nine month periods ended September 30, 1996, net income per
common and common equivalent share is computed by dividing net income by the
weighted average number of common and common equivalent shares during that
period.  Common equivalent shares from stock options have been included in the
computation using the treasury-stock method.  For the three and nine month
periods ended September 30, 1995, pro forma net income per common and common
equivalent share is computed by dividing net income, less the charge for the
accretion of the Series B preferred stock dividend, by the pro forma weighted
average number of common and dilutive common equivalent shares outstanding
during that period, assuming conversion of all shares of Series A convertible
preferred stock and all shares of Series C and D redeemable preferred stock into
common stock.  Stock options granted after July 1, 1994 through August 11, 1995
have been reflected as outstanding for the three and nine month periods ended
September 30, 1995 using the treasury stock method as required by the Securities
and Exchange Commission.

                                       6
<PAGE>
 
2.  STOCKHOLDERS' EQUITY

Initial Public Offering

  On August 11, 1995, the Company completed an initial public offering of
1,977,000 shares of its common stock, including 300,000 shares granted to the
underwriters upon exercise of their over-allotment option.  The proceeds to the
Company, net of underwriting discounts, commissions and offering expenses, were
approximately $26,711,000.

Convertible Preferred Stock

Concurrent with the above offering, the following transactions occurred:

  Upon the closing of the initial public offering, the Series A, Series C and
Series D preferred stock was converted into an aggregate of 3,847,123 shares of
common stock.  In addition, the Company paid cash dividends of approximately
$2,009,000 and $629,000 on the Series A and Series B preferred stock,
respectively.

  In accordance with the underlying agreement, the mandatory redemption
requirement related to the Series B preferred stock was relieved upon the
Company's initial public offering as the offering price exceeded $13.10 per
share.  In December 1995, the Company redeemed the Series B preferred stock for
$10.00 per share or an aggregate of $135,000, representing a $1,232,238
discount.

  On June 26, 1995, the Company's stockholders approved a new class of
undesignated preferred stock, which became effective upon the closing of the
Company's initial public offering.

3.  STOCK SPLIT

  On June 26, 1995, the Company's stockholders approved a 1-for-2.25 reverse
stock split of the common stock.  The reverse stock split has been retroactively
reflected in the accompanying consolidated financial statements and notes for
all periods presented.

4.  COMMITMENTS

  On August 31, 1995, the Company entered into an operating lease for office
facilities, which commenced in February, 1996 and expires in fiscal 2003.  The
Company will pay out a total of approximately $2.3 million in monthly lease
payments over the period of the lease.  The Company has paid approximately
$229,000 related to the security deposit on the lease.

                                       7
<PAGE>
 
ITEM 2             MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

  Desktop Data, through its NewsEDGE service and software, delivers a large
variety of news and information sources in real time to personal computers and
workstations installed on LANs and WANs, automatically monitors and filters the
news, and alerts the users to stories of interest to them.

  The Company's revenues consist primarily of NewsEDGE subscription fees and
related royalties received from news providers in connection with sales of their
newswires through NewsEDGE.  Historically, royalties have constituted less than
10% of this amount.  The Company's other revenues consist principally of
NewsEDGE installation services and related computer hardware system sales, and
non-recurring custom development projects related to the Company's software.

  NewsEDGE subscriptions are generally for an initial term of twelve months,
payable in advance, and are automatically renewable for successive one year
periods unless the customer delivers notice of termination prior to the
expiration date of the then current agreement.  NewsEDGE subscription revenues
are recognized ratably over the subscription term, beginning on installation of
the NewsEDGE service.  Accordingly, a substantial portion of the Company's
revenues are recorded as deferred revenues until they are recognized over the
license term.  The Company does not capitalize customer acquisition costs.

  Certain newswires offered by the Company through NewsEDGE are purchased by the
customer directly from the news provider and payments are made directly from the
NewsEDGE customer to the provider.  For some of these newswires, the Company
receives ongoing royalties on payments made by the customer to the news
provider, and those royalties constitute part of the Company's subscription and
royalty revenues.  For other newswires that are resold by Desktop Data to the
NewsEDGE customer, the Company includes a fee for the newswire in the NewsEDGE
subscription fee paid by the customer and pays a royalty to the news provider.
Such royalties are included in the Company's cost of revenues.

RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30,
1996

  Total revenues increased 47%, from $5.9 million for the three months ended
September 30, 1995 to $8.8 million for the three months ended September 30,
1996.  Year-to-date total revenues increased 47% to $24.1 million as compared to
$16.4 million for the same nine month period last year.  In the third fiscal
quarter, subscription and royalty revenues increased 44% to $8.1 million, up
from $5.6 million for the same period in 1995.  Year-to-date subscription and
royalty revenues increased 46% to $22.5 million from $15.4 million for the nine
months ended September 30, 1996 and 1995, respectively.  Other revenues
increased 107% to $690,000 and 63% to $1.6 million, respectively, for the three
and nine month periods ended September 30, 1996, from $334,000 and $1.0 million,
respectively, for the same periods in 1995.  The increase in subscription and
royalty revenues was due to increased subscription revenues from new customers,
the retention and growth of revenues from existing customers and increased
royalties from the sale of third party information news.  The increase in other
revenues was due to increased non-recurring custom development projects.

  The number of installed customers increased from 313 customers at September
30, 1995, to 373 customers at September 30, 1996, an increase of 19%.  The
number of authorized users within customer organizations increased from 68,915
users at September 30, 1995 to 110,298 users at September 30, 1996, an increase
of 60%.  The average users per customer increased from 212 users at September
30, 1995 to 270 users at September 30, 1996, an increase of 27%.  The Company's
average revenues per customer increased from $54,330 for the nine months ended
September 30, 1995 to $63,435 for the nine months ended September 30, 1996, an
increase of 17%.

  Cost of revenues, as a percentage of total revenues, remained relatively
constant at 28% and 27% for the three and nine months ended September 30, 1996
from 27% and 28% for the three and nine months ended September 30, 1995.

                                       8
<PAGE>
 
  Customer support expenses increased 32% to $898,000 for the three months ended
September 30, 1996, as compared to $683,000 for the same period in 1995.  Year-
to-date customer support expenses increased 41% to $2.5 million for the nine
months ended September 30, 1996, as compared to $1.8 million for the same period
in 1995.  These increases result primarily from higher staffing levels and the
continuing need for the Company to provide additional support to its growing
customer base.  As a percentage of total revenues, customer support expenses
remained relatively constant at 10% and 11%, respectively, for the three and
nine month periods ended September 30, 1996, as compared to 11% for both the
three and nine month periods ended September 30, 1995.  At September 30, 1996,
Desktop Data had 49 employees engaged in field and central customer support
operations.

  Development expenses increased 37% to $1.0 million for the three months ended
September 30, 1996, as compared to $747,000 for the three months ended September
30, 1995.  Year-to-date development expenses increased 56% to $3.2 million for
the nine months ended September 30, 1996, as compared to $2.0 million for the
comparable period in 1995.  Development expenses increased as a result of higher
staffing levels to provide for enhancements of existing features and the
development and quality assurance testing of new features.  As a percentage of
total revenues, development expenses remained relatively constant at 12% and
13%, respectively, for the three and nine month periods ended September 30,
1996, as compared to 13% and 12%, respectively, for the comparable periods in
1995.  The increase in development expenses was due primarily to planned
increases in development staff required to expand and enhance the Company's
product line.  At September 30, 1996, Desktop Data had 45 employees engaged in
development and quality assurance operations.

  Sales and marketing expenses increased 41% to $3.2 million for the three month
period ended September 30, 1996, as compared to $2.3 million for the same period
in 1995.  Year-to-date sales and marketing expenses increased 35% to $8.6
million for the nine month period ended September 30, 1996, from $6.4 for the
same period in 1995.  Sales and marketing expenses increased during these
periods, primarily due to the expansion of the sales and marketing
organizations.  As a percentage of total revenues, sales and marketing expenses
decreased to 37% and 36% for the three and nine month periods ended September
30, 1996, from 38% and 39% for the same periods in 1995.  The decrease was
primarily due to an increase in the Company's revenues, without a corresponding
increase in sales and marketing expenses.  As of September 30, 1996, Desktop
Data's direct sales force and marketing staff consisted of 63 employees.

  General and administrative expenses increased 28% to $359,000 for the three
months ended September 30, 1996 from $281,000 for the three months ended
September 30, 1995.  Year-to-date general and administrative expenses increased
35% to $1.1 million for the nine months ended September 30, 1996 from $835,000
for the nine month period ended September 30, 1995.  The increases in general
and administrative expenses were due primarily to additions to staff to support
the Company's growth.  General and administrative expenses, as a percentage of
total revenues, remained relatively constant at 4% and 5% for the three and nine
month periods ended September 30, 1996, as compared to 5% for both the three and
nine months ended September 30, 1995.  At September 30, 1996, Desktop Data had
12 employees engaged in general and administrative operations.

  Interest income, net increased to $490,000 and $1.4 million, respectively, for
the three and nine month periods ended September 30, 1996, from $283,000 and
$440,000 for the comparable periods in 1995, due to the interest earned on
higher cash balances generated from operations and the proceeds from the
Company's initial public offering and higher interest rates paid on cash
balances.

