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


                                    FORM 10-K

 X               ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
---              THE SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 1997

                                       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 0-27574

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

           FLORIDA                                            59-3350778
(State or other jurisdiction of                            (I.R.S. Employer
incorporation or organization)                            Identification No.)


            400 NORTH ASHLEY DRIVE, SUITE 2700, TAMPA, FLORIDA 33602
          (Address of principal executive offices, including zip code)

                                 (813) 226-2600
              (Registrant's telephone number, including area code)

        Securities registered pursuant to Section 12(b) of the Act: none
    Securities registered pursuant to Section 12(g) of the Act: common stock,
                            par value $.001 per share

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

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

The aggregate market value of the registrant's voting stock held by
non-affiliates as March 10, 1998 was approximately $17,319,000. There were
13,796,767 shares of the registrant's common stock, par value $.001 per share,
outstanding on March 10, 1998.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive Proxy Statement for its 1998 Annual
Meeting of Shareholders, scheduled to be held on June 2, 1998, which Proxy
Statement will be filed no later than 120 days after the close of the
registrant's fiscal year ended December 31, 1997, are incorporated by reference
in Part III of this Annual Report on Form 10-K.


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                              POWERCERV CORPORATION

                             FORM 10-K ANNUAL REPORT

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
   PART I                                                                                 Page No
   ------                                                                                 --------
<S>           <C>                                                                         <C>
   Item 1     Business .................................................................      2
   Item 2     Properties ...............................................................     17
   Item 3     Legal Proceedings ........................................................     18
   Item 4     Submission of Matters to a Vote of Security Holders ......................     18

PART II
-------
   Item 5     Market Value of the Registrant's Common Stock ............................     19
   Item 6     Selected Financial Data ..................................................     20
   Item 7     Management's Discussion and Analysis of Financial Condition and Results of
              Operations................................................................     22
   Item 8     Financial Statements and Supplementary Data ..............................     33
   Item 9     Changes in and Disagreements with Accountants on Accounting and Financial
              Disclosure................................................................     33

PART III
--------
  Item 10     Directors and Executive Officers of the Registrant .......................     34
  Item 11     Executive Compensation ...................................................     34
  Item 12     Security Ownership of Certain Beneficial Owners and Management ...........     34
  Item 13     Certain Relationships and Related Transactions ...........................     34

PART IV
-------
  Item 14     Exhibits, Financial Statement Schedules and Reports on Form 8-K ..........     35

  Signatures............................................................................     60
</TABLE>

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                                     PART 1
                                     ------

         The statements contained in this Annual Report on Form 10-K that are
not historical are "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including statements regarding PowerCerv
Corporation's (the "Company", as further defined below) expectations, beliefs,
intentions or strategies regarding the future. Forward-looking statements
include, without limitation, statements regarding the extent and timing of
future revenues and expenses and customer demand for the Company's products and
services under "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Forward-Looking Statements and Associated
Considerations;"  "--Ability to Manage Change," "--Liquidity," "--Fluctuations
in Quarterly Activities and Results of Operations;" "--Availability of
Consulting Personnel;" "--Dependence on Product Development; and Associated
Risks;" "--Competition;" "--Dependence on New Products;" "--Dependence on
Client/Server Environment;" "--Dependence on PowerBuilder and Other Third-Party
Products;" "--Dependence on Proprietary Technology; Risks of Third-Party Claims
for Infringement;" "--Expansion of Indirect Channels; Potential for Channel
Conflict;" "--Voting Control by Management;" "--Dependence on Key Personnel;"
and "--Possible Volatility of Stock Price." All forward-looking statements
included in this document are based on information available to the Company as
of the date hereof, and the Company assumes no obligation to update any such
forward-looking statement. It is important to note that the Company's actual
results could differ materially from those in such forward-looking statements.


ITEM 1.  BUSINESS

         PowerCerv's primary mission is to develop, market, license, implement
and support open, modifiable "ERP/back-office" and "front-office" enterprise
application software solutions for mid-size U.S. discrete manufacturing
companies with annual revenues between $25 million and $500 million. PowerCerv
is the first enterprise application vendor to develop, promote and license an
integrated ERP/back-office and front-office software solution having a common
technical architecture with a common look and feel. The Company refers to its
full suite of integrated ERP/back-office and front-office enterprise application
software products as its Customer Lifecycle Management (CLM) Solution. The
Company's Enterprise Resource Planning (ERP) application products (which also
may be referred to as "back office" products), consist of PowerCerv
Manufacturing, PowerCerv Distribution and PowerCerv Financials. PowerCerv's ERP
application products facilitate the management of resources and information to
allow manufacturers to reduce order fulfillment which times, improve operating
efficiencies and measure critical company performance against defined
objectives. The Company's front-office application products (which also may be
referred to as PowerCerv Customer Asset Management), consist of PowerCerv Sales
Force Automation and PowerCerv Customer Support. PowerCerv Customer Asset
Management application products increase the effectiveness of sales
organizations and customer support centers in two ways. PowerCerv Sales Force
Automation provides opportunity management for maximum sales efficiency.
PowerCerv Customer Support provides problem tracking and resolution management.
Because the Company leverages available software development tool technology
from Microsoft Corporation and Sybase Inc., the Company's research and
development efforts are directed primarily toward new features in its
application products.

          The Company also provides a wide range of professional technical and
business consulting services, including application analysis, design,
development, modification and integration programming, training and deployment
for its application products. Separately, the Company provides a wide range of
consulting services to companies who use PowerBuilder(R), a leading, technology
resale development tool of Sybase, Inc., for client/server systems development.
The Company also provides complementary development tool products used to
enhance or accelerate the implementation and ongoing maintenance of its
application products, and resells third party technology resale products to
complement the Company's products and services offering.

          The Company was incorporated in Florida in January 1995 under the name
"PowerCerv Holding Company" (the "Holding Company") for the purpose of owning
the stock of PowerCerv Technologies Corporation (the "Operating Subsidiary").
The Operating Subsidiary, formerly named PowerCerv Corporation, was incorporated
in Florida in April 1992. Pursuant to a share exchange among the Holding Company
and the shareholders of the Operating Subsidiary, the Holding Company acquired
all of the outstanding capital stock of the Operating Subsidiary as of January
1, 1996. Unless otherwise specified, references herein to "PowerCerv" and "the
Company" mean the Holding Company and the business of the Operating Subsidiary.

         The Company's principal offices are located at 400 North Ashley Drive,
Suite 2700, Tampa, Florida 33602, and its telephone number is (813) 226-2600.


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INDUSTRY BACKGROUND

          The computer revolution has evolved from the air-conditioned,
seven-figure plus mainframe computer running back-office operations such as
payroll and human recourse systems, to distributed, network-based systems with
an affordable computer on every knowledge-worker's desktop and now to a
browser-enabled application that allows anyone on the globe to access a system
over the Internet. Moreover, all this has occurred in less than forty years.
Contrasted to other industries such as transportation, medicine,
telecommunications or automotive, no other industry has grown as rapidly. In
addition, no other industry has impacted everyone from the chief executive
officer to the accounting clerk to the schoolteacher as much as the "information
industry." This revolution is now recognized as the "information revolution,"
not the computer revolution. The computer has become a conglomeration of
networks, routers, servers, laptops, desktops and application software joining a
world of people across economic, cultural, geographic and linguistic boundaries.

         Ultimately, an end user works with a software application to accomplish
his or her work. The client/server revolution (a sub-set of the computer
information revolution) began around 1990. Client/server computing was a new
form of computing that involved the distribution of systems across geographic
boundaries using lower cost hardware (desktop and laptop PC's and servers),
network and communications technologies, graphical user interface technology,
and software that could be developed rapidly with relative ease. Once accepted
as a viable means of computing, client/server computing gained global
popularity. Software development tools such as PowerBuilder(R) and Visual
Basic(TM), and database products such as Oracle, Sybase and Microsoft SQL Server
have became defacto standards used to implement client/server software
applications. Companies of all sizes embraced client/server computer systems
around the globe.

          The rapid acceptance of client/server computer systems gave birth to
the next generation of application software packages. For many years,
application software vendors sold products that were developed with programming
languages such as Cobol, and they were implemented on mainframe and
mini-computers generally characterized as proprietary. Each software vendor was
forced to "port" their applications to support the most popular hardware
platforms such as IBM Corporation, Digital Equipment Corporation and others. The
client/server revolution changed that for application software vendors. The
burden shifted from application software vendors to database vendors. The
database vendors began to deliver their products for the most popular hardware
platforms and their associated operating systems. This represented an
opportunity for established and entrepreneurial application software vendors to
focus their resources on building products with more features without the need
to port them to hardware vendors. Their only requirement was to "port" them to
the (small number of) popular database platforms, which is considerably less
resource-intensive than porting to a larger universe of popular hardware
platforms.

         The first wave of client/server application software products
introduced to the market was conventional back-office software for accounting,
human resources, manufacturing and order processing. Vendors such as McCormack &
Dodge, Oracle and SAP enjoyed rapid market acceptance with their back-office
software packages. By 1996, the vast majority of the leading global 2000
companies were well into a conversion of old-style, legacy-based computer
systems to newer client/server applications for these back-office systems.
Smaller companies who tracked their progress quickly followed the lead of these
early adopters as they began to realize the business value, in particular the
competitive differentiation, new back-office systems provided. The results were
being measured by chief executive officers in the form of increased inventory
turns, improved cash flow, reduced cycle times and other bottom-line business
metrics. These results translated to business differentiators that often made
the difference between market share points, and ultimately financial
performance. When earnings were benefited from these new back-office systems,
the world noticed and the vendor community grew rapidly to satisfy the new
appetite among companies clamoring for their conversion to this new wave of
information systems. As the looming year 2000 data conversion issues grew
closer, more companies became motivated to plan their conversion to open
client/server-based information systems. Eventually, these systems became known
as Enterprise Resource Planning (ERP) systems. The market for ERP products was
estimated to be over $6 billion in 1997, as reported by the GartnerGroup, and
growing in excess of 20% per year.

         Another software market was born in the middle of this decade. It
started with a $300 product called ACT(R). This program became the best selling
program used by PC users to record and track names, addresses and phone numbers
of customers, prospects and business affiliates. ACT(R)'s limitation was simple,
yet monumental. It ran on a


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proprietary database (included with the product) and only on the hard disk of
the user's computer. Therefore, while sales organizations could deploy this
software for a very reasonable cost, each salesperson became an island of
information. The corporate headquarters had no ability to access and therefore
benefit from this information. Additionally, when a salesperson left the company
he or she took all the contact information with them leaving no useful
information for the next salesperson in the same territory. This limitation was
recognized by entrepreneurs who introduced sales force automation software
products that were optimized for a client/server environment by leveraging the
new relational database technology from those vendors previously mentioned. The
sales force automation market became known as customer asset management (CAM),
also recently referred to as the front-office because it consists of
customer-facing departments (sales and services). The CAM or front-office, now
includes software for customer support. The GartnerGroup projected the CAM
market to grow from approximately $1.0 billion in 1996 to $3.9 billion in 2000.

THE POWERCERV APPROACH

         The Company's heritage is rooted in designing and developing
client/server systems for its customers. Since 1992, PowerCerv has been
developing client/server software systems. These systems have been embraced by
early adopters who were anxious to migrate to the next generation of systems.
Early in its history, PowerCerv became involved in developing applications for
customers for both the back-office (manufacturing, order management or
accounting) and the front-office (sales force automation or customer support)
operations of the enterprise. Through contracted project engagements, PowerCerv
developed a sales force automation application for one customer, a customer
support application for another customer, and a manufacturing and order
management application for another customer. PowerCerv leveraged its expertise
in the design and development of client/server application systems, as well as
its ability to design and develop applications under the real-world demands of
customer requirements, while deriving revenues from these projects. During 1995,
the Company was a relative newcomer to the enterprise application software
market and sold its software products as independent software modules primarily
on a "best of breed" basis to companies of all sizes across all industries. In
late 1995, the Company acquired the rights to the manufacturing and order
management applications (previously referred to as PowerMAN and PowerCOM) which
PowerCerv co-developed with one of its customers. In the same time period, the
Company acquired the intellectual property rights to a financial accounting
application product (previously referred to as INTERGY) to complete its product
line of full ERP, or back-office and CAM, or front-office enterprise application
products. By early 1996, many of the Company's competitors had application
products that were either back-office or front-office, but not both. Management
of the Company believed that the enterprise application software market would
evolve to demand an integrated ERP or back-office, and CAM or front-office
software solutions from a single vendor. In order for most vendors to achieve
this strategy, they would be forced to acquire or merge with other vendors whose
products complemented their's, and then attempt to integrate those products
under a common architecture.

          PowerCerv made a strategic decision to be the first enterprise
application software vendor to offer an integrated ERP and front-office software
solution. When a user logs into one application product of the Company where
multiple PowerCerv applications are running, he or she has logged into all of
the application products (depending on access/security privileges). That user
can use all of the Company's application products as defined by their business
requirements. In other words, PowerCerv application products permit its
customers to achieve meaningful business value through integration well beyond
the individual benefits of other, individually-implemented new systems. In
late September 1996, PowerCerv announced its applications for Customer Lifecycle
Management (CLM) Solution. This suite of application products were the first in
the industry to provide integrated client/server solutions for both ERP and
front-office systems from one vendor with a consistent development methodology,
under a common technical architecture and a common look and feel. The Company
believes that its suite of application products, which provides an integrated
enterprise solution, was the first of its kind in the industry, and represents
a competitive advantage for the Company.

