EXHIBIT 13.1


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF 
OPERATIONS


OVERVIEW

The  Indus  Group  develops,  markets,  implements  and  supports  client/server
enterprise management software solutions for process industries  worldwide.  The
Company  was  founded in 1988,  operated  as a sole  proprietorship  until being
incorporated  in 1990,  and completed its initial publc offering on February 29,
1996.  The Company  derives  its  revenues  primarily  from  software  licenses,
implementation  and training  services and associated  maintenance  fees sold to
electric and gas utilities and other process-related industries.





<PAGE>


                                       16

MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)

<TABLE>

RESULTS OF OPERATIONS

The  following  table sets forth the  Company's  results of  operations  for the
periods indicated expressed as a percentage of total revenues.

<CAPTION>
                                                                                  Percentage of Total Revenues
                                                                                     Years Ended December 31,
                                                                                1994          1995           1996
------------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>            <C>            <C>
Revenues:
    Software licensing fees                                                      25%            20%            21%
    Services and maintenance                                                     75             80             79
------------------------------------------------------------------------------------------------------------------
    Total revenues                                                              100            100            100
------------------------------------------------------------------------------------------------------------------
Cost of revenues                                                                 42             42             42
------------------------------------------------------------------------------------------------------------------
Gross margin                                                                     58             58             58
Operating expenses:
    Research and development                                                     23             15             16
    Sales and marketing                                                          14             11             12
    General and administrative                                                   15              9             10
    Compensation charge-stock options                                            --             35             --
------------------------------------------------------------------------------------------------------------------
    Total operating expenses                                                     52             70             38
------------------------------------------------------------------------------------------------------------------
Income (loss) from operations                                                     6            (12)            20
Other income (expense), net                                                      --             --              1
------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes                                                 6            (12)            21
Provision for income taxes                                                       --             --              9
Cumulative effect of deferred income taxes provided upon January 1, 1996
    conversion to C Corporation status                                           --             --              9
------------------------------------------------------------------------------------------------------------------
Net income (loss)                                                                 6%           (12)%            3%

PRO FORMA STATEMENT OF OPERATIONS DATA FOR 1995 AND 1996:
    Income (loss) before income taxes, as above                                                (12)%           21%
    Add back portion of compensation charge-stock options                                       33             --
------------------------------------------------------------------------------------------------------------------
    Income before income taxes, as adjusted                                                     21             21
    Provision for income taxes                                                                   9              9
------------------------------------------------------------------------------------------------------------------
    Pro forma net income                                                                        12%            12%
==================================================================================================================

</TABLE>

Revenues
  The  Company's  revenues are derived  from  software  licensing  fees and from
  services,  which include  implementation  and training  services  coupled with
  maintenance  fees. Total revenues  increased 76% from $30.6 million in 1994 to
  $53.8 million in 1995,  and 41% to $75.9 million in 1996. The increase in 1995
  resulted from increased  licensing activity in the latter half of 1994 and the
  associated  increase in demand for the Company's  implementation  and training
  services.  The growth in 1996 was attributable to increased licensing activity
  combined with new customer licenses and subsequent implementation and training
  services.  The Company does not believe the revenue growth experienced in 1996
  is  necessarily  indicative  of any  revenue  growth  that may occur in future
  periods.

Cost of Revenues
  Cost of revenues  consists  primarily  of: (i) personnel and related costs for
  implementation,  including the costs of the Company's Account Executives,  and
  (ii) personnel and related costs for training and customer  support  services.
  Substantially  all of the  cost  of  revenues  is  attributable  to  providing
  services  and  maintenance.  Costs of software  license  fees,  which  consist
  primarily of packaging and production  costs,  are not significant and are not
  segregated in the Company's accounting records. All software development costs
  are  expensed  to  research  and  development  as  incurred.  Cost of revenues
  increased  76% from $12.8  million in 1994 to $22.6 million in 1995 and 41% to
  $31.8 million in 1996, and  represented 42% of total revenues in each of those
  years.  The 1995  and  1996  increases  resulted  from  the cost of  increased
  services  associated with major new license  agreements as well as the cost of
  additional services associated with the expansion of existing projects.

Research and Development
  Research and  development  expenses  consist  primarily  of: (i) personnel and
  related costs and (ii) computer  timeshare costs directly  attributable to the
  development of new software  application  products,  enhancements  to existing
  products  and the  costs  of  porting  the  Company's  products  to  different
  platforms.  Research  and  development  expenses  increased  by 17% from  $7.1
  million in 1994 to $8.3 million in 1995 and  increased by 50% to $12.5 million
  in 1996, and represented 23%, 15% and 16%  respectively,  of total revenues in
  those years.  The decline in research and development as a percentage of total
  revenues  in 1995 was due to the  increase  in total  revenues.  Research  and
  development  investment  increased in absolute  dollars and as a percentage of
  total  revenues  in 1996 as  compared  to 1995 due to the  Company  committing
  substantial  development resources towards incorporating new technologies into
  PASSPORT and designing additional PASSPORT applications.  The Company believes
  that a significant  level of research and  development  is essential to remain
  competitive  and  will  continue  to  invest  development   resources  towards
  incorporating new technologies into PASSPORT and designing additional PASSPORT
  functionality.  The level of these  expenditures  for a particular  period may
  vary depending on the projects in progress.

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)

  In  accordance  with  Statement  of  Financial  Accounting  Standards  No. 86,
  software  development  costs are  expensed  as  incurred  until  technological
  feasibility of the software is established,  after which any additional  costs
  are  capitalized.  To date, the Company has expensed all software  development
  costs because  development  costs incurred  subsequent to the establishment of
  technological feasibility have not been material.


Sales and Marketing
  Sales and  marketing  expenses  increased  by 39% from $4.1 million in 1994 to
  $5.7  million  in 1995 and  increased  by 64% to $9.3  million  in  1996,  and
  represented 14%, 11% and 12%, respectively,  of total revenues in those years.
  The 1995 and 1996  increases  in  absolute  dollars  resulted  from  increased
  staffing levels and increased  commissions  expenses associated with increased
  revenues.  The  Company  believes  that  sales  and  marketing  expenses  as a
  percentage of total revenues will increase in 1997 due to the  reallocation of
  certain expenditures originally intended for research and development to sales
  and marketing  efforts,  and will increase as the Company expands its presence
  in the domestic  market,  initiates  operations  in  additional  international
  markets,  develops new and existing marketing and product strategic  alliances
  and increases focus on vertical markets.


General and Administrative
  General and administrative  expenses increased by 4% from $4.7 million in 1994
  to $4.9 million in 1995 and  increased  by 59% to $7.8 million in 1996.  These
  expenses represented 15%, 9% and 10%, respectively, of total revenues in those
  years. The increase in 1996 primarily  resulted from incremental  expenditures
  related to becoming a public  company and expansion in staffing to support the
  Company's growth.


Compensation Charge - Stock Options
  The Company  amended its 1992 Stock Option Plan effective in September 1995 to
  accelerate  the  exercisability  of all  outstanding  stock options  (covering
  1,788,570  shares  of  Common  Stock).   Exercisability  had  previously  been
  contingent upon certain  "liquidity events" such as an initial public offering
  or an acquisition of the Company.  As a result of this amendment,  the Company
  recognized a non-recurring  compensation  charge of $18.9 million in the third
  quarter of 1995.