  The provision for income taxes increased to $151,000 and $384,000,
respectively, for the three and nine month periods ended September 30, 1996 from
$49,000 and $81,000 for the comparable periods in 1995. The increase in the tax
provision is due to both the utilization of the available tax loss carryforwards
and higher expected taxable income in the Company's foreign operations with
higher tax rates.

                                       9
<PAGE>
 
LIQUIDITY AND CAPITAL RESOURCES

  At September 30, 1996, the Company had cash and investments aggregating $36.9
million (including $7.9 million in long term investments), as compared to $32.4
million of cash and investments at December 31, 1995, an overall increase of
$4.5 million.  Net cash generated from operations was $7.2 million for the nine
months ending September 30, 1996 compared with $5.1 million for the comparable
period in 1995, due primarily to higher net income in the period ended September
30, 1996 combined with the effects of changes in accounts receivable and
deferred revenue related to the timing of cash receipts.  Net cash used for
investing activities for the nine months ended September 30, 1996 was $18.0
million, due primarily to the purchase of long term and short term investments,
and purchases of property and equipment.  Net cash provided by financing
activities in the nine months ended September 30, 1996 was $256,000, due
primarily to proceeds from both employee stock option exercises and employee
stock plan purchases.

  The Company continues to investigate the possibility of investments in or
acquisitions of complementary businesses, products or technologies, although the
Company has not entered into any commitments with respect to any such
transactions.

  The Company believes that its current cash balances and funds anticipated to
be generated from operations, will be sufficient to satisfy working capital and
capital expenditure requirements for the next twelve months.

CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS

  The Company operates in a rapidly changing environment that involves a number
of risks, some of which are beyond the Company's control.  The following
discussion highlights some of the risks which may affect future operating
results.

  Competition. The business information services industry is intensely
competitive and is characterized by rapid technological change and the entry
into the field of extremely large and well-capitalized companies as well as
smaller competitors.  Increased competition, on the basis of price or otherwise,
may require price reductions or increased spending on marketing or software
development, which could have a material adverse effect on the Company's
business and results of operations. The Company competes or may compete directly
or indirectly with the following categories of companies: (i) large, well-
established news and information providers such as Knight-Ridder Information
Services, Inc. ("Dialog"), Dow Jones & Company, Inc. ("Dow Jones"), Reed
Elsevier PLC ("Lexis/Nexis"), Pearson PLC ("Pearson"), Reuters America, Inc.
("Reuters") and Thomson Financial Networks, Inc. ("Thomson"); (ii) market data
services companies such as Automatic Data Processing, Inc. ("ADP"), Bloomberg
L.P. ("Bloomberg"), Quotron Systems, Inc. ("Quotron") and Dow Jones Telerate
Inc. ("Telerate"); (iii) traditional print media companies that are increasingly
searching for opportunities for on-line provision of news, including through the
establishment of World Wide Web sites on the Internet; (iv) large providers of
LAN-based software systems such as Lotus Development Corporation ("Lotus") and
Microsoft Corporation ("Microsoft"), which could, in the future, ally with
competing news and information providers; and (v) to a lesser degree, consumer-
oriented commercial on-line services and Internet access providers. Many of
these companies and market participants not named above have substantially
greater financial, technical and marketing resources than the Company. The
Company believes that NewsEDGE is differentiated from the news and system
products offered by the large news and systems providers because of the
Company's ability to deliver news from many different, competing providers on an
enterprise-wide basis, directly to LAN-connected personal computers, customized
to meet the needs of each individual user, at a relatively low cost per user.

                                       10
<PAGE>
 
  In addition, several smaller companies offer directly competitive products or
services that provide news to enterprises through the customer's computer
network. The Company believes that NewsEDGE offers advantages over each of these
competing products. For example, certain of the competing services offers
substantially fewer real-time news sources than does NewsEDGE. Furthermore,
unlike NewsEDGE, certain competitors do not offer real-time scrolling of news
stories, while others do not support Lotus Notes or other groupware
applications. In addition, many competitors rely on database engines developed
by third parties, and as a result the Company believes these services are not as
readily adaptable to evolving customer or information provider needs as is
NewsEDGE. Finally, certain of these smaller competitors are owned by a larger
organization, which the Company believes restricts their ability to attract a
large variety of news sources and makes it difficult for them to provide the
same level and focus of sales, development and customer support as can be
provided by Desktop Data.

  Dependence on NewsEDGE Service. The Company currently derives substantially
all of its revenues from NewsEDGE service subscriptions and related royalties.
Although the Company intends to increase the number of news and other
information sources available through NewsEDGE and to otherwise enhance
NewsEDGE, the Company's strategy is to continue to focus on providing the
NewsEDGE service as its sole line of business. In addition, there can be no
assurance that the Company will be able to increase the number of news sources
or otherwise enhance NewsEDGE. As a result, any factor adversely affecting sales
of NewsEDGE would have a material adverse effect on the Company. The Company's
future financial performance will depend principally on the market's acceptance
of NewsEDGE and the Company's ability to sell NewsEDGE to additional customers
and to increase revenue derived from existing customers by increasing the number
of users within each customer, adding additional newswires or adding additional
NewsEDGE servers.