          When first introduced to the market, this CLM Solution - integrated
front/back office approach - was received by the industry analysts and by the
general target market with considerable reservation. At the time, no other
vendor was delivering this type of integrated solution. Today, management
believes that PowerCerv was ahead of its time and did not have the marketing and
sales clout to influence the market's perception. Approximately six months after
the Company's CLM integrated product announcement, Baan Company N.V., a large
ERP vendor, announced its acquisition of Aurum Software, Inc., a well-known CAM
software provider. However, Baan now faces a very significant challenge of
integrating their ERP software products with Aurum's CAM software products. The
integration challenge is complex because both products were developed using
different technology


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architectures, development tool sets and methodologies. Management of the
Company believes that this acquisition signaled a significant shift in the
direction of the software market. Based on the technology analysts' comments
concerning the market acceptance of CLM-like solutions that followed the
Baan/Aurum acquisition, the Company believes that its strategy has been
validated.

         During 1997, PowerCerv attempted to capitalize on its integrated CLM
strategy, but was not successful in capturing a significant market share based
on what management of the Company believes was a lack of sufficient marketing
and sales focus. During this time, the Company's target market was not focused
by industry or by location and the Company's sales organizations sold to
companies up to $1 billion in annual revenue sizes, in many different
industries, both in the U.S. and abroad. In 1998, the Company has focused its
marketing and sales efforts, together with other resources, on a much narrower
target market. As a result, the Company has reduced its focus on its development
tools and the sale of third party resale products. Management believes the
Company is positioned to leverage the strength of its products and services for
mid-size U.S. discrete manufacturing companies with annual revenues between $25
million and $500 million. This universe of companies, management believes, is
eager to implement full-featured ERP solutions that are year 2000 compliant and
tailored for their market. Recent announcements from leading ERP suppliers such
as SAP AG and Oracle Corporation of their intent to begin developing integrated
ERP and CAM solutions further serves to educate this target market that an
integrated solution is the correct approach. Additional announcements by other
vendors describing new alliances, mergers or acquisitions to achieve an ERP and
CAM solution has resulted in a great deal of industry-related media coverage.
The industry analysts who regularly write research notes and consult for
companies who seek ERP solutions are also now on the bandwagon, serving to
further educate the market about these front-office and ERP solutions.

          The Company refers to its full suite of integrated ERP and
front-office enterprise application software products as its Customer Lifecycle
Management (CLM) Solution. The Company's ERP application products consist of
PowerCerv Manufacturing, PowerCerv Distribution and PowerCerv Financials. The
Company's front-office or CAM application products consist of PowerCerv Sales
Force Automation and PowerCerv Customer Support. Many of the Company's customers
license the Company's ERP application products as an integrated suite.
Additionally, each PowerCerv application product can be licensed as a standalone
solution. The Company's CLM customers, those who license any combination of ERP
and front-office application products, are able to efficiently manage
information about their customers throughout its lifecycle (as depicted below)
beginning in the pre-sales stage and flowing throughout the ordering,
manufacturing, distribution and post-sale support stages. Although these
application products are sufficiently robust to be installed without
modification, they can also be modified to meet a particular customer's unique
business needs.


[GRAPHIC OMITTED]


         In addition to promoting and licensing its CLM Solution, the Company
provides a full complement of services that allow the Company's customers to
maximize the benefits of the Company's application products. These services
include application analysis, detailed pre-implementation consulting, project
management, application customization and modification, integration programming,
system implementation and deployment. PowerCerv consultants plan, manage and
execute implementation projects along side the customer's staff. The Company
also offers education and training services that provide customers with
formalized programs to ensure that applications are implemented and utilized in
an efficient and cost-effective manner. Additionally, the Company provides
timely, high quality support and maintenance on its products.


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         Separate from its application consulting services referenced above, the
Company provides a wide range of professional consulting services to companies
who use PowerBuilder(R) for client/server systems development. With this service
offering, the Company typically analyzes the customer's existing technology
infrastructure and assesses the customer's business needs and resource
constraints to determine the customer's requirements. This independent project
consulting relates to client/server architecture consulting, application design
and development consulting, internet consulting, PowerBuilder(R) consulting, or
consulting related to the Company's development tools or those third party
resale products. The Company delivers the necessary services to satisfy the
requirements of each independent project customer. The Company also provides
public certified Microsoft and PowerBuilder(R) basic and advanced training
classes that develop and improve essential skills of its customers.

         The Company markets, licenses and supports development tool products it
developed, complementing the core development platform of its application
products. These development tool products which are sold to the Company's
application product customers and independent project customers, as needed for
each application implementation, are no longer a primary focus of the Company.
The Company's object-oriented development tools include an object class library,
client side security, and software distribution tools. These development tools
offer high reusability and are designed to reduce implementation time resulting
in fewer program defects, better application performance and lower ongoing
maintenance costs.

         The Company also resells industry-leading client/server and Internet
development tools primarily in support of its implementation projects. When the
Company becomes engaged in a project to implement its application products, or
in an independent project, its pre-sales specialists determine which products
are needed to satisfy the requirements of the project. The development tools may
include those necessary for data model design, process and object-oriented
modeling, application and database development, data warehousing, documentation
development and quality testing. The products that provide those functions
include Sybase, Inc.'s PowerBuilder(R), Progress Software Corporation's
Apptivity(TM), FirstFloor Software Corporation's Smart Encyclopedia(TM), Haht
Software's Hahtsite(TM), Rational Software's Rational Rose(TM), SQA's Team
Test(TM), Intersolv's PVCS(TM), LogicWorks' ERwin(TM), Cast Software's SQL
Builder(TM), Sybase's Sybase IQ(TM) and relational databases from Microsoft(TM)
and Sybase(TM).

POWERCERV'S STRATEGY

         The Company's objective is to become a recognized leader in the
mid-size discrete manufacturing market with integrated ERP and front-office
enterprise application software solutions. The Company believes that the
mid-size or middle market has become segmented into two separate groups; one
market segment is comprised of manufacturers with annual revenues under $500
million, and the second market segment is comprised of manufacturers with annual
revenues between $500 million and $1 billion. As a result of the Company's
assessment of the markets and the Company's products and strengths, the Company
recently narrowed its focus on the under $500 million market segment. Many of
the Company's customers are manufacturers with revenue under $200 million
seeking to position themselves and their information systems for rapid revenue
growth. The Company's strategy to achieve this objective in this market includes
the following key components:

-        Increase license revenue and market share. The Company's
         primary objective is to increase its license revenues and market
         share in the middle market. The Company believes that its ERP and
         front-office suite of application products (CLM Solution) effectively
         meet the needs of mid-size manufacturing companies based on technology
         platforms, functionality, agility and integration capabilities. The
         Company also believes that the market for enterprise application
         vendors is growing rapidly based on, among other factors, the
         continuing acceptance of client/server technology, the migration from
         mainframe computers, and year 2000 concerns. The Company is focused on
         trying to successfully increase its license revenues while closely
         managing its operating costs.  If these objectives are achieved, this
         will result in improved earnings performance. To achieve the Company's
         strategy to increase license revenue and market share, the Company will
         have to continue to enhance its products, recruit and train additional
         consulting staff and recruit and train sales and marketing
         professionals. There can be no assurance that the Company will be able
         to achieve this strategy and to successfully compete against current
         and future competitors. See also "Business - Competition".

-        Focused Market Strategy. The Company is focused on delivering open,
         modifiable ERP and front-office enterprise application software
         solutions to mid-size U.S. discrete manufacturing companies with annual
         revenues between $25 million and $500 million. The Company has focused
         its resources, including


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         product development, marketing and sales efforts, on the needs and
         requirements of companies in this market.  A significant portion of the
         Company's ongoing product development efforts will focus on building
         new features and functionality that address the particular needs and
         requirements of mid-size discrete manufacturing companies. This product
         development strategy serves to make the Company a "specialist
         provider". The Company intends to leverage its expertise in this area
         and expects this expertise will provide the Company with a competitive
         advantage.

-        Increase the base of referenceable customers. Several customers of the
         Company are in the process of implementing the Company's ERP and
         front-office application products, and at this time a limited number of
         customers have implemented a majority of the Company's CLM
         application products. Many of the Company's other customers, however,
         have only implemented one or more of the Company's application
         products. As customers implement more of the Company's application
         products and become fully installed and operational, the Company
         believes that those customers will be available as sales references for
         the use of all of the Company's product. Based on its experience, the
         Company believes manufacturers selecting enterprise application
         software systems rely heavily on customer references. The Company is
         focused on increasing its reference base in order to accelerate its
         license revenues. There is no guarantee, however, that customers will
         serve as references or that they will be able to assist the Company
         with this objective.

-        Capitalize on Year 2000 compliance. Many companies are facing the
         prospect of severe business problems if they do not update or modify
         their existing enterprise software systems to appropriately recognize
         the calendar year 2000. The Company believes that this problem is
         accelerating the migration to open, client/server-based enterprise
         application solutions that are configured to successfully handle this
         transition. The Company's products have been year 2000 capable since
         their inception. The Company believes that it is well positioned to
         leverage its full suite of enterprise application products and
         development tools to be part of its customers' year 2000 solutions.

-        Provide a single-source full implementation solution. The Company
         believes that mid-size manufacturers are less willing to hire multiple
         vendors for the implementation of one solution due to the costs
         involved in the implementation and training.  Enterprise application
         software solutions generally require a team of professional service
         providers to implement. The Company's Professional Services
         Organization offers a full complement of services that allow the
         Company's customers to maximize the benefits of the Company's CLM
         Solution. These services include detailed pre-implementation
         consulting, project management, system implementation, deployment and
         integration programming, application customization, modification and
         enhancement services, and application education and training services.
         Therefore, customers of the Company can rely on one vendor for the full
         implementation solution.

-        Provide products that use open, industry-standard technology. The
         Company designs its application products and development tools to
         adhere to industry-standard development platforms in order to meet
         customer's demands for open solutions. The Company's products have an
         open architecture, are flexible and modifiable, and operate with
         several popular operating systems, relational databases and
         communication protocols. All of the Company's application products
         operate on a Microsoft NT (as well as UNIX) platform and are also able
         to use the Microsoft SQL Server Relational Database. The Company
         believes that its open systems/open architecture approach represents a
         competitive advantage over other pre-written application products that
         are written with proprietary development tool sets, for a proprietary
         database, on outdated operating systems and that may in fact be
         ports of older systems with significant limitations.

-        Achieve high level of customer satisfaction. The Company is committed
         to consistently achieving high levels of customer satisfaction with all
         of its products and services. The Company focuses on delivering high
         quality products that address specific requirements, are easy to
         implement and enable increased productivity. The Company also designs
         its application and development tools to permit customers to


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         easily modify and customize the software to fit their specific business
         requirements, which enhances overall satisfaction with the Company's
         products and services.

-        Focus its marketing efforts on the Company's CLM Solutions. The Company
         is regularly engaged in marketing activities designed to build
         Company/product awareness, and to position itself as a provider of
         integrated enterprise application software for mid-size discrete
         manufacturing companies. In addition to advertising, direct mail, trade
         shows and telemarketing activities, the Company regularly conducts
         briefing sessions to industry analysts who serve as influential
         observers, consultants and authors of published reports. The Company
         also works closely with targeted trade publications in an effort to
         garner press coverage, which serves to build awareness in the Company's
         target market.

Products and Services

         The Company's application products, development tools and services are
designed to enable the Company's customers to design, deploy and maintain
client/server-based information systems.

Application Products and Development Tools.