Provision for Income Taxes
  Effective  upon its  incorporation  in 1990,  the Company  elected to have its
  United States income taxed under Subchapter S of the Code. Accordingly, income
  tax provisions prior to 1996 were principally  attributable to state taxes and
  taxes  imposed  by  governments  on  the  Company's  foreign  operations.  The
  Company's S Corporation  status terminated  effective January 1, 1996, and the
  Company  was  subject  to  federal  income  taxation  at the  corporate  level
  thereafter.  In connection with the termination of S Corporation  status as of
  January 1, 1996, a one-time  charge  representing a cumulative net federal and
  state  deferred  income tax liability of $6.7 million was recorded  during the
  first quarter of 1996.


Net Income (Loss)
  The Company's net income of $2.5 million in 1996  increased  from the net loss
  recorded  in 1995,  primarily  due to  increased  revenues.  The effect of the
  increased  revenues was partially offset by the factors described above and by
  a one-time  charge  representing  a cumulative  net federal and state deferred
  income tax liability associated with the Company's conversion to C Corporation
  status. The loss in 1995 was a result of the non-recurring compensation charge
  upon elimination of the contingency related to stock options.



o LIQUIDITY AND CAPITAL RESOURCES
  
  During  1996,  the Company  financed  its  operations  primarily  through cash
  provided by operations  and the proceeds of its initial  public  offering.  In
  March 1996, the Company received $33.9 million, representing the proceeds (net
  of  underwriting  commissions  and  offering  costs)  from an  initial  public
  offering of 2,500,000 shares of its Common Stock.  Cash provided by operations
  was $2.3  million,  $3.1  million  and $20.2  million in 1994,  1995 and 1996,
  respectively.  Accounts  receivable  increased  substantially  in  1995 as the
  overall  level  of  new  licensing  activity  and  associated  service  levels
  increased.  Accounts  receivable  decreased  in 1996  in  spite  of  increased
  revenues as a result of additional focus on collections. Investing activities,
  consisting primarily of the purchase of marketable securities and acquisitions
  of property and equipment,  used cash of approximately $861,000,  $577,000 and
  $33.3 million in 1994, 1995 and 1996,  respectively.  Financing  activities in
  1994 and 1995  used  cash of $1.4  million  and  $2.6  million,  respectively.
  Financing  activities in 1996 generated  cash of $26.3 million  primarily as a
  result of the proceeds from the initial public  offering  partially  offset by
  repayment of the line of credit.

  As of  December  31,  1996,  the  Company's  principal  sources  of  liquidity
  consisted of  approximately  $13.3  million in cash and cash  equivalents  and
  $26.5  million in  marketable  securities.  In  addition,  the  Company has an
  unsecured  revolving bank line of credit  agreement which permits  borrowings,
  including  stand-by  letters of credit,  of up to $15  million.  The  facility
  expires  in May  1997.  The  Company  believes  it will be able to renew  this
  agreement or replace it on terms acceptable to the Company. No borrowings were
  outstanding under this line at December 31, 1996.

  The Company presently  anticipates capital  expenditures of approximately $6.0
  million in 1997, primarily for equipment and furniture.

  The Company believes that existing cash and marketable securities, anticipated
  cash flow from  operations and available bank borrowings will be sufficient to
  meet its cash requirements  during at least the next 12 months.  The foregoing
  statement  regarding the Company's  expectations for continued  liquidity is a
  forward-looking  statement, and actual results may differ materially depending
  on a variety of factors, including variable operating results.


                                       17
<PAGE>

                                       18



CONTENTS OF FINANCIAL STATEMENTS


    19        REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS  
              
    20        BALANCE SHEETS                                     
              
    21        STATEMENTS OF OPERATIONS                           
              
    22        STATEMENT OF SHAREHOLDERS' EQUITY                  
              
    23        STATEMENTS OF CASH FLOWS                           
              
    24        NOTES TO FINANCIAL STATEMENTS                      


<PAGE>


REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Shareholders
The Indus Group, Inc.

We have audited the accompanying  consolidated balance sheet of The Indus Group,
Inc.  as of  December  31,  1996,  and the related  consolidated  statements  of
operations,  shareholders'  equity,  and cash flows for the year then ended, and
the  accompanying  combined  balance  sheet of The Indus  Group,  Inc. and Indus
International, Inc. (a related entity acquired by The Indus Group, Inc. in 1996)
as of December 31, 1995,  and the related  combined  statements  of  operations,
shareholders'  equity,  and cash  flows for each of the two years in the  period
ended December 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 The Indus Group,
Inc. at December 31, 1996,  and the  consolidated  results of its operations and
its cash flows for the year then ended and the  combined  financial  position of
The Indus Group,  Inc. and Indus  International,  Inc. at December 31, 1995, and
the combined  results of their operations and their cash flows for the two years
in the period ended  December 31, 1995 in  conformity  with  generally  accepted
accounting principles.


                         /s/ Ernst & Young LLP


                         Palo Alto, California                         
                         January 24, 1997


                                       19

<PAGE>

                                       20


<TABLE>
COMBINED (1995); CONSOLIDATED (1996) BALANCE SHEETS

ASSETS

<CAPTION>
(In thousands, except share amounts)
                                                                                                December 31,
Current assets                                                                            1995              1996
-------------------------------------------------------------------------------------------------------------------
<S>                                                                                    <C>                <C>     
   Cash and cash equivalents                                                           $     45           $ 13,266
   Marketable securities                                                                   --               26,524
   Billed accounts receivable, less allowance for doubtful accounts of $652 and $449
      at December 31, 1995 and 1996, respectively                                        17,661             16,889
   Unbilled accounts receivable                                                           9,053              5,633
   Other current assets                                                                   1,108              4,523
-------------------------------------------------------------------------------------------------------------------
         Total current assets                                                            27,867             66,835
Marketable securities - maturing beyond one year                                           --                2,129
Property and equipment, net                                                               3,128              6,337
Employee notes receivable                                                                    80                140
Other assets                                                                               --                   73
-------------------------------------------------------------------------------------------------------------------
                                                                                       $ 31,075           $ 75,514
===================================================================================================================

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
   Borrowings under line of credit                                                     $  8,900           $   --
   Accounts payable                                                                       1,331              2,165
   Accrued compensation                                                                   1,841              3,030
   Income taxes payable                                                                     218               --
   Deferred income taxes                                                                    326              3,837
   Other accrued liabilities                                                                186                511
   Deferred revenue                                                                       7,425             10,599
-------------------------------------------------------------------------------------------------------------------
   Total current liabilities                                                             20,227             20,142

Commitments                                                                                --                 --

Shareholders' equity:
   Preferred stock                                                                         --                 --
   Common stock                                                                             609                 19
   Additional capital                                                                    18,900(1)          46,425
   Other                                                                                   (438)              (300)
   Retained earnings (deficit)                                                           (8,223)             9,228
-------------------------------------------------------------------------------------------------------------------
   Total shareholders' equity                                                            10,848             55,372
-------------------------------------------------------------------------------------------------------------------
                                                                                       $ 31,075           $ 75,514
===================================================================================================================

<FN>
(1)  Value  of  unexercised   stock  options  of  The  Indus  Group,  Inc.  upon
     elimination of contingency  feature,  which had precluded exercise of these
     options.  This  amount was  charged to  operations  in  September  1995 and
     reduced retained earnings at December 31, 1995.