  Dependence on News Providers. The Company currently makes over 600 news and
information sources available through NewsEDGE, pursuant to agreements between
the Company and over 50 different news providers. A significant percentage of
the Company's customers subscribe to services provided by one or more of Press
Association Inc., a subsidiary of The Associated Press ("The Associated Press"),
Dow Jones, The Financial Times, Reuters and Thomson. The Company's agreements
with news providers are generally for a term of one year, with automatic renewal
unless notice of termination is provided before the end of the term by either
party. These agreements may also be terminated by the provider if Desktop Data
fails to fulfill its obligations under the agreement and, under some of the
agreements, upon the occurrence of a change in control of the Company. Many of
these news and information providers compete with one another and, to some
extent, with the Company. Termination of one or more significant news provider
agreements would decrease the news and information which the Company can offer
its customers and would have a material adverse effect on the Company's business
and results of operations.

  Dependence on News Transmission Sources. NewsEDGE news and information is
transmitted using one or more of three methods: leased telephone lines,
satellites or FM radio transmission. None of these methods of news transmission
is within the control of the Company, and the loss or significant disruption of
any of them could have a material adverse effect on the Company's business. Many
newswire providers have established their own broadcast communications networks
using one or more of these three vehicles. In these cases, Desktop Data's role
is to arrange communications between the news provider and the NewsEDGE
customer's server. For sources which do not have their own broadcast
communications capability, news and information is delivered to the Company's
news consolidation facility, where it is reformatted for broadcast to NewsEDGE
servers and retransmitted to customers through an arrangement between the
Company and WavePhore Networks, Inc. ("WavePhore"), a common carrier
communications vendor.  WavePhore is also the communications provider for many
newswires offered by the Company through NewsEDGE. The Company's agreement with
WavePhore expires on December 31, 1998 and can be terminated earlier in the
event of a material breach by the Company of the agreement. If the agreement
with WavePhore were terminated on short notice, or if WavePhore were to
encounter technical or financial difficulties adversely affecting its ability to
continue to perform under the agreement or otherwise, the Company's business
would be materially and adversely affected.  The Company believes that if
WavePhore were unable to fulfill its obligations, other sources of
retransmission would be available to the Company, although the transition from
WavePhore to those sources could result in delays or interruptions of service
that could have a material adverse affect on the Company's business.

                                       11
<PAGE>
 
  Rapid Technological Change. The business information services, software and
communications industries are subject to rapid technological change, which may
render existing products and services obsolete or require significant
unanticipated investments in research and development. The Company's future
success will depend, in part, upon its ability to enhance NewsEDGE and keep pace
with technological developments.

  Dependence on Key Personnel. The Company's success depends to a significant
extent upon the continued service of its executive officers and other key
management, sales and technical personnel, and on its ability to continue to
attract, retain and motivate qualified personnel. The competition for such
employees is intense. The Company has no long-term employment contracts with any
of its employees and none of its employees is bound by a non-competition
agreement. The loss of the services of one or more of the Company's executive
officers, sales people, design engineers or other key personnel or the Company's
inability to recruit replacements for such personnel or to otherwise attract,
retain and motivate qualified personnel could have a material adverse effect on
the Company's business and results of operations. The Company maintains $3
million of key-man life insurance on Donald L. McLagan, the Company's Chairman,
President and Chief Executive Officer.

                                       12
<PAGE>
 
                               DESKTOP DATA, INC.


PART II - OTHER INFORMATION

ITEM 6.  EXHIBITS AND REPORTS FILED ON FORM 8-K.
------------------------------------------------

6a.  Exhibits.

  11.1 Computation of earnings per share

6b.  REPORTS ON FORM 8-K

     No reports on Form 8-K have been filed during the quarter for which this
     report is filed.

                                       13
<PAGE>
 
                      DESKTOP DATA, INC. AND SUBSIDIARIES



SIGNATURE


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


                                            DESKTOP DATA, INC.
                                            (Registrant)



Date: November 8, 1996              /s/   Edward R. Siegfried
                                    --------------------------------------------
                                    Edward R. Siegfried
                                    Vice President--Finance and Operations
                                    Treasurer and Assistant Secretary

                                       14
<PAGE>
 
                      DESKTOP DATA, INC. AND SUBSIDIARIES
                                 EXHIBIT INDEX



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

  11.1    -    Computation of earnings per share              16