         The following table summarizes certain information about the Company's
products:

<TABLE>
<CAPTION>
                             COMMERCIAL RELEASE    DATE OF MOST RECENT          SUGGESTED                 PRODUCT
PRODUCT                             DATE                  UPGRADE            U.S. LIST PRICE            DESCRIPTION
-------                      ------------------    -------------------      ------------------    -----------------------
<S>                          <C>                   <C>                      <C>                   <C>
POWERCERV APPLICATION
PRODUCTS

PowerCerv Manufacturing             3Q94                   V7.0             Starts at $23,000     Multiple modules that
(formerly called                                           4Q97                                   address manufacturing
ADAPTlication for                                                                                   resource planning,
Manufacturing)                                                                                    scheduling, shop floor
                                                                                                  control, configuration
                                                                                                      management and
                                                                                                       performance
                                                                                                       management

PowerCerv Distribution              3Q95                   V7.0             Starts at $32,000     Multiple modules that
(formerly called                                           4Q97                                   address order processing,
ADAPTlication for                                                                                     returned goods
Distribution)                                                                                     processing, quotation
                                                                                                   processing, customer
                                                                                                   profiling, marketing and
                                                                                                  sales, pricing, shipping,
                                                                                                 freight, invoicing, and
                                                                                                   inventory/warehouse
                                                                                                        management

PowerCerv Financials                2Q95                   V7.0             Starts at $14,000     Multiple modules that
(formerly called                                           4Q97                per module          address accounting,
ADAPTlication for                                                                                 financial and business
Financials)                                                                                          management needs
                                                                                                  including general ledger,
                                                                                                    accounts payable,
                                                                                                   accounts receivable,
                                                                                                   purchasing, project
                                                                                                    accounting, order
                                                                                                  processing, inventory and
                                                                                                       fixed assets
</TABLE>

                                       8


<PAGE>   10



<TABLE>
<S>                                 <C>                    <C>              <C>                   <C>
PowerCerv Sales Force               2Q95                   V7.0             Starts at $35,000     Sales force automation
Automation (formerly                                       4Q97                                   and contact management
called ADAPTlication for
Sales Force Automation)

PowerCerv Customer Support          3Q95                   V7.0             Starts at $27,000       Customer support,
(formerly called                                           4Q97                                     including problem
ADAPTlication for Customer                                                                        management and tracking
Support)


PowerCerv Customer Asset            3Q95                   V7.0             Starts at $50,000      Combined, integrated
Management (formerly                                       4Q97                                    package of PowerCerv
called ADAPTlication for                                                                          Sales Force Automation
Customer Asset Management)                                                                         and PowerCerv Customer
                                                                                                           Support


POWERCERV SOFTWARE
DEVELOPMENT TOOLS

PowerTOOL                           4Q93                   V5.0                $1,200 per         Object-oriented class
                                                           4Q96                 developer              library for
                                                                                                    PowerBuilder-based
                                                                                                       applications

PADLock                             3Q95                   V5.0             $2,300 per server      Data and application
                                                           4Q96                                     access control for
                                                                                                    PowerBuilder-based
                                                                                                       applications

AppSync                             2Q96                   V3.0               $80 per seat          Software and file
                                                           1Q97                                      distribution and
                                                                                                     synchronization


PFCtool                             4Q96                   V5.5            $695 per developer       Class library for
                                                           1Q97                                     PowerBuilder using
                                                                                                  Powersoft's PFC product
</TABLE>


PowerCerv Application Products

         The Company's application products are robust graphical client/server
systems that are based on open industry standard development tools that
generally can be integrated with other industry standard applications and
utilities. PowerCerv's application products, which by a name change and a new
functional release in October 1997 replaced the Company's ADAPTlication Series,
may be installed without modification, but were designed and built with
extensibility in mind. (When originally released, the Company referred to its
application products as the EnPower Series; however, this reference was phased
out in September 1996.) The Company employs a modular, object-based architecture
built upon industry standard development tools. This object-extensible
architecture, in conjunction with the Company's methodology, permits developers
to modify and extend the Company's application products without affecting the
underlying integrity of the unmodified portions of the application. In this
manner, the Company's customers gain the ability to customize and extend the
application, while maintaining the benefits of a supported and enhanced
application.

         The Company refers to its full suite of integrated ERP/back-office and
front-office application products as its Customer Lifecycle Management (CLM)
Solution. The Company's ERP application products consist of PowerCerv
Manufacturing, PowerCerv Distribution and PowerCerv Financials. The Company's
front-office


                                       9

<PAGE>   11

application products consist of PowerCerv Sales Force Automation and PowerCerv
Customer Support and, when combined, are also referred to as PowerCerv Customer
Asset Management.

         The Company's application products are licensed with or without source
code to customers for internal use based on a maximum number of servers and
users. Customers may select one or more of PowerCerv's application products and
may install them on a stand-alone basis or as part of an integrated suite of
products. PowerCerv's application products consist of the following six business
software applications and the PowerCerv Application Integration Server (AIS):

         PowerCerv Manufacturing. PowerCerv Manufacturing is a full-feature,
multi-module manufacturing resource planning system and manufacturing execution
system for discrete manufacturing companies. This application product contains
multiple modules that address manufacturing resource planning, scheduling, shop
floor control, configuration management and performance management. PowerCerv
Manufacturing has a robust feature set that provides an efficient supply-side
management tool. PowerCerv Manufacturing, combined with PowerCerv Distribution
and PowerCerv Financials, allows the Company to deliver a complete Enterprise
Resource Planning (ERP) Solution.

         PowerCerv Distribution. Distribution is a full-feature customer order
management system that allows mid-size organizations to expand and improve their
customer order management and distribution efforts by integrating technology
with customer-oriented concepts. This application product includes multiple
modules that address order processing, returned goods processing, quotation
processing, customer profiling, marketing and sales, pricing, shipping, freight,
invoicing and inventory/warehouse management. PowerCerv Distribution's robust
feature set is targeted to meet the complex order management needs of
manufacturing companies and other mid-size industrial organizations.

         PowerCerv Financials. Financials is a comprehensive suite of
financial/accounting and business management modules designed to automate
administration and improve information flow. PowerCerv Financials consists of a
suite of modules including General Ledger, Purchasing, Accounts Payable,
Accounts Receivable, Project Accounting, Order Entry, Inventory Control and
Fixed Assets. The Company developed and uses an automated, time and expense
system with remote accessing capabilities for its internal operations, and is
considering releasing this as a separate product or a PowerCerv Financials
module.

         PowerCerv Sales Force Automation (SFA). SFA provides an
enterprise-level solution to the contact management and sales force automation
needs of sales and marketing organizations. PowerCerv SFA is designed to allow
professional sales organizations to manage their prospect and customer databases
pro-actively, track the complex sales cycle, capture and leverage sales and
marketing trend data and thus improve productivity of sales personnel, while
delivering summary information to management.

         PowerCerv Customer Support. Customer Support is an enterprise-level
solution to the problem management/tracking needs of internal or external
support organizations. PowerCerv Customer Support is designed to provide support
organizations with increased productivity and improved responsiveness, and
allows them to use trend data to improve overall company quality performance and
caller satisfaction.

         PowerCerv Customer Asset Management. Customer Asset Management is an
enterprise-level, integrated solution that supports the automation needs of an
organization's sales and support services. PowerCerv Customer Asset Management
integrates the Company's SFA and Customer Support application products into an
integrated sales and support solution via a common database architecture.

               PowerCerv Application Integration Server (AIS). AIS provides a
distributed, message-based environment for integrating multiple application
products. AIS may link multiple PowerCerv application products or alternatively
PowerCerv application products and non-PowerCerv application products. The AIS
software engine permits the end user to distribute logical components on one or
more physical servers that may be in different geographic locations or use
different relational database engines.


                                       10

<PAGE>   12

POWERCERV SOFTWARE DEVELOPMENT TOOLS

         The Company's software development tools extend the functionality of
PowerBuilder(R) and are designed to assist PowerBuilder(R) developers in more
quickly building applications that contain fewer defects, run faster and are
easier to maintain. The Company's software development tool products are:

         PowerTOOL (PowerBuilder(R) Template Object-Oriented Library). Object
class libraries assist software development teams in efficiently developing and
maintaining medium- to large-sized applications written with object-oriented
development tools. PowerTOOL, the Company's award-winning object class library
for the PowerBuilder(R) development environment, addresses these complex
development needs. PowerTOOL directly and seamlessly extends the PowerBuilder(R)
development environment and includes programming standards, reusable visual
interface components (e.g., menus, windows, data windows, command buttons),
reusable non-visual processing objects, error handling objects, communication
objects and pre-written window and application templates. PowerTOOL facilitates
accelerated development, while promoting consistency and enforcing programming
standards. The typical PowerTOOL license configuration includes a PowerTOOL
development license for each PowerBuilder(R) development license owned.

         PADLock (PowerBuilder(R) Application and Data Locking). Data and
application access control in any mid-to large-size client/server application
usually involves significant design and development time. PADLock is a
data-driven security methodology and software product that provides object,
window, row or column level security to any existing or new
PowerBuilder(R)-based application. The typical PADLock license configuration
includes a development server license for developing and testing application and
user access and a deployment server license for each server where a
PADLock-secured application is deployed.

         AppSync (Application Distribution and Synchronization Tool). AppSync is
an automated software distribution and file synchronization system for
client/server computing environments. AppSync automatically distributes entire
applications, updated versions of software, or files of any type using a local
area network (LAN), wide area network (WAN) or the internet. AppSync licensing
configurations are based on the number of end users accessing and using the
software.

         PFCtool (Object Class Library for the PowerBuilder(R) Foundation Class
Product). PFCtool is a class library that extends the base functionality of
Sybase's release of the PowerBuilder(R) Foundation Class Library (PFC), a
library of objects which provide software developers with a starting point for
building PowerBuilder(R) based applications. PFCtool is used by developers who
choose to use PFC's service-based architecture for application development.
PFCtool provides advanced services, template objects, and inheritable windows,
menus, and controls for efficient and productive application development. The
typical PFCtool license configuration includes a PFCtool development license for
each PowerBuilder(R) development licensed owned.

         TECHNOLOGY RESALES

         The Company resells industry-leading client/server development tools
that complement the Company's own development tools and, when installed and
utilized in conjunction with the Company's development tools, can provide a
comprehensive client/server development environment as well as an internet
development environment. These tools include the tools necessary for data model
design, process and object-oriented modeling, application and database
development, data warehousing, documentation development and quality testing.
These tools include PowerBuilder(R), Apptivity(TM), Smart Encyclopedia(TM),
Hahtsite(TM), Rational Rose(R), SQA Team Test(TM), PVCS(TM), Erwin(R), SQL
Builder(TM), Sybase IQ(TM) and relational databases from Microsoft(TM),
Sybase(TM) and Oracle(TM).

         SERVICES

         The Company's service offerings from its Professional Services
Organization (PSO) consist of the following:

         Consulting Services. The Company provides a wide range of professional
technical and business consulting services for the Company's application
products. Application product services include a full complement of services
that allow the Company's customers to maximize the benefits of the Company's
application products. These services include application analysis, detailed
pre-implementation consulting, project management, application customization and
modification, integration programming, system implementation and deployment, and
application education and training services. PowerCerv consulting services are
not included in the price of its software.


                                       11


<PAGE>   13
         The Company also offers a variety of other professional consulting
services, including client/server architecture consulting, application design
and application development, Internet consulting and general deployment
application consulting. Client/server architecture consulting involves analyzing
the customer's existing technology infrastructure and assessing the customer's
business needs as well as time and resource constraints to determine whether the
customer should build and deploy a custom application, deploy a pre-written
application or deploy the Company's pre-written application products. Design and
development services include relational data modeling, process and
object-oriented modeling, application and database development and
customization, data warehousing and quality testing. Internet consulting
includes designing, developing and modifying applications to use the internet
capabilities to promote and/or operate a business organization. General
deployment consulting involves providing installation and implementation
assistance necessary to install the Company's application products selected by
the customer.

         In order to be responsive to the specific needs of each customer, the
Company offers three service options, representing varied levels of customer and
Company involvement. The first option is technical mentoring, whereby the
customer retains primary responsibility for the project. A senior Company
consultant occasionally visits the customer site, assisting on the most
difficult aspects of a project. The second option is co-development, whereby
Company consultants work side-by-side with a customer's technical staff. This is
a popular option with customers because there is a significant transfer of
knowledge to the customer. The third option, popular when the customer lacks the
time or resources to participate in the project, is the "Software Factory,"
whereby the Company assigns the work to its internal design and development
center, which the Company calls the "Software Factory." Under this option, the
work is performed at the Company's facility by the Company's technical
consultants, and typically upon project completion the customer's technical
personnel are briefed so that they may provide on-going support if they so
desire.

         The Company's services are provided to end-user customers pursuant to
written service agreements which, among other things, detail the scope of the
consulting services, to be provided and the applicable billing rates via written
"statements of work" require separate change orders for any modifications to a
statement of work, generally name project management personnel responsible for
overseeing each project and require weekly and/or monthly status meetings
between PowerCerv and its customers. PowerCerv consulting services are generally
billed on a time and materials (including travel and living expenses) basis.

         Education Services. Education services consist of end-user education on
the Company's application products and technical training on third party resale
products and the Company's development tools.  End-user education involves
providing comprehensive education and training classes for end-users on the
implementation and use of the PowerCerv application products in an efficient and
cost-effective manner. Customized education and training programs are also
available to meet the end-user customers' specific requirements.  Technical
training involves providing comprehensive education and training classes to
assist the customer's technical staff in implementing and using client/server
development tools licensed or resold by the Company.  The Company provides its
end-user customers classroom training in nine classrooms in eight cities across
the U.S. In addition, training courses are frequently provided at customer
sites, using customer facilities and equipment, with the Company providing the
instructor and class materials. Some classes are offered on a per-student basis
and other classes are offered on a negotiated fixed-fee basis.

         Maintenance Services. PowerCerv is committed to providing timely, high
quality support and maintenance on its products. Maintenance services are
generally provided pursuant to maintenance agreements between the Company and
its end-user customers. These agreements entitle customers to hotline telephone
support during extended business hours, notification of product enhancements and
upgrades, the enhancements and upgrades, functional releases and maintenance
releases, technical bulletins, replacement of damaged products and access to the
Company's World Wide Web site (http://www.powercerv.com) and electronic bulletin
board. The Company currently charges a percentage of its product license fee for
renewable one-year to three-year maintenance agreements.
Maintenance fees are generally billed annually in advance.

CUSTOMERS

         Since its inception, the Company has more than 3,000 customers
worldwide for its products and services.  The Company's customers include Allied
Signal Corporation, Cavalier Homes, Inc., Chatsworth Products, Inc., Compaq
Computer


                                       12

<PAGE>   14
Corporation, Ellett Brothers, Inc., F.X. Coughlin Company, JBB (Asia-Pacific)
Pty Ltd., Monaco Coach Corporation,  Reliance Electric, Ltd., Rohm and Haas
Company,  Silicon Valley Bank, SNS Bank Groep N.V., Sony Pictures Entertainment,
Inc., Southern Indiana Gas & Electric, Textron Financial Corporation, Unit Parts
Company, and Wellington Leisure Products, Inc.  The Company recently narrowed
its marketing and sales focus primarily on mid-size U.S. discrete manufacturing
companies with annual revenues between $25 and $500 million.