See accompanying notes.
</FN>
</TABLE>

<PAGE>

<TABLE>

COMBINED (1994 and 1995); CONSOLIDATED (1996) STATEMENTS OF OPERATIONS

<CAPTION>
(In thousands, except per share amounts)
                                                                                      Years Ended December 31,
                                                                              1994            1995             1996
---------------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>             <C>             <C>     
Revenues:
    Software licensing fees                                                 $  7,547        $ 10,676        $ 16,208
    Services and maintenance                                                  23,044          43,115          59,731
---------------------------------------------------------------------------------------------------------------------
       Total revenues                                                         30,591          53,791          75,939
Cost of revenues (1)                                                          12,798          22,578          31,790
---------------------------------------------------------------------------------------------------------------------
Gross margin                                                                  17,793          31,213          44,149
Operating expenses:
    Research and development                                                   7,120           8,306          12,493
    Sales and marketing                                                        4,144           5,680           9,306
    General and administrative                                                 4,654           4,918           7,819
    Compensation charge - stock options (2)                                     --            18,900            --
---------------------------------------------------------------------------------------------------------------------
       Total operating expenses                                               15,918          37,804          29,618
---------------------------------------------------------------------------------------------------------------------
Income (loss) from operations                                                  1,875          (6,591)         14,531
Interest and other income, net                                                     7             167           1,356
Interest expense                                                                (108)            (71)           (105)
---------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes                                              1,774          (6,495)         15,782
Provision for income taxes (state and foreign only in 1994 and 1995)              69             325           6,554
Cumulative effect of deferred income taxes provided upon January 1, 1996
    conversion to C-Corporation status (3)                                      --              --             6,700
---------------------------------------------------------------------------------------------------------------------
Net income (loss)                                                           $  1,705        $ (6,820)       $  2,528
=====================================================================================================================

PRO FORMA STATEMENT OF OPERATIONS DATA:
    Income (loss) before income taxes, as above                                             $ (6,495)         15,782
    Add back portion of compensation charge - stock options (4)                               17,900            --
---------------------------------------------------------------------------------------------------------------------
    Income before income taxes, as adjusted                                                   11,405          15,782
    Provision for income taxes (federal, state and foreign)                                    5,083           6,554
---------------------------------------------------------------------------------------------------------------------
    Pro forma net income                                                                    $  6,322           9,228
=====================================================================================================================
Pro forma net income per share                                                              $   0.36            0.49
=====================================================================================================================
Shares used in computing pro forma net income per share                                       17,490          18,924
=====================================================================================================================

<FN>
(1)  Includes  royalties  due to  the  Chief  Executive  Officer  and  principal
     shareholder of $924 in 1994. No royalties were due after 1994. 
(2)  Value  of  unexercised   stock  options  of  The  Indus  Group,  Inc.  upon
     elimination of contingency  feature,  which had precluded exercise of these
     options.
(3)  Deferred  income taxes related to differences in cash basis  accounting for
     income tax purposes and accrual basis  accounting  for financial  statement
     purposes through December 31, 1995.
(4)  To reduce compensation expense to amount related to options granted in 1995
     only.

See accompanying notes.
</FN>
</TABLE>


                                       21
<PAGE>

                                       22

<TABLE>

COMBINED (1994 and 1995); CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

<CAPTION>

(In thousands, except share amounts)
                                                                                                 Retained
                                                                                                  Earnings          Total
                                                          Common     Additional                 (Accumulated    Shareholders'
                                                           Stock       Capital       Other        Deficit)         Equity
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                          <C>      <C>          <C>           <C>            <C>     
Balance at December 31, 1993 (1)                             131      $   --       $     (9)     $  8,001       $  8,123
    Repurchase of common stock                                (2)         --           --             (47)           (49)
    Cash distributions to shareholders                      --            --           --          (1,546)        (1,546)
    Translation adjustment                                  --            --              9          --                9
    Net income                                              --            --           --           1,705          1,705
-----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994                                 129          --           --           8,113          8,242
    Issuance of common stock as deferred compensation        480          --           (480)         --             --
    Cash distributions to shareholders (2)                  --            --           --          (9,516)        (9,516)
    Translation adjustment                                  --            --             (6)         --               (6)
    Stock options (3)                                       --          18,900         --            --           18,900
    Amortization of deferred compensation                   --            --             48          --               48
    Net loss                                                --            --           --          (6,820)        (6,820)
-----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995                                 609        18,900         (438)       (8,223)        10,848
    Conversion to C Corporation on January 1, 1996          --          (8,223)        --           8,223           --
    Reincorporation and adoption of $.001 par value         (494)          494         --            --             --
    Issuance of common stock (4)                               4        35,288         --            --           35,292
    Tax benefit from employee stock transactions            --           6,669         --            --            6,669
    Purchase of Indus International, Inc. net assets (1)    (100)           (3)        --            --             (103)
    Unrealized loss on marketable securities                --            --            (42)         --              (42)
    Translation adjustment                                  --            --             84          --               84
    Amortization of deferred compensation                   --            --             96          --               96
    Net income                                              --          (6,700)        --           9,228          2,528
-----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996                                  19      $ 46,425     $   (300)     $  9,228       $ 55,372
=============================================================================================================================
                                                                                                      
<FN>
(1)  Except  for the $100  capitalization  of  Indus  International,  Inc.,  all
     transactions in common stock relate to The Indus Group, Inc.
(2)  Cash  distributions to shareholders have been made by The Indus Group, Inc.
     only. Indus  International,  Inc. did not make any cash distributions prior
     to its acquisition by The Indus Group, Inc.
(3)  Value  of  unexercised   stock  options  of  The  Indus  Group,  Inc.  upon
     elimination of contingency  feature.  
(4)  Consists of $33,864 received from February 29, 1996 initial public offering
     (2,500,000  common  shares  offered  at $15  per  share  less  underwriting
     commission  and expenses),  $1,052  received from issuance of 71,309 common
     shares under the Employee  Stock  Purchase  Plan and $376 received from the
     issuance of 916,845 common shares upon exercise of options.