MARKETING, SALES AND DISTRIBUTION

         The Company markets and sells its full suite of open, modifiable
ERP/back-office and front-office enterprise application software solutions to
mid-size U.S. discrete manufacturing companies with annual revenues between $25
million and $500 million. The Company's application products and development
tools are sold through a direct sales force and through a network of VARs,
distributors and teaming partners who generally serve in their respective
capacities on a nonexclusive basis. As of December 31, 1997, the Company's sales
and marketing organizations had 60 full-time employees.

         As a result of the Company's assessment of the markets and the
Company's products and strengths, in January 1998, the Company announced its
intent to concentrate its sales and marketing efforts on U.S. discrete
manufacturing companies. At that time, and in connection with a work force
reduction, the Company folded two of its sales groups (Business Development
Group and Client/Server Migration Group) into its direct sales force and closed
its international headquarters in Amsterdam. Prior to January 1998, the Company
addressed a broad range of sales opportunities within a market consisting of
mid-size organizations (with annual revenues up to $1 billion) and government
entities, and relied on the coordinated efforts of its U.S. direct sales force,
international sales force, corporate marketing and corporate telesales groups,
together with its Business Development Group and Client/Server Migration Group.

         The Company utilizes a direct sales force to sell its enterprise
application software solutions. The sales force is geographically dispersed
across three regions in the United States.  The charter of the Company's direct
sales force is to identify manufacturers in the target market and engage those
accounts in a sales campaign once a target company has acknowledged its interest
in the Company's enterprise software solutions. The Company's sales force uses a
structured sales methodology to maximize the efficiency of its sales resources
and maximize its competitiveness.  The sales force consists of twelve sales
representatives reporting into three regional sales vice presidents. The sales
regions have application product specialists responsible for detailed product
demonstrations during qualified sales campaigns.

         In the United States, the Company also utilizes VARs and channel
partners to sell its application products to manufacturing companies generally
with annual revenues below $25 million or into other market segments that the
Company does not directly focus on. VARs (or valued added resellers) are
authorized to promote and assist in connection with licensing the Company's
products, and generally provide professional consulting services and some level
of customer support following implementation and deployment. Channel partners
generally identify qualified sales opportunities for the Company's direct sales
organization to address and close, and subsequent to product delivery are
involved in providing professional consulting services. Internationally, the
Company utilizes distributors and channel partners to sell and support its
products. VARs, distributors and channel partners typically have expertise in
particular vertical markets and geographic ties to their target markets.
Additionally, the Company's VARs, channel partners and international
distributors receive training and support in the Company's enterprise
application software solutions.

         The Company employs application consultants and technical consultants
to assist the direct sales force as may be necessary in competitive sales
opportunities, though these consultants' primary function is to provide
customers with billable services related to installing, customizing, supporting
and maintaining its products. The Company employs application and technical
consultants that are experienced professionals with in-depth knowledge of their
particular field of expertise.


                                       13

<PAGE>   15
         The Company actively and regularly conducts marketing activities
designed to increase its market awareness. These marketing activities include
advertising in trade publications such as "Manufacturing Systems Magazine",
public relations activities to gain valuable press exposure, trade shows that
target manufacturing companies, telemarketing activities designed to generate
leads for the direct sales organization, direct mail campaigns and on-line
seminars for product demonstrations. Additionally, the Company updates industry
analysts regularly with announcements including new customers and updated
product features. The Company maintains a World Wide Web site that serves as a
marketing communication vehicle. The Company also publishes all of its product
and service information on its World Wide Web site, including a full color
version of its product literature, recent press releases, selected reprinted
press coverage, the Company's training and trade show schedule and other
relevant information pertaining to its full suite of products and services.

         Products are generally shipped as orders are received and, accordingly,
the Company has historically operated with little or no backlog. Because of the
generally short cycle between order and shipment, the Company does not believe
that its backlog as of any particular date is meaningful.

PRODUCT DEVELOPMENT

         The Company made substantial investments in internal research and
development in 1997, and in prior years made substantial investments through
both internal development and technology acquisitions.  The Company's product
development efforts are focused primarily on continued enhancement of its ERP
and front-office enterprise application products to meet the needs and
requirements of mid-size discrete manufacturing companies. The Company believes
its future performance will depend in large part on its ability to maintain and
enhance its current product line to meet the needs of this target market, its
development of new application products as well as exploiting emerging
technologies. As of December 31, 1997, the Company had 57 full-time employees in
product development group.  The Company opened a new 15,000 square foot
facility in Anderson, South Carolina on March 23, 1998.  Research and
development expenses consist primarily of salaries for employees in the
product development group and a portion of the related overhead. Research and
development expenses are charged to operations as incurred.  Research and
development expenditures were approximately $5.8 million in 1997 and $6.7
million in 1996.

         In October 1997, the Company released version 7.0 of its enterprise
application products on schedule as planned. The new release added additional
functionality and features including a Web-based push technology for
distributing information both inside and outside a customer organization,
integration of PowerCerv Sales Force Automation with Microsoft Outlook(TM),
serialization and lot control options for tracking inventory and a new workflow
management facility to expedite change management and customer returns. Version
7.0 also increased the integration among the Company's ERP and front-office
application products.

         The Company plans to continue to enhance its ERP and front-office
enterprise application products to address the evolving needs of mid-sized
discrete manufacturing companies. In particular, the Company intends to continue
pursing improved functionality on its existing application products, and to make
changes to the base products to suit specific customer requirements. The
objectives of the product development group include taking advantage of features
in the Company's underlying core technologies. These features include multiple
hardware platform support, database independence, multiple network support and
support for various operating systems (primarily Microsoft Windows, Microsoft
Windows NT and various versions of UNIX), while offering a broad and robust
product function and feature set that may be extended and modified as needed by
the customer.

         The client/server enterprise software application market is highly
influenced by rapid technological change, adoption of new industry standards,
frequent new product introductions and changing customer demands that can render
existing products unmarketable and obsolete. The Company's future success will
depend upon its ability to enhance its current products and develop and
introduce new products that keep pace with technological developments, respond
to evolving customer requirements and achieve market acceptance. In particular,
the Company believes it must continue to respond quickly to its customers' needs
for functionality. In the past, the Company has experienced delays in the
introduction of new products and product enhancements. There can be no assurance
that the Company will be successful in developing and marketing new products or
product enhancements, addressing changing customer demands or the adoption of
new industry standards, or that the Company will not


                                       14

<PAGE>   16

experience significant delays in the introduction of new products or product
enhancements in the future, any of which could have a material adverse effect on
the Company's results of operations.

STRATEGIC ALLIANCES

         An element of the Company's strategy is the continued creation and
development of strategic alliances with notable industry participants. The
Company's goals in establishing these relationships are to create marketing
alliances that will endorse and promote the Company's products to a larger
potential customer base than can be reached through the Company's direct
marketing efforts and to assist the Company in developing a supply of
aftermarket service providers, who will train personnel to implement the
Company's products, thereby leveraging the Company's resources and reach. The
Company seeks strategic alliances with companies that have maximum penetration
and leading reputations for quality with the Company's target customers. Many of
these relationships are in the early stages of development and have not yet
resulted in material revenue for the Company. Generally, existing agreements
outlining the Company's alliances do not impose significant financial
obligations or liabilities on either party and have terms no longer than one
year. There can be no assurance that these relationships will successfully
develop to the extent that they will contribute materially to the Company's
financial results in the future.

         To date, the Company's significant alliances include the following
organizations:

         Microsoft Corporation. The Company has entered into an agreement with
Microsoft that permits the Company to resell Microsoft's products as a
"Microsoft Solution Provider." In addition, the Company receives frequent
briefings on Microsoft's strategic and technical product direction, participates
in joint marketing activities, and receives early access to new software
releases. The Company's entire suite of products operate in conjunction with
Microsoft SQL Server, Windows NT Workstation, Windows NT Server and Windows 95,
and have received the important Microsoft back-office certification.

         Sybase, Inc. The Company has entered into a strategic marketing
relationship with Sybase. The relationship includes joint sponsorship of
seminars highlighting the Company's applications, press releases announcing the
availability and performance of the Company's products on Sybase platforms,
publications of joint success stories and other items of a similar nature. The
Company also packages and resells Sybase's database products and provides formal
Sybase training. Sybase includes the Company's application products in its
listing of products available on the PowerBuilder platform, and frequently
conducts joint product seminars with the Company in the United States. Recently,
the Company provided training to a group of Sybase telemarketing sales
representatives on the Company's application products and on identifying joint
Sybase/PowerCerv sales opportunities.

         SBT Accounting Systems, Inc.  SBT Accounting Systems, Inc. ("SBT") is a
leading provider of accounting software in the small-to-medium enterprise market
and has established a network of approximately 2,000 value-added resellers.  The
Company entered into a partnering agreement providing SBT with OEM license
rights on the PowerCerv Financials (formerly referred to as ADAPTlications for
Financials). In addition, SBT and its VARs will be able to resell the Company's
other application products in the United States.  The Company anticipates that
some of SBT's VAR's will begin selling the Company's other application products
to their customers in 1998.  In December 1996, the Company had  purchased a five
percent ownership interest (which, as of December 1997, was four percent) in
SBT's parent organization, Software Business Technologies.

         In addition to those strategic alliances referenced above, the Company
has entered into agreements and relationships with several of the "big six"
accounting firms on a regional basis. Under these agreements and relationships,
representatives of the accounting firms promote the Company's application
products to their client base. The Company provides training to individuals from
these firms on product implementation.

         Competition could develop between the Company and certain of the
parties with which it has strategic alliances. There can be no assurance that
the Company would be able to effectively compete with any such parties in such
circumstances.

                                       15

<PAGE>   17

COMPETITION

         The market for enterprise software application products and services is
intensely competitive, rapidly changing and significantly affected by new
product offerings and other market activities. A number of companies offer
products similar to the Company's products and services, which are targeted at
mid-size discrete manufacturers. In addition, the Company's market has no
proprietary barriers to entry, which would limit competitors from developing
similar products or selling competing products. Many of the Company's existing
competitors, as well as a number of potential competitors, have longer operating
history, more established marketing and sales organizations, greater name
recognition, larger R&D and technical organizations, significantly greater
financial and technical resources and a larger installed based of customers than
the Company. As a result, these competitors may be able to respond more quickly
to new or emerging technologies and to changes in customer requirements, or to
devote greater resources to the development, promotion and sale of their
products, than can the Company. There can be no assurance that the Company will
be able to compete successfully with existing or new competitors or that such
competitors will not offer or develop products that are superior to the
Company's products or that achieve greater market acceptance.

         The Company competes in the enterprise software application products
and services market on the following merits: a focus on the mid-size discrete
manufacturing market, product functionality, integrated ERP and CAM solution,
modification and customization capabilities, single-source implementation
solution, time to benefit, technology, service and cost. The Company currently
competes primarily with (i) other vendors of software focused on the specific
needs of mid-size discrete manufacturing companies, which include DataWorks
Corporation, J.D. Edwards World Solutions Company, QAD Inc., PivotPoint Inc. and
Symix Computer Systems, Inc., and (ii) VARs and system integrators of the larger
enterprise software companies, including SAP AG, Baan Company N.V., Peoplesoft,
Inc., Oracle Corporation, targeting mid-size discrete manufacturing companies
with annual revenues below $500 million. In addition, customers who have a large
installed base of legacy systems may resist committing the time and resources
necessary to convert to an open systems, client/server-based software suite of
products. Further, as the client/server market continues to develop, companies
with significantly greater resources than the Company may attempt to increase
their presence in the target market where the Company is focused by acquiring or
forming strategic alliances with competitors of the Company. Increased
competition is likely to result in price reductions and related reductions in
gross margins and market share, any one of which could materially adversely
affect the Company's business, results of operations and financial condition.

         For the Company's consulting services business, the competition is
primarily based on the type of project or the type of service being rendered.
When the services are related to the Company's products, generally there is less
competition. The Company also provides client/server design and development
services on client/server software development projects where the Company's
products have little or no material contribution to the project. In this
circumstance, the Company competes with a large number of consulting service
providers, both large and small in size, and price pressure is more intense.

         There is currently little competition for education services related to
the Company's development tools and application products. There is, however,
significant competition for education services on its technology resale
products. Competition in the latter case comes from the original manufacturers,
regional firms specializing in training and other product or consulting firms
that also offer education services. The Company competes based on the quality of
its instructors, its broad course offering and its total solution approach.

INTELLECTUAL PROPERTY AND OTHER PROPRIETARY TECHNOLOGY

         The Company regards its products as proprietary trade secrets and
confidential information. The Company relies on a combination of copyright,
trademark and trade secrets laws, employee and third-party nondisclosure
agreements and other industry standard methods for protecting ownership of its
products.  The Company has no patents.  There can be no assurance, however, that
in spite of these precautions, an unauthorized third party will not use, copy or
reverse engineer portions of the Company's products. In addition, the laws of
some foreign countries do not protect the Company's proprietary rights to the
same extent as do the laws of the United States. There can be no assurance that
the methods used by the Company to protect its products will be adequate or that
the Company's competitors will not independently develop products that are
substantially equivalent or superior to the Company's products.

                                       16

<PAGE>   18

         The Company licenses its application products and development tool
products to customers under non-transferable, non-exclusive license agreements
which are generally in standard form, although application licenses are
individually negotiated and may contain variations. The standard form
application license agreement allows customers to use the Company's products
solely for internal purposes and specifies the maximum number of servers and
concurrent users that may use the products. The Company licenses the source code
for its application products to enable its customers to customize the software
to meet particular requirements. The disclosure of source code increases the
likelihood of misappropriation or other misuse of the Company's proprietary
rights. The Company's standard form application license contains confidentiality
provisions protecting the products. In the event of termination of the license,
the customer remains responsible for any unpaid license fees and the
confidentiality obligations. However, there can be no assurance that such
customers will take adequate precautions to protect the Company's proprietary
trade secrets and confidential information. For development tool license
agreements, which are also generally provided in source code form, the Company
relies on both "shrink wrap" license and negotiated license agreements,
depending on various factors including the size of the transaction, the number
of programs, and the level of support or customization. A shrink wrap license is
a printed agreement included in the product packaging that purports to bind the
licensee when the package is opened. It is not signed by a customer and,
therefore, may be unenforceable under the laws of certain jurisdictions. There
can be no assurance that the Company's means of protecting its proprietary
rights and confidential information will be adequate.

         The Company believes that it has all necessary rights to market its
software products and development tool products, although there can be no
assurance that third parties will not assert infringement claims against the
Company in the future. The Company expects that, as the number of products
increase and the functionality of these products further overlaps, the
likelihood of third parties asserting infringement claims against the Company
will increase. Any claim, whether or not it has merit, could result in costly
litigation, and require the Company to enter into royalty or other license
arrangement. Such royalty or other license arrangement, if required, may not be
available on terms acceptable to the Company or at all.

         Although the Company's competitive position may be affected by its
ability to protect its proprietary rights and confidential information, the
Company believes that the rapid pace of technological change in the industry
will cause other factors, such as the technological and creative skills of the
Company's management and technical personnel, name recognition, the ability to
develop, produce, enhance and market innovative products and services, the
timeliness and quality of support services, and strategic relationships in the
industry, to be more important in establishing and maintaining a leading
position within the industry than are copyright, trademark and other legal
protections for intellectual property.

EMPLOYEES

         As of December 31, 1997, the Company had 372 full-time employees. These
employees include 60 in sales, marketing and related activities, 57 in research
and development, 208 in customer support, training and consulting services, and
47 in finance, administration and human resources. The Company's employees are
not represented by any collective bargaining organization and the Company has
never experienced a work stoppage. The Company believes that its relations with
employees are good. The loss of certain key employees or the Company's inability
to attract and retain other qualified employees could have a material adverse
effect on the Company's business and operations.

         Based on the Company's December 1997 plan to significantly reduce
operating expenses and minimize the usage of cash, the Company underwent a
reduction in work force of approximately 50 persons through January 1998. The
Company's execution of this plan resulted in a work force reduction and other
charge of $1,010,000, which was recorded in the fourth quarter of fiscal 1997.
This charge included expenses related to work force reductions, severance
payments, impairment of property and equipment and other costs.

ITEM 2.  PROPERTIES

         The Company's corporate headquarters are located in Tampa, Florida in a
24,000 square foot facility, including office space and customer training
facilities, occupied under a lease expiring in September 2000. The Company
leases additional office space in two other Florida cities, and in Alabama,
California, Georgia, Illinois, Michigan, Minnesota, North Carolina,
Pennsylvania, South Carolina, Texas, Virginia and Washington. The Company
believes that its existing offices and facilities are adequate to support its
current needs, and that suitable


                                       17

<PAGE>   19
additional facilities will be available, when needed, on commercially
reasonable terms.

ITEM 3.  LEGAL PROCEEDINGS

         In December 1995, the Company, Synergistic Technologies Business
Systems, Inc. ("STI") and the sole shareholder of STI were named as defendants
in a lawsuit filed by a former STI employee in the Fourth Judicial District
Court of the State of Minnesota. The Company acquired substantially all of the
assets and assumed certain specific liabilities of STI on November 1, 1995. On
March 25, 1998, the Court issued an order on summary judgment that dismissed
all claims against the Company and STI. The suit had alleged employment
discrimination and tort, contract and equitable claims arising from the
plaintiff's employment with STI prior to the Company's acquisition of STI's
assets. The liabilities expressly assumed by the Company did not include any of
the claims raised by the plaintiff in the suit. The plaintiff had alleged that
the Company was nonetheless liable as a successor corporation for the claims
asserted in the complaint. In addition, the plaintiff had alleged tortious
interference with a prospective business relationship and conversion against the
Company. The complaint sought, among other things, compensatory and punitive
damages, and other legal and equitable relief. The Company had denied the
plaintiff's assertion and, in addition, STI and its sole shareholder have agreed
to indemnify the Company from the plaintiff's claims. One remaining claim
against the sole shareholder of STI is scheduled to go to trial on March 30,
1998. The plaintiff will have the right to appeal the Court's summary judgment
decision after final judgment is entered. If an appeal is filed, the Company
intends to defend its position vigorously.

         A complaint was filed on July 24, 1997 in the United States District
Court for the Middle District of Florida, captioned J. Conrad Lifsey vs. Harold
R. Ross, Gerald R. Wicker, Marc J. Fratello, Roy E. Crippen, III, Donald B.
Hebb, Jr., Thomas S. Roberts, PowerCerv Corporation, Alex Brown & Sons, Inc.,
Robertson, Stephens & Company, ABS Capital Partners, L.P., Summit investors II,
L.P., and Summit Ventures III, L.P. The complaint purports to be a class action
on behalf of those persons who purchased shares of the Company's common stock
from March 1, 1996 (the date of the Company's initial public stock offering)
through July 24, 1996. The complaint alleges, among other things, that the
defendants violated the Securities Act of 1933 and the Securities Exchange Act
of 1934 in connection with the Company's initial public offering of stock and in
its subsequent securities filings, press releases and other public statements.
The plaintiff seeks damages of an unspecified amount, rescission of certain
securities sales and certain other remedies. On March 19, 1998, the defendants
filed their motions to dismiss this complaint. An effect of this motion filing
is to postpone any discovery on this case until after the motions are ruled on
by the Court. No ruling has yet been handed down. The defendants deny any
wrongdoing and intend to contest the suit vigorously.

         The Company had previously reported legal proceedings with Crown Paper
Co. ("Crown") arising from two June 1997 complaints, one filed by Crown in the
United States District Court for the Northern District of California and a
second complaint filed by the Company in the Thirteenth Judicial Circuit,
Hillsborough County, Florida, Civil Division. During a November 1997 mediation,
both the Company and Crown agreed to settle all claims asserted against the
other, the effect of which had no material adverse impact on the Company's
consolidated financial position. The parties finalized the binding settlement
documents on January 28, 1998, and all legal proceedings between the Company and
Crown were subsequently dismissed.

         A complaint was filed on August 29, 1997 in the United States District
Court for the Northern District of Ohio, captioned Automated Packaging Systems,
Inc. vs. PowerCerv Corporation. The plaintiff sought a declaratory judgement
with respect to its rights and obligations on a 1995 software license and
service agreement and a development agreement. The complaint also alleged breach
of contract, breach of certain warranties and fraudulent inducement. The
plaintiff sought compensatory damages in excess of $75,000, punitive damages in
excess of $1 million and other relief. The Company had claims against the
plaintiff including its failure to pay outstanding invoices of approximately
$420,000. In December 1997, the Company filed a motion to dismiss certain claims
in this matter. On March 26, 1998, the plaintiff and the Company agreed in
principal to settle this case. The Company believes that the final resolution of
this matter will occur in early April 1998, and that the proposed settlement
will have no material adverse impact on the Company's consolidated financial
position.

         The Company is also subject to miscellaneous legal proceedings in the
normal course of business. The Company is currently defending these proceedings
and claims, and anticipates that it will be able to resolve these matters in a
manner that will not have a material adverse effect on the Company's
consolidated financial position.

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

         No matters were submitted to a vote of security holders during the
fourth quarter of the year ended December 31, 1997.

                                       18

<PAGE>   20


                                     PART II
                                     -------


ITEM 5.  MARKET VALUE OF THE REGISTRANT'S COMMON STOCK

         The Company's Common Stock, $.001 par value ("Common Stock"), is traded
on the Nasdaq National Market under the symbol "PCRV." Prior to the Company's
March 1, 1996 initial public offering ("IPO"), there was no established public
trading market for the Common Stock. The following table sets forth the range of
high and low sales prices on the National Market for the Common Stock since the
IPO, as reported by Nasdaq. Such quotations represent inter-dealer prices
without retail markup, markdown or commission and may not necessarily represent
actual transactions.

<TABLE>
<CAPTION>
         Fiscal 1996                                          High              Low
         -----------                                        -------          --------

         <S>                                                <C>              <C>
         1st Quarter (subsequent to March 1, 1996)          $ 18.00          $  14.00
         2nd Quarter                                          19.50             11.25
         3rd Quarter                                          13.25             3.125
         4th Quarter                                          5.625             2.875

         Fiscal 1997                                          High              Low
         -----------                                        -------          --------

         1st Quarter                                        $ 6.875          $  3.250
         2nd Quarter                                          4.250             2.750
         3rd Quarter                                          3.875             2.125
         4th Quarter                                          3.750             1.750
</TABLE>

         As of December 31, 1997, the Company had approximately 79 shareholders
of record, and the Company believes there are more than 1,781 beneficial
shareholders. The Company declared no dividends in respect of its Common Stock
in 1996 and 1997. The Company intends to retain any earnings for use in the
business for the foreseeable future.

                                       19

<PAGE>   21


ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

                      SELECTED CONSOLIDATED FINANCIAL DATA

         The following historical selected consolidated financial data of the
Company is qualified by reference to and should be read in conjunction with the
Consolidated Financial Statements and Notes thereto and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere in this Form 10-K. The balance sheet data set forth below
for the years ended December 31, 1997 and 1996 and the statement of operations
data for the years in the three-year period ended December 31, 1997 are derived
from the Consolidated Financial Statements of the Company audited by KPMG Peat
Marwick LLP, independent certified public accountants appearing elsewhere in
this report on Form 10-K. The statement of operations data set forth below with
respect to the fiscal years ended December 31, 1994 and 1993, and the balance
sheet data as of December 31, 1995, 1994 and 1993 are derived from the audited
financial statements not included in this Form 10-K.

<TABLE>
<CAPTION>
                                                                            YEARS ENDED
                                                                           DECEMBER 31,
                                                      --------------------------------------------------------
                                                         1997       1996        1995       1994        1993
                                                      ---------  ----------  ---------- ----------  ----------
                                                               (In thousands, except per share data)

<S>                                                   <C>        <C>          <C>        <C>        <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
   License fees                                       $  6,434      11,324       8,258      2,280          439
   Technology resales                                    2,385       2,860       3,368      2,399        2,159
   Service fees                                         24,268      23,172      16,573      8,453        2,405
                                                      --------   ---------   ---------  ---------   ----------
      Total revenue                                     33,087      37,356      28,199     13,132        5,003
                                                      --------   ---------   ---------  ---------   ----------

Costs and expenses:
   Cost of licenses                                      2,975       1,319         439        445            -
   Cost of technology resales                            1,871       2,337       2,651      1,802        1,692
   Cost of services                                     19,635      15,973      10,341      4,614        1,058
   General and administrative                            7,687       5,256       4,761      2,441          542
   Sales and marketing                                  11,075      10,730       4,829      1,826          543
   Research and development                              5,788       6,688       3,082        481        -
   Work force reduction and other                        1,010       -           -          -            -
   In-process research and development                    -            100       6,913      -            -
                                                      --------   ---------   ---------  ---------   ----------

      Total costs and expenses                          50,041      42,403      33,016     11,609        3,835
                                                      --------   ---------   ---------  ---------   ----------
Operating income (loss)                                (16,954)     (5,047)     (4,817)     1,523        1,168
Other income (expense)                                     578         674        (158)        (7)       -
                                                      --------   ---------   ---------  ---------   ----------
Income (loss) before income taxes                      (16,376)     (4,373)     (4,975)     1,516        1,168
Income tax expense (benefit)                             1,711      (1,658)      -           -           -
                                                      --------   ---------   ---------  ---------   ----------
Net income (loss)                                     $(18,087)     (2,715)     (4,975)     1,516        1,168
                                                      ========   =========   =========  =========   ==========
Basic and diluted net loss per share                  $  (1.31)      (0.21)
                                                      ========   =========
Shares used in computing basic and diluted
   net loss per share                                   13,839      12,950
                                                      ========   =========

Pro forma (1):
   Income (loss) before income taxes as reported                             $  (4,975)     1,516        1,168
   Income tax expense (benefit)                                                   (550)       605          450
                                                                             ---------  ---------   ----------
   Net income (loss)                                                         $  (4,425)       911          718
                                                                             =========  =========   ==========
   Basic and diluted net income (loss) per share                             $   (0.52)      0.11         0.09
                                                                             =========  =========   ==========
   Shares used in computing basic and diluted
        net income (loss) per share                                              8,451      8,400        8,400
                                                                             =========  =========   ==========
</TABLE>


                                       20


<PAGE>   22



<TABLE>
<CAPTION>
                                                                              DECEMBER 31,
                                                         --------------------------------------------------------
                                                            1997        1996       1995        1994       1993
                                                         ----------  ---------  ----------  ---------  ----------
                                                                          (Table in thousands)

<S>                                                      <C>         <C>        <C>         <C>        <C>
BALANCE SHEET DATA:
Cash and cash equivalents                                  $ 6,360     14,637           1         87           2
Working capital                                              7,885     21,619      (1,308)     1,368         760
Total assets                                                19,242     36,351      15,292      4,630       1,844
Long-term debt, less current portion                             -          -       8,932          -           -
Convertible preferred stock                                      -          -       5,500          -           -
Redeemable preferred stock                                       -          -       5,500          -           -
Retained earnings (accumulated deficit)                    (37,921)   (19,834)    (17,119)     2,015         930
Shareholders' equity (deficit)                              12,957     30,992     (15,990)     2,024         938
</TABLE>


(1)  Prior to May 15, 1995, the Company had elected to be treated as a small
     business corporation (S Corporation) for income tax purposes. The pro forma
     income taxes have been calculated using the statutory tax rates in effect
     during the applicable periods, as if the Company was taxable as a C
     Corporation. The pro forma income taxes also assume the adoption of
     Statement of Financial Accounting Standards No. 109, Accounting for Income
     Taxes, for all periods presented above. The basic net income (loss) per
     share and the shares used in computing basic and diluted net income (loss)
     per share were computed in accordance with the statement of Financial
     Accounting Standards No. 128, Earnings Per Share, which the Company adopted
     during the year ended December 31, 1997.