See accompanying notes.
</FN>
</TABLE>

<PAGE>

<TABLE>

COMBINED (1994 and 1995); CONSOLIDATED (1995) STATEMENTS OF CASH FLOWS

<CAPTION>

(In thousands)
                                                                                            Years Ended December 31,
                                                                                      1994           1995           1996
--------------------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>            <C>            <C>     
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)                                                                  $  1,705       $ (6,820)      $  2,528
Adjustments to reconcile net income to net cash provided by operating activities:
    Compensation charge - stock options                                                --           18,900           --
    Depreciation and amortization                                                     1,105            901          1,360
    Provision for doubtful accounts                                                     436            325           (203)
    Amortization of deferred compensation                                              --               48             96
    Cumulative effect of deferred income taxes provided on conversion to
    C-corporation status                                                               --             --            6,700
    Changes in operating assets and liabilities:
       Billed accounts receivable                                                    (4,782)        (8,910)           975
       Unbilled accounts receivable                                                    (984)        (4,502)         3,420
       Receivable from shareholder                                                      306           --             --
       Other current assets                                                            (387)          (316)        (3,415)
       Employee notes receivable                                                        157             13            (61)
       Accounts payable                                                                 191            223            834
       Accrued payroll and related expense                                              348            824          1,189
       Income taxes payable                                                               7            (75)         6,451
       Deferred income taxes                                                             14            384         (3,189)
       Other accrued liabilities                                                        299           (387)           106
       Deferred revenue                                                               3,780          2,596          3,174
       Other                                                                             62            (59)           231
--------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities                                             2,257          3,145         20,196
--------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of marketable securities                                                      --             --          (39,010)
Sales and maturities of marketable securities                                          --             --           10,314
Acquisition of property and equipment                                                  (861)          (577)        (4,568)
--------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities                                                  (861)          (577)       (33,264)
--------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds (repayment) of line of credit                                              172          6,895         (8,900)
Net proceeds from issuance of common stock                                             --             --           35,292
Repurchase of common stock                                                              (49)          --             --
Distributions to shareholders                                                        (1,546)        (9,517)          --
Purchase of Indus International, Inc. net assets                                       --             --             (103)
--------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities                                  (1,423)        (2,622)        26,289
--------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents                                    (27)           (54)        13,221
Cash and cash equivalents at beginning of period                                        126             99             45
--------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period                                         $     99       $     45       $ 13,266
==========================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid                                                                      $    108       $     72       $    105
==========================================================================================================================
Income taxes paid                                                                  $   --         $    236       $  5,417
==========================================================================================================================
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES
Issuance of common stock in exchange for notes receivable                          $   --         $    480       $   --
==========================================================================================================================

<FN>
See accompanying notes.
</FN>
</TABLE>


                                       23
<PAGE>

                                       24


NOTES TO COMBINED (1994 and 1995); CONSOLIDATED (1996) FINANCIAL STATEMENTS

NOTE 1....NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

o ORGANIZATION AND BUSINESS
  The  Indus  Group,  Inc.  was  incorporated  under  the  laws of the  state of
  California in 1990. On March 1, 1996, pursuant to an Asset Purchase Agreement,
  The Indus  Group,  Inc.  purchased  all of the assets and  assumed  all of the
  liabilities of Indus International,  Inc., an entity which was incorporated in
  1993 to  operate  in the  United  Kingdom  and which was  related to The Indus
  Group, Inc. through control by common shareholders.  The purchase price of the
  net assets,  which equaled the net book value,  was $103,252.  Concurrent with
  this purchase, The Indus Group, Inc. established a new wholly-owned subsidiary
  also named Indus International, Inc. to which the net assets were transferred.
  On  January  1,  1996,  The Indus  Group,  Inc.  established  a foreign  sales
  corporation,  Indus Foreign Sales Corporation.  Collectively, the entities are
  referred to as the Company.

  The  Company  develops,   markets,   implements  and  supports   client/server
  enterprise  management  software  solutions.  The Company focuses primarily on
  process industry companies,  including electric utility, nuclear, oil and gas,
  chemical refining, steel and forest products companies.

o BASIS OF PRESENTATION
  The  Company's  combined  financial  statements  for 1994 and 1995 include the
  accounts of The Indus Group, Inc. and Indus International,  Inc. The Company's
  consolidated  financial  statements for 1996 include the accounts of The Indus
  Group,  Inc., Indus  International,  Inc. and Indus Foreign Sales Corporation.
  All significant intercompany accounts and transactions have been eliminated.


o SIGNIFICANT ACCOUNTING POLICIES

Revenue recognition
  The Company  provides its software to customers  under contracts which provide
  for both software license fees and system  implementation  services.  Revenues
  from  system   implementation   services,   which   generally  are  time-  and
  material-based, are recognized as direct contract costs are incurred. Revenues
  from application  software  licenses are recognized as earned revenue over the
  estimated time period to complete implementation of the software, which period
  generally  is twelve to fourteen  months.  Revenues  from  client  workstation
  software are recognized as billed.

  A portion of license fees is deferred  initially and  subsequently  recognized
  over the one-year  period  during  which  continuing  maintenance  and support
  services  are provided to customers  under the  contracts.  After that initial
  contract  period,  additional  maintenance and support services are subject to
  separate  contracts for which revenue is recognized  ratably over the contract
  period.

  Unbilled  accounts  receivable  represent amounts related to revenue which has
  been recorded  either as deferred  revenue or earned revenue but which has not
  been billed. Generally, unbilled amounts are billed within 90 days.

  Deferred  revenue  represents  primarily  unearned  license  fees and unearned
  maintenance and support fees.

Concentration of Credit Risk
  The  Company's  customers  are  generally  large  companies in the  electrical
  utility,  nuclear,  oil and gas, chemical refining,  steel and forest products
  industries.  The Company performs ongoing credit  evaluations of its customers
  and  does  not  require  collateral.  The  Company  maintains  allowances  for
  potential  credit  losses  and  such  losses  have  been  within  management's
  expectations.  Two customers accounted for 12% and 11% of revenues in 1995 and
  11% and 10% of revenues in 1996. No individual  customer  represented  greater
  than 10% of sales in 1994.

Cash Equivalents and Marketable Securities
  The Company  considers all highly  liquid,  low risk debt  instruments  with a
  maturity  of  three  months  or less  from  the  date of  purchase  to be cash
  equivalents.  The Company  generally  invests its cash and cash equivalents in
  money market accounts.

  The   Company    presently    classifies   all   marketable    securities   as
  available-for-sale   investments  and  carries  them  at  fair  market  value.
  Marketable  securities  represent  U.S.  government  obligations  and indirect
  investments  in municipal  obligations.  Marketable  securities  classified as
  long-term mature no later than July 1998. Unrealized holding gains and losses,
  net of taxes, are carried as a separate component of shareholders' equity.

Depreciation and Amortization
  Depreciation on office and computer  equipment and furniture is computed using
  the  straight-line  method over estimated useful lives of five to seven years.
  Leasehold  improvements are amortized using the straight-line  method over the
  shorter of the related lease term or their estimated useful lives.

  The  Company's  policy  is to  capitalize  software  development  costs  after
  technological feasibility has been established.  To date, software development
  costs incurred  subsequent to the  establishment of technological  feasibility
  have not been material and have not been capitalized.

Income Taxes
  Effective January 1, 1996, the Company elected C Corporation status for income
  tax  purposes.  Prior to 1996,  the  Company  was an S  Corporation  and, as a
  result,  income  determined  on the cash  basis for income  tax  purposes  was
  taxable to the  shareholders,  and not the  Company,  for  federal and certain
  state income tax purposes. In connection with the termination of S Corporation
  status on  January  1,  1996,  a $6.7  million  cumulative  effect  charge was
  recorded. The majority of the cumulative effect charge is due to changing from
  the cash basis of  accounting  as an S  Corporation  to the  accrual  basis of
  accounting as a C Corporation.  The related  deferred tax liability is payable
  over four years.

  The  provision  for  income  taxes  included  in  the  accompanying  financial
  statements  represents  federal,  state and foreign  income  taxes in 1996 and
  state income taxes in certain  states for the Company and foreign income taxes
  relating to Indus International, Inc. in 1995 and 1994.

Pro Forma Data
  For purposes of presenting  comparative  earnings and calculating earnings per
  share data, pro forma net income for 1996 reflects the elimination of the $6.7
  million cumulative deferred income tax charge.