                                       21

<PAGE>   23


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

         The Company's revenues consist primarily of software license fees,
resales of software products developed by other independent software vendors
("technology resales") and fees for services, including consulting, education
and maintenance. The Company was organized in April 1992, and through calendar
year 1994 a substantial part of the Company's revenue was derived from
technology resales and consulting and education services. The Company began
selling its own license product in the fourth quarter of 1993. Since then, the
Company has brought several additional tools and applications to the market.
Service fees remain the Company's largest single revenue source, although the
Company's strategy is to seek to increase revenue generated by licensing its
application products as a percentage of total revenue.

         The discussion in this report contains forward-looking statements that
involve risks and uncertainties. The Company's future actual results may differ
materially from the results discussed herein and including those in the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to those risks discussed in this
section under "Forward Looking Statements and Associated Considerations".

         The Company recognizes revenue in accordance with the American
Institute of Certified Public Accountants Statement of Position 91-1, Software
Revenue Recognition. Software license fees are recognized upon shipment to the
customer if collection is probable and the remaining Company obligations are
insignificant. The Company provides for potential product returns and allowances
at the time of shipment. Historically, product returns and allowances have been
immaterial. Technology resales are recognized at the time of product shipments.
Revenues from consulting and education services are recognized as those services
are performed. Revenue for maintenance services is recognized ratably over the
term of the support period. Unrecognized amounts are recorded as deferred
revenue.

         In October 1997, the American Institute of Certified Public
Accountants issued Statement of Position 97-2: Software Revenue Recognition
("SOP 97-2") which is effective for software transactions entered into in
fiscal years beginning after December 15, 1997. Accordingly, the Company
adopted SOP 97-2 beginning in fiscal 1998. The Company has evaluated the effect
of SOP 97-2, and does not anticipate that it will have a material impact on its
operating results. Revenue is recognized from licenses of the Company's
software products when the contract has been executed, the product(s) has been
shipped, collectibility is probable and the software license fees are fixed or
determinable. The Company generally accounts for consulting services separate
from software license fees for those arrangements where services are separately
stated on a time and materials basis and are not essential to the customer's
functionality requirements. If any portion of the software license fees is
subject to forfeiture or refund, the Company will postpone revenue recognition
until the contingency has been removed. Revenues from consulting services are
recognized as those services are performed. Revenues from maintenance and
support are recognized ratably over the term of the maintenance period.

         During December 1997, the Company recorded a charge of $1,010,000 for
work force reductions and other charges with the intent to significantly reduce
operating expenses and the usage of cash. The charge included severance and
related costs associated with 50 employees, a charge for impairment of property
and equipment, costs related to office downsizing or closings and other costs.

         On March 1, 1996, the Company completed its initial public offering
("IPO") and issued 2,900,000 shares of its common stock at a price of $14.00 per
share and on April 3, 1996 the underwriter exercised the over-allotment option
and the Company issued 495,000 additional shares of its Common Stock. The total
cash received was approximately $43.3 million net of offering costs,
underwriting discounts and commissions. See "Liquidity and Capital Resources"
for a discussion on the use of the IPO proceeds.

         Effective November 1, 1995, the Company completed the acquisition of
substantially all of the net assets of STI, including intellectual property
rights to its accounting software application product. Effective December 6,
1995, the Company also completed the acquisition of the intellectual property
rights related to manufacturing and customer order software applications owned
by Reliance Electric Industrial Company ("Reliance"). These acquisitions allowed
the Company to enhance its suite of application products, resulting in the
Company's ability to offer its customers a broader range of client/server
application products. Effective January 1, 1996, the Company expanded its sales
and consulting force and acquired rights to a client/server development tool by
the completion of the acquisition of substantially all of the net assets of
Visual Systems Development Group of Michigan, Inc. The Company is not currently
considering additional significant acquisitions of complementary businesses,
products or technologies, although it may do so in the future.

         All of the acquisitions were recorded as purchase transactions for
accounting purposes and the STI and Reliance transactions resulted in a
non-recurring charge to 1995 fourth quarter income for in-process research and

                                       22


<PAGE>   24
development of approximately $6.9 million. The Visual transaction resulted in a
non-recurring charge to 1996 first quarter income for in-process research and
development of $0.1 million.

RESULTS OF OPERATIONS

          The following table sets forth, for the periods indicated, certain
financial data regarding the Company's revenues derived from license fees,
technology resales and service fees:

<TABLE>
<CAPTION>
Revenue:                                                 FOR THE YEAR ENDED DECEMBER 31,
                                    ---------------------------------------------------------------------
                                                               ($'s in thousands)
                                         1997         Change         1996        Change         1995
--------------------------------    ------------- ------------- ------------- ------------ --------------
<S>                                 <C>           <C>           <C>           <C>          <C>
License fees                            $6,434        (43)%        $11,324         37%          $8,258
Percentage of total revenue                 20%                         30%                         29%
--------------------------------    ------------- ------------- ------------- ------------ --------------
Technology resales                      $2,385        (17)%         $2,860        (15)%         $3,368
Percentage of total revenue                  7%                          8%                         12%
--------------------------------    ------------- ------------- ------------- ------------ --------------
Service fees                           $24,268          5%         $23,172         40%         $16,573
Percentage of total revenue                 73%                         62%                         59%
--------------------------------    ------------- ------------- ------------- ------------ --------------
</TABLE>

         License Fees. The Company's license fees are derived from licensing the
Company's application products and development tools. The Company establishes
its licensing fees using a tiered pricing approach based on the number of
concurrent servers and users. Source code licenses are available at an
additional cost.

         License fees increased 37% from 1995 to 1996 due primarily to an
increase in the number of licenses sold as well as increased transaction size,
OEM license fees, and increased market acceptance of the Company's application
products. Increased OEM license fees includes a $2 million license fee from a
channel partner in which the Company subsequently acquired a four-five percent
ownership interest for $1.5 million. The Company believes that its release of
enhancements for its application products at the end of the third quarter of
1996 which was later than originally planned negatively impacted the Company's
1996 license fees.

         The Company's license fees decreased 43% from 1996 to 1997 due to lower
product application and development tools sales. Lower sales in part were a
result of the early 1997 restructuring of the Company's direct sales force and
sales management and the Company's continuing efforts to increase the number and
caliber of its direct sales force. Given that the typical application sales
cycle is at least four to nine months long, there is a corresponding lag before
the Company will see the effect, if any, of the increased sales force on its
license sales. During late December 1997 and through January 1998, the Company
implemented a new plan and strategy to increase license revenues from its
application products.  Under this plan, the Company has focused its marketing
and sales efforts on licensing its ERP/back-office and front-office application
products to mid-size U.S. discrete manufacturing companies with annual revenues
between $25 million and $500 million.  The decision to implement this new plan
is the result of the Company's assessment of the market for enterprise
application software solutions, the Company's products and its strengths.
Pursuant to this new plan, the Company approved and implemented a financial
operating plan associated with its marketing and sales focus, hired a
president/COO with relevant industry experience to assist in connection with
executing this plan, and promoted its director of international sales to the new
position of senior vice president of worldwide sales. The plan also includes
continued enhancement of the Company's application products, recruiting and
training additional marketing and sales professionals and recruiting and
training additional consulting personnel. Management believes this new plan will
assist the Company in attempting to accomplish its strategic objective to
increase license revenues from its application products; however, there can be
no assurance that the Company will achieve this objective or that the Company's
license revenues will increase in accordance with its expectations.

         Sales of the Company's development tools decreased $1,359,000 for the
year ended December 31, 1997 compared to 1996 due to increased competition in
the software development tools market and the Company's decision to focus its
sales, marketing and development resources on its application products. In
addition, the second quarter 1996 release of Sybase's PowerBuilder(R) version
5.0 software created a certain amount of client/server class library market
indecisiveness which negatively impacted revenues associated with one of the
Company's software development tools. Although the Company released a new
version of its class library development tool in the first quarter of 1997, the
Company believes this negative impact is expected to continue on its development
tools sales.

         Technology resales. Technology resales are derived from licensing
complementary client/server and Internet development tools developed by other
independent software vendors. Technology resales and related services are more
susceptible to change based on the price for such products and services than the
Company's application license fees and related services. Technology resales
revenue decreased 15% from 1995 to 1996 and

                                       23


<PAGE>   25
17% from 1996 to 1997 due to the Company's increased focus on sales of its own
application products and development tools and increased market competition for
technology resale products. The Company believes that 1998 technology resales
revenue, as a percentage of total revenue, will be less than in prior year
periods.

         Service fees. The Company's service fees consist of revenue from
consulting, education and maintenance services. Consulting services are
primarily provided on a time and material basis, educational services are
generally priced on a per student basis and annual maintenance service fees are
based on a percentage of the related license fees. During 1996, service fees
grew 40% over 1995 due primarily to the increase in the number of consulting
personnel, increase in the realized consulting hourly rates and the additional
maintenance revenue provided by the Company's product licensing activities.
During 1997, service fees grew 5% over 1996 due primarily to the increase in the
realized consulting hourly rates, increase in education revenue and the
additional maintenance revenue provided by the Company's product licensing
activities. During 1997 as compared to 1996, consulting fees increased 3%,
education fees increased 5% and maintenance fees increased 26%.

COSTS AND EXPENSES

         The following table sets forth, for the periods indicated, certain
financial data regarding the Company's costs associated with its license fees,
technology resales and services:

<TABLE>
<CAPTION>
Cost of revenue:                                        FOR THE YEAR ENDED DECEMBER 31,
                                   ----------------------------------------------------------------------
                                                              ($'s in thousands)
                                       1997          Change         1996         Change         1995
-------------------------------    -------------- ------------- ------------- ------------- -------------
<S>                                <C>            <C>           <C>           <C>           <C>
Cost of licenses                     $ 2,975         126 %       $ 1,319         200 %        $   439
Gross profit percentage                   54%                         88%                          95%
-------------------------------    -------------- ------------- ------------- ------------- -------------
Cost of technology resales           $ 1,871         (20)%       $ 2,337         (12)%        $ 2,651
Gross profit percentage                   22%                         18%                          21%
-------------------------------    -------------- ------------- ------------- ------------- -------------
Cost of services                     $19,635          23 %       $15,973          54 %        $10,341
Gross profit percentage                   19%                         31%                          38%
-------------------------------    -------------- ------------- ------------- ------------- -------------
</TABLE>

         Cost of Licenses. The cost of licenses consists primarily of production
costs, royalties associated with a module of one of the Company's application
products, and the amortization of intangible assets. The cost of licenses
increased 200% from 1995 to 1996 and 126% from 1996 to 1997 due to the
amortization of intangible assets acquired in the STI, Visual and Reliance
acquisitions. Additionally, in 1997 the cost of licenses increased compared to
1996 as a result of a charge of approximately $1,300,000 to reduce the
intangible assets acquired in the STI, Visual and Reliance acquisitions to their
net realizable value. The gross profit percentage decreased from 95% during 1995
to 88% during 1996 as a result of the increased amortization of intangibles
discussed above, and to 54% during 1997 due to the reduction in intangible
assets of approximately $1,300,000 and the decrease in 1997 license fee revenue
compared to the license fee revenue recorded in 1996. The Company will incur an
annual amortization expense of approximately $400,000 during 1998, $300,000
during 1999 and $100,000 for the three years thereafter.

         Cost of Technology Resales. The cost of technology resales consists
primarily of costs associated with resales of complementary client/server and
Internet development tools developed by independent software vendors. The cost
of technology resales decreased in 1997 and 1996 compared to the prior year
because of a decrease in technology resales revenue. This decrease in revenue is
due to an increased focus on sales of its own software development tools and
application products and increased market competition for technology resale
products.

         Cost of Services. The cost of services consists primarily of
compensation and travel costs associated with providing consulting, product
support, technical services and education. The cost of services increased 54%
from 1995 to 1996 and 23% from 1996 to 1997 primarily due to increased number of
personnel, compensation and related expenses. The decrease in gross profit
percentage from 38% during 1995 to 31% during 1996 and to 19% during 1997
resulted from providing certain services at reduced rates or on a "no charge"
basis in connection with addressing customer issues, higher costs associated
with recruiting and training a more experienced, and thus more expensive,
consulting staff. Other factors that contributed to higher costs of services
included higher than expected consultant turnover, lower utilization of the
application consultants due to lower application license sales and delays
associated with the redeployment of consultants from large projects that were
completed.