<PAGE>

NOTES TO COMBINED (1994 and 1995); CONSOLIDATED (1996) FINANCIAL STATEMENTS

  Pro forma net  income  in 1995  reflects  provisions  for taxes  assuming  the
  Company was taxed as a C Corporation.  Furthermore,  pro forma net income data
  in 1995 includes a $1 million  nonrecurring  compensation  charge representing
  the fair value of the  options  granted in 1995 and  excludes a $18.9  million
  nonrecurring   compensation  charge  representing  the  value  of  unexercised
  non-qualified stock options upon elimination of the contingency  feature.  The
  contingency  feature  was  intended to preserve  the  Company's S  Corporation
  qualification by limiting the number of  shareholders.  If the Company had not
  been an S Corporation, no contingency feature would have been necessary.

Per Share Data
  Pro forma net income per share is computed  using pro forma net income and the
  weighted  average  number of common  and  dilutive  common  equivalent  shares
  outstanding  during each period.  Dilutive common equivalent shares consist of
  incremental  common shares issuable upon the assumed exercise of stock options
  (using the treasury  stock  method).  Pursuant to the  Securities and Exchange
  Commission Staff Accounting  Bulletins and Staff policy,  the number of shares
  in 1995 also  includes:  (i) all common shares  issued (and shares  subject to
  stock options  granted)  within 12 months of the initial public offering date,
  as if they  were  outstanding  for all  periods  presented;  and (ii)  634,444
  additional  shares  (equivalent  to  dividends  paid  in 1995  divided  by the
  expected offering price per share).

Foreign Currency Translation
  Gains and losses from the translation of Indus International, Inc.'s financial
  statements  are  included  in  shareholders'  equity.  Net  gains  and  losses
  resulting from foreign  exchange  transactions  were immaterial in all periods
  presented.

Use of Estimates
  The  preparation  of the financial  statements in  conformity  with  generally
  accepted  accounting  principles  requires  management  to make  estimates and
  assumptions that affect the amounts reported in the financial statements.

NOTE 2....MARKETABLE SECURITIES

The Company held no marketable  securities  prior to the initial public offering
of common  stock in February  1996.  The  following  is a summary of  marketable
securities,  all of which  are  available  for  sale at  December  31,  1996 (in
thousands):

                                             Gross         Gross     
                                          Unrealized    Unrealized     Estimated
                                   Cost      Gains        Losses      Fair Value
--------------------------------------------------------------------------------
U.S. Treasury securities                                             
and obligations of U.S.                                              
government agencies              $ 16,067     $ 0          $(65)        $ 16,002
Municipal obligations              13,628      23             0           13,651
--------------------------------------------------------------------------------
                                 $ 29,695     $23          $(65)        $ 29,653
================================================================================
Included in:                                                         
Cash and cash equivalents        $  1,000     $ 0          $  0         $  1,000
Short term investments             26,579      10           (65)          26,524
Long term investments               2,116      13             0            2,129
--------------------------------------------------------------------------------
                                 $ 29,695     $23          $(65)        $ 29,653
================================================================================
                                                                     
  There were no realized gains or losses on sales of marketable securities.  The
  net adjustment to unrealized holding losses on marketable  securities included
  as a component of shareholder's equity totaled $41,986 in 1996.


                                       25
<PAGE>

                                       26

NOTES TO COMBINED (1994 and 1995); CONSOLIDATED (1996) FINANCIAL STATEMENTS

NOTE 3....PROPERTY AND EQUIPMENT

Property and  equipment is recorded at cost and  consists of the  following  (in
thousands):

                                                                 December 31,
                                                               1995       1996
--------------------------------------------------------------------------------
Office and computer equipment                                $ 4,233     $ 6,886
Furniture                                                      2,153       2,973
Leasehold improvements                                           434       1,337
Purchased software                                               272         465
--------------------------------------------------------------------------------
                                                               7,092      11,661
Less accumulated depreciation and amortization                 3,964       5,324
--------------------------------------------------------------------------------
                                                             $ 3,128     $ 6,337
================================================================================

NOTE 4....LINE OF CREDIT

  The  Company  has an  unsecured  revolving  bank  line  of  credit  agreement,
  renewable  annually  in May,  which  permits  borrowings,  including  stand-by
  letters of credit, of up to $15 million. No direct borrowings were outstanding
  under this agreement at December 31, 1996. Interest would have been payable at
  the bank's prime rate of 8.25% at December 31,  1996.  Borrowings  outstanding
  under this agreement at December 31, 1995 were $8.9 million,  with interest at
  the bank's prime rate of 8.50%.  Stand-by  letters of credit  outstanding were
  $232,641 and $602,641 at December 31, 1995 and 1996, respectively.  The credit
  agreement contains certain affirmative and negative covenants. The Company was
  in compliance with these covenants at December 31, 1996.

NOTE 5....RELATED PARTY TRANSACTIONS

  The  Company  had a software  license  and  royalty  agreement  with its Chief
  Executive Officer and principal shareholder through 1995. In 1995, accrual and
  payment under this agreement was waived.  The related royalty  expense,  which
  was  included in the cost of  revenues,  was $924,956 for 1994 (none in 1995).
  There were no royalties payable at December 31, 1996.

  The Company held employee notes  receivable  totaling  $79,827 and $140,763 at
  December 31, 1995 and 1996,  respectively,  from officers and employees of the
  Company.

NOTE 6....COMMITMENTS

  The  Company  leases its  office  facilities  under  various  operating  lease
  agreements.  The leases  require  monthly rental  payments in varying  amounts
  through 2001. These leases also require the Company to pay all property taxes,
  normal maintenance, and insurance on the leased facilities.

Total rental expense under these leases was approximately $1,450,000, $2,378,000
and  $3,888,000  for 1994,  1995 and 1996,  respectively.  Future  minimum lease
payments  under  all   non-cancelable   operating  leases  are  as  follows  (in
thousands):

                    December 31, 1996
   1997               $    3,529
   1998                    3,019
   1999                    2,717
   2000                    2,313
   2001                      589
-------------------------------------
                      $   12,167
=====================================

  A stand-by letter of credit ($202,674 at December 31, 1996), which is required
  in the lease for the Company's office,  has been issued under The Indus Group,
  Inc.'s bank line of credit.  This letter of credit  requirement will terminate
  in May 1997.

  In 1995, the bank issued four irrevocable  stand-by letters of credit totaling
  $29,967. In 1996, the bank issued two additional  irrevocable stand-by letters
  of credit  totaling  $370,000.  These letters are a requirement  of two of the
  Company's  licensing  agreements. These  letter  of credit  requirements  will
  terminate in 1998.

<PAGE>

NOTES TO COMBINED (1994 and 1995); CONSOLIDATED (1996) FINANCIAL STATEMENTS

NOTE 7....SHAREHOLDERS' EQUITY

  On December 27, 1995, the articles of incorporation  of The Indus Group,  Inc.
  were  amended  to: (i)  increase  the  authorized  number of common  shares to
  50,000,000,  all of which are voting shares; (ii) effect a 17-for-one split of
  the outstanding  common shares (and shares under option),  and (iii) authorize
  5,000,000 shares of preferred stock,  issuable in series,  with the rights and
  preferences to be established for each series. All share and per share data in
  the accompanying financial statements have been adjusted retroactively to give
  effect to the stock split. No series of preferred stock has been designated.

Preferred and Common Stock
  On February 29, 1996,  the Company  completed  an initial  public  offering in
  which it sold  2,500,000  shares of  common  stock at $15.00  per  share.  The
  offering raised net proceeds of $33,863,764  after  underwriting  discount and
  $1,011,236 in related expenses.

Common Stock
The  following  is a summary of the  authorized  and issued  common stock of The
Indus Group, Inc. and in 1995 only for Indus International, Inc.:

                                                         December 31,
                                                  1995                  1996
--------------------------------------------------------------------------------
The Indus Group, Inc.:                                          
   Authorized shares, no par value in 1995,                     
   $.001 par value in 1996                     50,000,000             50,000,000
                                                                
   Issued and outstanding                      15,102,222             18,590,376
   Amount                                     $   509,061            $    18,590
--------------------------------------------------------------------------------
Indus International, Inc.:                                      
   Authorized shares, no par value                200,000       (not applicable)
   Amount                                     $   100,000       (not applicable)
--------------------------------------------------------------------------------
Total Amount for The Company                  $   609,061            $    18,590
================================================================================

NOTE 8....INCENTIVE COMMON STOCK PLANS ISSUED AS DEFERRED COMPENSATION

Common Stock
  In June 1995,  the Company  issued  162,622  shares of common stock to several
  employees  in  exchange  for notes  aggregating  $109,626.  The notes  will be
  forgiven  over a five-year  period  provided the note holders  continue  their
  employment with the Company.  Additional deferred compensation of $370,000 has
  been recorded for the  difference  between the notes and the deemed fair value
  of  the  shares  at  the  date  of  issuance.   The  $479,626  total  deferred
  compensation is being amortized over the five-year period.

1992 Stock Option Plan
  In 1992,  the Company  adopted a stock  option plan under which  options for a
  total of  1,805,400  shares of common stock may be granted to  employees.  The
  exercise  price of each common share under option was the book value per share
  on the grant date.  No further  options  will be granted  under the 1992 Stock
  Option Plan. Under the plan,  options granted would not be exercisable until a
  "liquidity  event" had occurred.  A liquidity event was defined as the sale of
  more than 20% of the voting stock interest to an independent  party or parties
  or an  acquisition  of the Company  which would result in  termination  of the
  plan. Options granted would expire on the earlier of termination of employment
  or ten years.  Upon expiration of an option,  the Company was obligated to pay
  the optionee the increase in book value over the term of the option ("the book
  value appreciation feature"). If any options were exercised, the Company would
  retain the right to repurchase the issued shares at their then book value upon
  termination of employment.

  As of September  29, 1995,  the board of directors  eliminated  the  liquidity
  event  contingency,  thereby  causing  the  options  then  outstanding  as  to
  1,791,970  common shares to be  exercisable  in their  entirety.  As a result,
  these  options were valued as of September  30, 1995 for  financial  statement
  purposes  and a one-time  charge of  $18,900,000  was recorded in the combined
  statement of operations.  The book value appreciation feature, in the event of
  expiration of an option, also was eliminated at that time.

A summary of activity under the option plan is as follows:

                                                           Options Outstanding
                                                      --------------------------
                                 Shares Available      Number        Price Per
                                    for Grant         of Share         Share
--------------------------------------------------------------------------------
Balances at December 31, 1993         99,790         1,705,610     $0.28-$0.35
    Options canceled                 298,860          (298,860)    $0.28-$0.35
--------------------------------------------------------------------------------
Balances at December 31, 1994        398,650         1,406,750     $0.28-$0.35
    Options granted                 (438,260)          438,260           $0.69
    Options canceled                  56,440           (56,440)          $0.28
--------------------------------------------------------------------------------
Balances at December 31, 1995         16,830         1,788,570     $0.28-$0.69
    Options exercised                   --            (916,845)    $0.28-$0.69
    Options canceled                   1,700            (1,700)          $0.28
--------------------------------------------------------------------------------
Balances at December 31, 1996         18,500           870,025     $0.28-$0.69
================================================================================


                                       27

<PAGE>

                                       28

NOTES TO COMBINED (1994 and 1995); CONSOLIDATED (1996) FINANCIAL STATEMENTS

1995 Stock Plan
  The 1995 Stock  Plan  provides  for the grant of  incentive  stock  options to
  employees  of  the  Company  and  nonstatutory  stock  options  to  employees,
  directors  and  consultants  of the Company.  A total of  1,500,000  shares of
  common stock have been  reserved for issuance  under the plan.  The  incentive
  stock  options  will be granted at not less than the fair market  value of the
  stock on the date of grant;  nonqualified stock options will be granted at not
  less than 85% of the fair market value of the stock on the date of grant.  The
  options will  generally vest over a one to four year period and have a maximum
  term of ten years.

A summary of activity under the option plan is as follows:

                                                          Options Outstanding
                                                    ----------------------------
                              Shares Available      Number of       Price Per
                                  for Grant           Share           Share
--------------------------------------------------------------------------------
Balances at December 31, 1995     1,500,000            --
    Options granted                (807,350)        807,350      $16.50-$22.75
    Options canceled                  2,250          (2,250)            $16.50
--------------------------------------------------------------------------------
Balances at December 31, 1996       694,900         805,100      $16.50-$22.75
================================================================================

1995 Director Option Plan
  The 1995 Director Option Plan provides for the issuance of nonstatutory  stock
  options to nonemployee  directors of the Company. A total of 100,000 shares of
  common stock have been  reserved  for  issuance.  Under the plan,  nonemployee
  directors  were each  granted an option to  purchase  10,000  shares of common
  stock upon the completion of the initial public offering in February 1996. The
  options  were  granted  at an  exercise  price of  $15.00  per  share and vest
  quarterly  over a four  year  period.  On each  date of the  Company's  Annual
  Meeting of Shareholders,  each nonemployee  director will be granted an option
  to purchase an additional  2,500  shares,  provided the director has served on
  the board for at least six months.  Future options will be granted at the fair
  market value of the stock on the date of grant and will vest  quarterly over a
  four year period.

1995 Employee Stock Purchase Plan
  The Company has an employee  stock purchase plan under which 500,000 shares of
  common  stock have been  reserved for  issuance.  The plan allows for eligible
  employees  to purchase  stock at 85% of the lower of the fair market  value of
  the  Company's  common  stock as of the first day of each  six-month  offering
  period  or the  fair  market  value of the  stock  at the end of the  offering
  period.  The  offering  period  will  commence on January 1 and July 1 of each
  year,  with the first  offering  period  beginning on such date  following the
  closing of the initial  public  offering in February  1996.  Purchases will be
  limited to 10% of each  employee's  compensation.  The Company  issued  71,309
  shares  under the plan in 1996 at prices  ranging  from  $12.75 to $17.21  per
  share.

<PAGE>

NOTES TO COMBINED (1994 and 1995); CONSOLIDATED (1996) FINANCIAL STATEMENTS

NOTE 9....ALTERNATIVE METHOD OF VALUING STOCK OPTIONS

  The Company has elected to follow  Accounting  Principal Board Opinion No. 25,
  "Accounting   for  Stock   Issued   to   Employees"   (APB  25)  and   related
  Interpretations  in  accounting  for its employee  stock options  because,  as
  discussed  below,  the alternative  fair value  accounting  provided for under
  Financial  Accounting  Standards  Board  Statement  No. 123,  "Accounting  for
  Stock-Based  Compensation,"  (Statement 123) requires use of option  valuation
  models that were not  developed  for use in valuing  employee  stock  options.
  Under APB 25,  because the  exercise  price of the  Company's  employee  stock
  options equals the market price of the underlying  stock on the date of grant,
  no compensation expense is recognized in the Company's financial statements.