                                       24

<PAGE>   26

          The following table sets forth, for the periods indicated, certain
financial data regarding the Company's operating expenses:

<TABLE>
<CAPTION>
Operating expenses                              FOR THE YEAR ENDED DECEMBER 31,
                                          -------------------------------------------
                                                       ($'s in thousands)
                                            1997    CHANGE    1996     CHANGE   1995
---------------------------------------   -------   ------   -------   ------  ------
<S>                                       <C>        <C>     <C>        <C>    <C>
General and administrative                $ 7,687      46%   $ 5,256     10%   $4,761
Percentage of total revenue                    23%                14%              17%
---------------------------------------   -------    ----    -------   ----    ------
Sales and marketing                       $11,075       3%   $10,730    122%   $4,829
Percentage of total revenue                    33%                29%              17%
---------------------------------------   -------    ----    -------   ----    ------
Research and development                  $ 5,788    (13)%   $ 6,688    117%   $3,082
Percentage of license fees revenue             90%                59%              37%
---------------------------------------   -------    ----    -------   ----    ------
</TABLE>

          General and administrative ("G&A"). G&A expenses include compensation,
communications, accounting, human resources, legal and related facilities
expenses. The increase in G&A expenses in 1996 from 1995 of 10% was a result of
the continued expansion of the Company's administrative staff to support its
operations, and increased expenses associated with being a public company. The
increase in G&A expenses in 1997 from 1996 of 46% was a result of an increased
bad debt expense of approximately $1,700,000 and increased legal expenses
primarily associated with litigation matters. As a result of the Company's
implementation of the financial operating plan associated with its marketing
and sales focus, and the work force reduction, the Company expects its G&A
expenses to be lower during 1998 as compared to 1997.

          Sales and Marketing. Sales and marketing expenses primarily consist of
compensation paid to sales and marketing personnel, costs of marketing, direct
mail and telemarketing activities, costs of public relations, trade shows and
conferences, and related communication costs. Sales and marketing expenses
increased as a percentage of total revenue from 17% in 1995 to 29% in 1996
primarily due to the Company's investment in its direct and indirect sales force
(including the Company's Business Development Group and Technology Deployment
Group), its opening of an international office in The Netherlands and increased
marketing expenses for the Company's products and services. During the third
quarter of fiscal 1996, the Company restructured the sales management team from
ten districts to three sales regions to reduce the number of layers between the
customer and sales management as well as reduce the infrastructure costs. The
sales and marketing expenses increased as a percentage of total revenue to 33%
in 1997 as a result of the Company continuing to invest in its direct and
indirect sales force, increased marketing expenses for the Company's products
and services and increased costs associated with sales force turnover. As a
result of the Company's implementation of the financial operating plan
associated with its marketing and sales focus, and the work force reduction, the
Company expects its sales and marketing expenses to be lower during 1998 as
compared to 1997.

          Research and development ("R&D"). R&D costs consist primarily of
compensation and related facilities and equipment costs associated with
developing, maintaining and enhancing the Company's application products and
development tools. Since inception, the Company has not capitalized any internal
R&D costs as the costs incurred during the period between the point in time that
technological feasibility is established and that a product is released to the
market have been insignificant. R&D costs increased 117% from 1995 to 1996
primarily due to costs associated with additional R&D personnel necessary to
expand and enhance the Company's application products and development tools.
During the second and third quarters of fiscal 1996, the Company temporarily
reassigned consulting personnel to R&D positions to facilitate new version
releases of its application products. This temporary transfer not only increased
R&D costs but also decreased service fees during those respective quarters.
Following the Company's September 30, 1996 release of its ADAPTlication Series
of products, the Company consolidated four separate application R&D centers into
one facility to reduce costs and facilitate a more effective development
environment. R&D costs decreased 13% from 1996 to 1997 primarily due to the
temporary assignment of consulting personnel to R&D positions and the
consolidation of R&D facilities as described above. Additionally in March 1997,
the Company hired an experienced industry executive to manage the R&D
organization. R&D costs as a percentage of license fees have increased from 37%
in 1995 to 59% in 1996 as a result of higher R&D costs during 1996 compared to
1995. R&D costs as a percentage of license fees increased to 90% during 1997 as
a result of lower license fee revenues during 1997 as compared to 1996. As a
result of the Company's implementation of the financial operating plan
associated with its marketing and sales focus, and the work force reduction,


                                       25

<PAGE>   27
the Company expects its R&D expenses to be lower during 1998 as compared to
1997.

    WORK FORCE REDUCTION AND OTHER CHARGE

         During December 1997, the Company recorded a work force reduction and
other charge totaling $1,010,000. In addition to severance and related costs of
$411,000, it included a charge related to impairment of property and equipment
of $192,000, costs of $113,000 related to office downsizing or closings and
other costs totaling $294,000. The Company expects its G&A, R&D, and sales and
marketing costs to be significantly lower during fiscal 1998 as a result of this
work force reduction.

    IN-PROCESS RESEARCH AND DEVELOPMENT

         An aggregate expense of $6.9 million was recorded in the fourth
quarter of 1995 as a result of the STI and Reliance intellectual property
acquisition transactions and a $0.1 million expense was recorded in the first
quarter of 1996 as a result of the Visual transaction related to the acquisition
of in-process research and development. Such amounts have been recorded as an
operating cost and a reduction of operating income.

    INCOME TAX EXPENSE (BENEFIT)

         Until May 1995, the Company was treated as an S Corporation for federal
and state income tax purposes. Accordingly, federal income taxes on any earnings
were payable by the Company's shareholders rather than the Company. On May 15,
1995, the Company terminated its S Corporation status and became subject to
statutory corporate income taxes. During 1997, the Company increased its
deferred income tax asset valuation allowance by $7.9 million to offset deferred
tax benefits previously recorded and reduce the deferred tax asset balance to
zero. The decision to fully reserve the deferred income tax asset was primarily
the result of the Company's continued losses from operations. Any realization of
the Company's net deferred tax asset will reduce the Company's effective tax
rate in future periods.

    LIQUIDITY AND CAPITAL RESOURCES

         From the inception of the Company until the IPO, the Company financed
its operations primarily through cash flow from operations, private sales of
equity securities, shareholder loans and borrowings under a commercial line of
credit. In May 1995, the Company sold a total of 55,000 shares of its Redeemable
Preferred Stock and 1,600,000 shares of its Convertible Preferred Stock to
certain institutional investors for a total price of $11.0 million. During 1995,
prior to termination of its S Corporation status, the Company made approximately
$14.1 million of distributions to its founding shareholders in the form of cash
and notes. In December 1995, the Company borrowed a total of $1.0 million from
the Company's three founding shareholders pursuant to promissory notes bearing
interest at the rate of 8% per annum.

         The Company's IPO resulted in net proceeds of approximately $43.3
million. The Company used these IPO proceeds to repay the $7.1 million
promissory note issued to Reliance in connection with the acquisition of certain
software from Reliance; redeem all outstanding shares of the Company's
Redeemable Preferred Stock of approximately $5.5 million; repay promissory notes
from the Company to the three founding shareholders of the Company of
approximately $3.4 million; repay the outstanding bank line of credit balances;
and repay the $1.0 million working capital notes from the three founding
shareholders of the Company. The remaining proceeds from the IPO were invested
in short-term investments and are being used to provide working capital and
capital resources as needed.

         At December 31, 1997, 1996 and 1995, the Company had available cash and
cash equivalents of $6,360,249, $14,637,168 and $500 respectively, and working
capital of $7.9 million, $21.6 million, and $(1.3) million, respectively. At
December 31, 1997, the Company had approximately $7.5 million of accounts
receivable.

         The Company has an unsecured $5 million revolving line of credit with a
commercial bank for working capital and other purposes. The line of credit
expires February 15, 1999 and bears interest at a rate equal to the 90 day
floating LIBOR rate plus 150 or 200 basis points, based on the Company's
tangible net worth. The line of credit requires the Company to maintain certain
financial ratios. At December 31, 1997, no balance was outstanding on the line
of credit. On


                                       26


<PAGE>   28
January 26, 1998, the Company and its bank amended the terms of this line of
credit providing for the application of a $300,000 sublimit for the purpose of
supporting letters of credit.

         Net cash provided by financing activities for the years ended December
31, 1997, 1996 and 1995 was $0.1 million, $22.8 million and $4.6 million,
respectively.

         Net cash used in operating activities for the years ended December 31,
1997, 1996 and 1995 was $7.6 million, $4.8 million and $0.9 million,
respectively. In 1997 and 1996, uses of cash increased as a result of increased
expenditures in research and development associated with the October 1997 and
September 1996 application product releases and increased marketing and sales
costs due to the Company's increased investment in its sales force and marketing
organizations.

         Net cash used in investing activities for the years ended December 31,
1997, 1996 and 1995 was $0.7 million, $3.4 million and $3.8 million,
respectively. Such uses were for purchases of furniture, fixtures, and
communication and computer equipment. In 1995, such uses included $2.3 million
associated with the STI and Reliance transactions and in 1996 included $1.5
million for an investment in a non-public third party and $0.1 million related
to the STI transaction.

         To date, inflation has not had a material effect on the Company's
financial results. There can be no assurance, however, that inflation may not
adversely affect the Company's financial results in the future.

         If the Company is not successful in achieving targeted license and
service revenues, the Company may be required to take further actions to align
its operating expenses with its revenues, such as further reductions in work
force or other cost cutting measures. The Company is dependent upon its ability
to generate cash flows from its license and service fees, as well as the
collection of its outstanding accounts receivable, to maintain its current
liquidity levels.

    The Company believes that, based upon its projected revenues and the
operating expense reductions associated with the recent work force
reduction, that funds generated from operations, existing cash and cash
equivalents and its short-term accounts receivable together with the
availability of the line of credit, will be sufficient to finance the Company's
operations for at least the next twelve months.

YEAR 2000 COMPLIANCE

         The Company has reviewed its computer information systems to identify
any systems that could be affected by the "Year 2000" issue. Year 2000 problems
typically arise from computer programs using two characters rather than four to
define the applicable year. This could result in system failure or
miscalculations. The Company presently believes that its software systems which
include its application products and other internally-developed software, its
relational data base management system, and its information systems hardware
used in connection with managing the Company's operations are Year 2000
compliant.

         The Company has not assessed fully the impact of the Year 2000
compliance issue on the entities with whom the Company interacts, such as its
channel partners, resellers, distributors, suppliers, manufacturers and
customers. The Company has issued, however, a Year 2000 position statement for
those entities with which the Company does business. The Company also has not
verified that its non-information systems equipment is Year 2000 compliant.

FORWARD-LOOKING STATEMENTS AND ASSOCIATED CONSIDERATIONS

         This report contains statements that constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The
words "believe," "estimate," "expect," "intend," "anticipate" and similar
expressions and variations thereof identify certain of such forward-looking
statements, which speak only as of the dates on which they were made. In
addition, the Company may from time to time make oral forward looking
statements. The Company undertakes no obligation to publicly update or revise
any forward-looking statements, whether as a result of new information, future
events, or otherwise. Such statements appear in a number of places in this
report and include


                                       27

<PAGE>   29
statements regarding the intent, belief or current expectations of the Company,
its directors or its officers with respect to, among other things: (i) trends
affecting the Company's financial condition or results of operations; (ii) the
industry in which the Company operates; (iii) the Company's business and growth
strategies; and (iv) other matters. Prospective investors are cautioned that any
such forward-looking statements are not guarantees of future performance and
involve risks and uncertainties, and that actual results may differ materially
from those indicated in the forward-looking statements as a result of various
factors. Readers are cautioned not to place undue reliance on these
forward-looking statements. Factors to consider in evaluating any
forward-looking statements and the other information contained herein include
the following:

          Ability to Manage Change. The Company was incorporated in April 1992
and commercially shipped its initial products in late 1993. Since inception and
through fiscal 1996, the Company experienced rapid growth in its revenue, the
number of its employees and the scope of its operations. The number of Company
employees, for example, has fluctuated from 11 on December 31, 1992, to 420 as
of December 31, 1996, and to 372 as of December 31, 1997. The Company's rapid
growth has resulted in, and is expected to continue to create, new and increased
responsibilities for management personnel, as well as additional demands on the
Company's operating and financial systems, including addressing and reducing
employee turnover. The Company's business and future growth will depend on the
efforts of key management personnel and the Company's ability to attract and
retain qualified management personnel. The Company's business plan will also
require it to recruit additional qualified technical personnel, to enhance its
managerial systems for its operations, and to successfully integrate new
employees and systems into its existing operations. If the Company is unable to
manage change effectively, the Company's business, financial condition and
results of operations could be materially adversely affected.

          The Company began operations primarily as a value-added reseller of
client/server software development tools developed by third parties and as a
provider of related consulting services. For each fiscal quarter since that
time, including the quarter ended December 31, 1997, revenue from services has
accounted for at least a majority of the Company's revenue. Although the
Company's initial development tool, PowerTOOL, became commercially available in
the fourth quarter of 1993, the Company's other development tool offerings were
commercially introduced in the second half of 1995 or the first quarter of 1996.
The Company's first application product, PowerCerv Manufacturing (previously
known as Adaptlication for manufacturing), was commercially introduced in the
third quarter of 1994, but the Company's remaining application product offerings
were commercially introduced or acquired in the second and third quarters of
1995. The Company's strategy is to seek to increase its revenue from the sale of
the Company's software products (primarily its application products) as a
percentage of total revenue. However, selling, distributing and supporting
computer software may demand different sales, technological and management
skills than providing software consulting services. To be successful, the
Company and its management will be required to adapt to the changing nature of
the Company's business. Any failure to do so would have a material adverse
effect on the Company's business, financial condition and results of operations.