  The Company's  1995 Stock Option Plan has  authorized  the grant of options to
  employees  for up to  1,500,000  shares of the  Company's  common  stock.  All
  options  granted  typically  have 10 year  terms  and  vest and  become  fully
  exercisable at the end of 4 years of continued employment.

  Pro forma information  regarding net income and earnings per share is required
  by Statement 123, which also requires that the information be determined as if
  the Company had accounted for its employee stock options granted subsequent to
  December  31, 1994 under fair value method of that  Statement.  The fair value
  for these  options was  estimated at the date of grant using the minimum value
  method for 1995 and the  Black-Scholes  option pricing model for 1996 with the
  following  weighted-average  assumptions  for  1995  and  1996,  respectively:
  risk-free interest rates of 6.0% and 5.75%;  dividend yields of 0%; volatility
  factors of the expected market price of the Company's common stock of 0.75 and
  0.0; and a weighted-average expected life of the option of 1 and 4 years.

  The option  valuation  models were  developed for use in  estimating  the fair
  value of traded  options  which  have no  vesting  restrictions  and are fully
  transferable. In addition, option valuation models require the input of highly
  subjective assumptions including the expected stock price volatility.  Because
  the  Company's  employee  stock  options  have  characteristics  significantly
  different from those of traded options,  and because changes in the subjective
  input  assumptions  can  materially   affect  the  fair  value  estimate,   in
  management's  opinion,  the  existing  models  do not  necessarily  provide  a
  reliable single measure of the fair value of its employee stock options.

For purposes of pro forma  disclosures,  the estimated fair value of the options
is amortized to expense over the options'  vesting  period.  The  Company's  pro
forma  information  net income  including  compensation  expense,  net of tax of
$1,074,000  and  $878,000  for the  year  ended  December  31,  1995  and  1996,
respectively,  is as  follows  (in  thousands  except  for  earnings  per share
information):

                          1995        1996
---------------------------------------------
Pro forma
net income              $ 5,248      $ 8,350

Pro forma
earnings per share:     $  0.29      $  0.44

<TABLE>

Because  Statement  123 is  applicable  only to options  granted  subsequent  to
December 31, 1994, its pro forma effect will not be fully  reflected until 1997.
A summary of the Company's stock option  activity,  and related  information for
the years ended December 31, follows: 

<CAPTION>
                                                1995                           1996
                                   -----------------------------   -----------------------------
                                                       Weighted-                       Weighted-
                                                        Average                        Average
                                      Options          Exercise         Options        Exercise
                                   (in thousands)        Price      (in thousands)     Price
------------------------------------------------------------------------------------------------
<S>                                  <C>              <C>               <C>           <C>   
Outstanding-beginning of year         1,407           $0.32             1,789         $ 0.41
Granted                                 438            0.69               827          16.50
Exercised                              --              --                (917)          0.41
Forfeited                               (56)           0.28                (4)          5.25
------------------------------------------------------------------------------------------------
Outstanding-end of year               1,789           $0.41             1,695         $ 8.38
                                     ======                            ======
Exercisable at end of year            1,789           $0.41               874         $ 8.38
Weighted-average fair value of                                                      
  options granted during the year    $ 5.16                            $16.71       
                                                                                    
</TABLE>



                                       29
<PAGE>                                                                         

                                       30


NOTES TO COMBINED (1994 and 1995); CONSOLIDATED (1996) FINANCIAL STATEMENTS

<TABLE>

The following table summarizes information about fixed stock options outstanding
as of December 31, 1996.

<CAPTION>
                                   Options Outstanding         Options Exercisable
-----------------------------------------------------------  --------------------------
                                      Weighted-
                                       Average    Weighted-                  Weighted-
                         Number       Remaining    Average       Number       Average
Range of Exercise    Outstanding As  Contractual  Exercise   Exercisable as  Exercise
       Prices          of 12/31/96      Life        Price      of 12/31/96     Price
--------------------------------------------------------------------------------------
<S>                   <C>               <C>        <C>          <C>           <C>   
$0.28-$0.69             870,025         6.53       $  0.41      870,025       $ 0.41
$15.00-$22.75           825,100         9.28       $ 16.79        3,750       $15.00
--------------------------------------------------------------------------------------
Total                 1,695,125         7.87       $  8.38      873,775       $ 0.47
======================================================================================

</TABLE>

NOTE 10....EMPLOYEE BENEFIT AND PROFIT-SHARING PLANS

  The Company has a defined contribution 401(K) plan. All employees over the age
  of 21 who have  completed  at least  one-half  year of service are eligible to
  participate.  Each  participant may elect to have amounts deducted from his or
  her  compensation  and  contributed  to the  plan up to 15% of his or her base
  salary. All contributions are fully vested at the time the employee becomes an
  active participant.

  The Company also has a profit  sharing plan.  All employees over the age of 21
  who  have  completed  at  least  one-half  year of  service  are  eligible  to
  participate.  Contributions  to the plan are at the discretion of the board of
  directors  and  are  made  to  eligible  employees'   individual  accounts  in
  proportion to their base salary.  Contribution  expense  related to the profit
  sharing plan for 1994, 1995 and 1996 was approximately $100,000,  $238,000 and
  $250,000, respectively.

NOTE 11....EXPORT SALES

Export sales were as follows (in thousands):

                                     1994               1995              1996
--------------------------------------------------------------------------------
Europe                             $ 1,457            $ 2,017            $ 7,337
Pacific                              2,237              1,766              2,326
Other                                  753              2,118              3,005
--------------------------------------------------------------------------------
                                   $ 4,447            $ 5,901            $12,668
================================================================================

NOTE 12....INCOME TAXES

The  provision  for  income  taxes  (state  and  foreign  only in 1994 and 1995)
consists of the following (in thousands):

                                         1994           1995              1996
--------------------------------------------------------------------------------
Current:
   Federal                             $  --           $  --            $ 7,639
   State and foreign                        55              95            2,202
--------------------------------------------------------------------------------
Deferred:                                   55              95            9,841
--------------------------------------------------------------------------------
   Federal                                --              --             (2,522)
   State and foreign                        14             230             (765)
--------------------------------------------------------------------------------
                                            14             230           (3,287)
--------------------------------------------------------------------------------
                                       $    69         $   325          $ 6,554
================================================================================


<PAGE>

NOTES TO COMBINED (1994 and 1995); CONSOLIDATED (1996) FINANCIAL STATEMENTS

The provision for income taxes reconciles to the amount computed by applying the
federal  statutory  rate to income before  provision for income taxes as follows
(in thousands):

                                                                  1996
                                                        Amount          Percent
--------------------------------------------------------------------------------
Federal statutory rate                                 $ 5,524           35.0%
State taxes, net of federal benefit                        934            5.9
FSC benefit                                               (294)          (1.8)
Other                                                      390            2.4
--------------------------------------------------------------------------------
                                                       $ 6,554           41.5%
================================================================================

  No state  income tax benefit has been  recorded in  connection  with the $18.9
  million  compensation  charge  recorded in 1995. The 1996 current  federal and
  state tax  provisions do not reflect the tax savings of  $6,669,000  resulting
  from deductions  associated with the exercise of stock options by employees in
  1996. This tax benefit has been included in additional capital in 1996.

Deferred income taxes reflect the tax effects of temporary  differences  between
the carrying amounts of assets and liabilities for financial  reporting purposes
and the amounts used for income tax purposes.  Significant components of the net
deferred tax liability are as follows (in thousands):
                                                                December 31,
                                                            1995          1996
--------------------------------------------------------------------------------
Accounts receivable allowances                             $  --        $  (197)
Tax over book depreciation and amortization                   --            363
Nondeductible accruals                                        --           (782)
Deferred licensing fees                                       --         (3,820)
State income taxes                                            --           (339)
Conversion from cash to accrual basis of accounting           --          8,612
Cash basis of accounting for income taxes                      312         --
Other, net                                                      14         --
--------------------------------------------------------------------------------
Net deferred tax liability                                 $   326      $ 3,837
================================================================================


  The  additional  taxable  income  resulting  from the change  from the cash to
  accrual  basis of  accounting  for income taxes in 1996 will be  reportable in
  taxable income over the year 1996 through 1999.

NOTE 13....SUBSEQUENT EVENTS

  The Company  entered  into an  agreement  to acquire a 10% interest in TenFold
  Corporation,  a private software company,  for $8 million in cash. The Company
  will receive a perpetual,  unlimited license for future applications and tools
  developed with TenFold's technology.

  The Company entered into an agreement to acquire Prism  Consulting,  a private
  management  consulting  firm, for $4.75 million in the Company's  stock at the
  current market value and $250,000 in cash. The principals of Prism  Consulting
  will become employees of the Company and be subject to non-compete agreements.



                                       31
<PAGE>

SELECTED FINANCIAL INFORMATION

<TABLE>

  The following  selected  financial  information of the Company is qualified by
  reference to and should be read in conjunction  with the financial  statements
  and notes thereto and other financial  information  included elsewhere herein.
  The combined  statements of operations  data for the years ended  December 31,
  1994 and 1995 and combined  balance  sheet data as of December 31, 1995 of The
  Indus Group, Inc. and Indus International, Inc. and the consolidated statement
  of  operations  data for the year ended  December  31,  1996 and  consolidated
  balance  sheet data as of December 31, 1996 are derived from and  qualified by
  reference  to  financial  statements  of the Company that have been audited by
  Ernst & Young LLP,  independent  auditors,  and are included elsewhere herein.
  The  combined  balance  sheet data as of  December  31,  1992 and 1993 and the
  combined  statement of operations  data for the years ended  December 31, 1992
  and 1993 are derived from the  financial  statements  of the Company that have
  been audited by Ernst & Young LLP that are not included herein.

<CAPTION>
                                                                                         Years Ended December 31,
                                                                  1992         1993          1994           1995          1996
---------------------------------------------------------------------------------------------------------------------------------
                                                                             (in thousands, except per share data)
<S>                                                            <C>           <C>           <C>            <C>            <C>     
STATEMENT OF OPERATIONS DATA:
Revenues:
    Software licensing fees                                    $  6,112      $  6,514      $  7,547       $ 10,676       $ 16,208
    Services and maintenance                                     16,681        20,978        23,044         43,115         59,731
---------------------------------------------------------------------------------------------------------------------------------
       Total revenues                                            22,793        27,492        30,591         53,791         75,939
---------------------------------------------------------------------------------------------------------------------------------
    Cost of revenues                                              9,127        10,395        12,798         22,578         31,790
---------------------------------------------------------------------------------------------------------------------------------
    Gross margin                                                 13,666        17,097        17,793         31,213         44,149
    Operating expenses:
       Research and development                                   4,295         6,910         7,120          8,306         12,493
       Sales and marketing                                        1,856         3,533         4,144          5,680          9,306
       General and administrative                                 3,988         3,595         4,654          4,918          7,819
       Compensation charge - stock options(1)                      --            --            --           18,900           --
---------------------------------------------------------------------------------------------------------------------------------
            Total operating expenses                             10,139        14,038        15,918         37,804         29,618
---------------------------------------------------------------------------------------------------------------------------------
    Income (loss) from operations                                 3,527         3,059         1,875         (6,591)        14,531
    Other income (expense), net                                      83            83          (101)            96          1,251
---------------------------------------------------------------------------------------------------------------------------------
    Income (loss) before income taxes                             3,610         3,142         1,774         (6,495)        15,782
    Provision for income taxes (state and foreign only
        prior to 1996)                                               90            55            69            325          6,554
    Cumulative effect of deferred income taxes provided upon
    January 1, 1996 conversion to C Corporation status(2)          --            --            --             --            6,700
---------------------------------------------------------------------------------------------------------------------------------
    Net income (loss)                                          $  3,520      $  3,087      $  1,705       $ (6,820)      $  2,528


PRO FORMA STATEMENT OF OPERATIONS DATA FOR 1995 AND 1996:
    Income (loss) before income taxes, as above                                                           $ (6,495)      $ 15,782
    Add back portion of compensation charge - stock options(1)                                              17,900           --
---------------------------------------------------------------------------------------------------------------------------------
    Income before income taxes, as adjusted                                                                 11,405         15,782
    Provision for income taxes (federal, state and foreign)(2)                                               5,083          6,554
=================================================================================================================================
    Pro forma net income                                                                                  $  6,322       $  9,228
=================================================================================================================================
    Pro forma net income per share(3)                                                                     $   0.36       $   0.49
=================================================================================================================================
    Shares used in computing pro forma net income per share(3)                                              17,490         18,924
=================================================================================================================================


                                                                                  December 31,
                                                               1992         1993          1994          1995          1996
---------------------------------------------------------------------------------------------------------------------------------
                                                                                  (in thousands)
BALANCE SHEET DATA:                                           
    Working capital                                            $ 6,789       $ 4,179       $ 4,698        $ 7,640        $46,693
    Total assets                                                14,914        13,080        18,063         31,075         75,514
    Short-term debt                                              1,700         1,833         2,005          8,900           --
    Long-term debt                                                --            --            --             --             --
Total shareholders' equity                                       9,641         8,123         8,243         10,848         55,372
                                                                                                       
<FN>
(1)  Reflects  nonrecurring  expense  incurred  in the third  quarter of 1995 in
     connection  with an  amendment to the  Company's  1992 Stock Option Plan to
     accelerate  the  exercisability  of outstanding  stock  options,  which had
     previously been  contingent upon the occurrence of certain events.  The pro
     forma adjustment of $17,900 is to reduce 1995  compensation  expense to the
     amount related to options  granted in 1995 only. See Note 1 of the Notes to
     the Combined Financial Statements.
(2)  Prior to January 1, 1996, the Company was not subject to federal  corporate
     income taxation because of its election to be taxed under the provisions of
     Subchapter S of the Code. Pro forma net income for 1995 has been determined
     by assuming  that the Company had been taxed as a C  Corporation  for 1995.
     Pro forma net income for 1996 reflects the  elimination  of a  nonrecurring
     charge for the cumulative  effect of deferred  income taxes incurred in the
     first quarter of 1996 in connection with the termination of the Company's S
     Corporation  status.  See  Notes  1 and 12 of  Notes  to  the  Consolidated
     Financial Statements.
(3)  See  Note  1 of  Notes  to  Consolidated  Financial  Statements  for a more
     complete  explanation of the  determination of the number of shares used in
     computing pro forma net income per share.
</FN>
</TABLE>

                                       32