          As a result of its growth, the Company has significantly increased its
operating expenses in recent periods as it has continued to expand its
organization to support sales growth and product development. There can be no
assurance that the Company will be able to increase its levels of revenue or
achieve profitability in the future.

          During fiscal 1997, the Company's revenues totaled approximately $33
million or approximately $4 million less than fiscal 1996. In addition, the
Company posted an $18 million loss during fiscal 1997. In response, in late 1997
the Company embarked on a corporate-wide initiative to focus its efforts on
ERP/back-office and front-office enterprise application solutions for mid-size
U.S. discrete manufacturers with annual revenues between $25 million and $500
million. The Company also initiated a search for an experienced executive to
focus on executing this strategy, which search was successfully completed in
February 1998 with the hiring of its new President/COO. In addition, to
reduce operating expenses and minimize the usage of cash, the Company underwent
a reduction in work force of approximately 50 persons through January 1998. This
plan resulted in a work force reduction and other charges of $1,010,000.00 which
was recorded in the fourth quarter of fiscal 1997. This charge included expenses
related to work force reductions, severance payments, impairment of property and
equipment, office closings and other costs. The Company believes that this
strategy and these accomplishments will positively impact the business and
financial condition of the Company; however, there can be no assurance that the
Company will achieve those objectives sought in connection with this
ERP/back-office and front-office sales and marketing focus.


                                       28

<PAGE>   30

         The Company has pursued, and will continue to pursue, growth
opportunities through internal development and, if appropriate opportunities
arise, acquisition of complementary enterprises and products. The Company
competes for acquisition and expansion opportunities with many entities that
have substantially greater resources. In addition, acquisitions may involve
difficulties in the retention of personnel, diversion of management's attention,
unexpected legal liabilities, and tax and accounting issues. There can be no
assurance that the Company will be able to successfully identify suitable
acquisition candidates, complete acquisitions, integrate acquired businesses
into its operations or expand into new markets. Once integrated, acquisitions
may not achieve comparable levels of revenue, profitability or productivity as
the existing business of the Company or otherwise perform as expected. The
occurrence of any of these events could have a material adverse effect on the
Company's business, financial condition and results of operations.

          Liquidity. The Company's cash and cash equivalents decreased from
$14,637,168 at December 31, 1996 to $6,360,249 at December 31, 1997, principally
due to cash used in operations. Net cash used in operating activities was
$7,590,328 for the year ended December 31, 1997, and $4,809,310 for the year
ended December 31, 1996. In 1997 and 1996, uses of cash increased as a result of
increased expenditures in research and development associated with the October
1997 and September 1996 application product releases and increased marketing and
sales costs due to the Company's increased investment in its sales force and
marketing organizations. To reduce operating expenses and minimize the usage of
cash, the Company underwent a reduction in work force of approximately 50
persons. This plan resulted in a work force reduction and other charge of
$1,010,000, which was recorded in the fourth quarter of fiscal 1997. This charge
included expenses related to work force reductions, severance payments,
impairment of property and equipment, office closings and other costs. If the
Company is not successful in achieving targeted license and services revenues or
positive cash flow, the Company may be required to take further actions to align
its operating expenses with its revenues, such as further reductions in work
force or other expense cutting measures.

         Fluctuations in Quarterly Activities and Results of Operations. The
Company has experienced significant fluctuations in its revenues and operating
results from quarter to quarter and anticipates that it will continue to
experience such quarterly fluctuations. Factors that may contribute to such
fluctuations include, among others, the number of new orders and product
shipments; the size and timing of new orders; overall market demand for the
Company's products and services; seasonal factors that generally influence
purchasing decisions of computer software; the timing and significance of new
product announcements by the Company and its competitors; the ability of the
Company to develop, market and ship existing, new and enhanced versions of the
Company's products on a timely basis; competition and pricing in the software
industry; reduction in demand for existing products and shortening of product
life cycles as a result of new product introductions by competitors; product
quality problems; customer order deferrals in anticipation of new products;
changes in customer budgets; changes in the mix between the Company's products,
technology and resale products and services; the mix of direct and indirect
sales; reassignment of consultants from providing billable services to research
and development positions; changes in the Company's sales incentive strategy;
changes in the Company's strategy; changes in the Company's operating expenses;
personnel changes; the evolving nature of the client/server marketplace;
conditions or events in the manufacturing industry; and general economic
factors. Any one or more of these or other factors could have a material adverse
effect on the Company's business, financial condition and results of operations.
The potential occurrence of any one or more of these factors makes the
prediction of revenue and results of operations on a quarterly basis difficult.

         License revenues for the Company's applications products generally
reflect a relatively high amount of revenue per order. The loss or delay of
individual orders for these products, therefore, could have a more significant
impact on the revenues and quarterly results of the Company than on those of
companies with higher sales volumes and lower revenues per order. The Company's
software products generally are shipped as orders are received (generally are no
significant order backlog exists); and revenues are recognized as software
products are shipped if collection is probable and the remaining Company
obligations are insignificant. As a result, software license revenues in any
quarter are substantially dependent on orders booked and shipped in that
quarter. The timing of license revenues derived from sales of the Company's
application products is difficult to predict because of the length of the sales
cycle for these products, which is typically at least four to nine months long.
In addition, the Company's license revenues occur predominantly in the third
month of each quarter and tend to be concentrated in the last weeks or days of a
quarter. Accordingly, the Company's quarterly results of operations are
difficult to predict and delays in product delivery or in closings of license
sales near the end of a quarter could cause quarterly revenues and, to a greater
degree, net income, to fall substantially short of anticipated levels. Since the
Company's operating expenses are based on anticipated revenue trends and because
a high percentage of the Company's expenses are relatively fixed, a delay in the
recognition of revenue from a limited number of application license transactions
could cause significant variations in the Company's operating results from
quarter to quarter and could result in losses. To the extent such expenses
precede, or are not subsequently followed by, increased revenues, the Company's
operating results would be materially adversely affected. In addition, the
achievement of anticipated revenues is substantially dependent on the ability of
the Company to attract, on a timely basis, and retain skilled personnel,
especially sales and service personnel. As a result of these factors, revenues
for any quarter are subject to significant variation, and the Company believes
that period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as indications of future
performance. Fluctuations in operating results may also result in volatility in
the price of the Company's Common Stock.

         Availability of Consulting Personnel. The Company's application
products and, to a lesser extent, the Company's development tools, generally
require that some level of post-sale technical consulting services be provided
to the customer. The Company's future success will depend on its ability to
recruit, hire, train, retain and provide enough application and technical
consultants or, alternatively, to continue to develop and expand relationships
with third party organizations willing and able to provide these services. There
can be no assurance that the Company will be able to achieve these objectives
and, if it is unable to do so, this could have a material adverse effect on the
Company's business, financial condition and results of operations.



                                       29

<PAGE>   31
          Dependence on Product Development; and Associated Risks. The
client/server software market is characterized by rapid technological advances,
changes in customer requirements and frequent new product introductions and
enhancements. The Company's future success will depend upon its ability to
enhance its current products and to develop and introduce


                                       30

<PAGE>   32
new products on a timely basis that keep pace with technological developments,
respond to evolving customer requirements and achieve market acceptance. Any
failure by the Company to anticipate or respond adequately to technological
developments and customer requirements, or any significant delays in product
development or introduction, could result in a loss of competitiveness or
revenue. In the recent past, the Company has experienced unexpected delays in
the introduction of certain of its products, which has had an adverse impact on
the Company's revenue. Also, new products, when first released by the Company,
may contain undetected difficulties or defects that, despite testing by the
Company, are discovered only after they have been installed and used by
customers. There can be no assurance that such difficulties will not be
discovered in the future, causing significant customer relations issues, delays
in product introduction and shipments, or requiring design modifications that
could adversely affect the Company's competitive position, business, financial
condition and results off operations. In addition, there can be no assurance
that new products or product enhancements developed by the Company will achieve
market acceptance, in which case the Company's business, financial condition and
results of operations could be adversely affected. See "Business - Product
Development."

          Competition. The market for enterprise software application products
and services is intensely competitive, rapidly changing and significantly
affected by new product offerings and other market activities. A number of
companies offer products similar to the Company's products and services, which
are targeted at mid-size discrete manufacturers. In addition, the Company's
market has no proprietary barriers to entry, which would limit competitors from
developing similar products or selling competing products. Many of the Company's
existing competitors, as well as a number of potential competitors, have longer
operating history, more established marketing and sales organizations, greater
name recognition, larger R&D and technical organizations, significantly greater
financial and technical resources and a larger installed based of customers than
the Company. As a result, these competitors may be able to respond more quickly
to new or emerging technologies and to changes in customer requirements, or to
devote greater resources to the development, promotion and sale of their
products, than can the Company. There can be no assurance that the Company will
be able to compete successfully with existing or new competitors or that such
competitors will not offer or develop products that are superior to the
Company's products or that achieve greater market acceptance.

          Dependence on New Products. Many of the Company's development tools
and application products have only recently been introduced by the Company or
acquired by the Company for inclusion in its product line. Although the
Company's initial development tool, PowerTOOL, became commercially available in
the fourth quarter of 1993, its other development tool offerings were
commercially introduced in or following the second half of 1995. The Company's
first application product, ADAPTlication for Manufacturing, was commercially
introduced in the third quarter of 1994; however, its other application product
offerings were commercially introduced or acquired in the second and third
quarters of 1995. Accordingly, the Company has little history with these
products, and there can be no assurance that these products will achieve market
acceptance. The Company's future success will depend heavily on sales of these
products, and the failure of these products to find market acceptance would have
a material adverse effect on the Company's business, financial condition and
results of operations. Also, new products, when first released by the Company,
may contain undetected difficulties or defects that, despite testing by the
Company, are discovered only after they have been installed and used by
customers. In response, the Company's support staff provides software fixes and
maintenance releases designed to correct or work around these difficulties or
defects, most of which are uncovered in the months immediately following
commercial release of a new product. There can be no assurance that such
difficulties will not be discovered in the future, causing significant customer
relations issues, delays in product introduction and shipments, or requiring
design modifications that could adversely affect the Company's competitive
position, business, financial condition and results of operations. See "Business
- Products and Services."

          Dependence on Client/Server Environment. The Company's development
tools, application products, technology resale products, and consulting and
education services are intended to help organizations build, customize or deploy
solutions that operate in a client/server computing environment. The
client/server market is relatively new and there can be no assurance that
organizations will continue to adopt client/server environments or that
customers of the Company that have begun the migration to a client/server
environment will broadly implement this model of computing. The Company's future
financial performance will depend in large part on continued growth in the
market for client/server software applications, development tools and related
services, which in turn will depend in part on the growth in the number of
organizations implementing client/server computing environments and the number
of applications developed for use in those environments. There can be no
assurance that these markets will continue to grow or that the Company will be
able to respond effectively to the evolving requirements of these markets. If
the market for client/server development tools, application products and
services does not grow in the future, or grows more slowly than the Company
anticipates, or if the Company fails to respond effectively to evolving
requirements of this market, the Company's business, financial condition and
results of operations would be materially adversely affected. See "Business -
Industry Background."

          Dependence on PowerBuilder(R) and Other Third-Party Products. The
Company currently derives substantially all its revenue from (i) sales of its
application products written using PowerBuilder(R) software and various
relational database management software products available from Microsoft,
Sybase, and (ii) consulting, education and maintenance services related to all
of these products. As a result, any factor adversely affecting demand for or use
of PowerBuilder(R) or, to a lesser extent, the other technology resale products
sold by the Company, or adversely affecting the Company's relationship with
Sybase, Inc. and Powersoft Corporation, could have a material adverse effect on
the Company's business, financial condition and results of operations. In
addition, Powersoft could in the future release development tools competitive
with the Company's development tools. Moreover, any changes in or new versions
of PowerBuilder that require changes to the Company's products could
materially adversely affect the Company's business, financial condition and
results of operations if the Company were not able to successfully develop or
implement such changes in a timely fashion. The Company's future financial
performance will also depend in part on the successful development and
introduction of new and enhanced versions of PowerBuilder(R) and other products,
and customer acceptance of such new and enhanced products. See "Business -
Products and Services."

         Dependence on Proprietary Technology; Risks of Third-Party Claims for
Infringement. The Company regards its products as proprietary trade secrets and
confidential information. The Company relies on a combination of copyright,
trademark and trade secrets laws, employee and third-party nondisclosure
agreements and other industry standard methods for protecting ownership of its
products. There can be no assurance, however, that in spite of these
precautions, an unauthorized third party will not use, copy or reverse engineer
portions of the Company's products. In addition, the laws of some foreign
countries do not protect the Company's proprietary rights to the same extent as
do the laws of the United States. There can be no assurance that the methods
used by the Company to protect its products will be adequate or that the
Company's competitors will not independently develop products that are
substantially equivalent or superior to the Company's products.

         The Company believes that it has all necessary rights to market its
software products and development tool products, although there can be no
assurance that third parties will not assert infringement claims against the
Company in the future. The Company expects that, as the number of products
increase and the functionality of these products further overlaps, the
likelihood of third parties asserting infringement claims against the Company
will increase. Any claim, whether or not it has merit, could result in costly
litigation, divert management attention, and require the Company to enter into
royalty or other license arrangement. Such royalty or other license arrangement,
if required, may not be available on terms acceptable to the Company or at all.

         There has been substantial litigation in the software industry
involving intellectual property rights. Although the Company does not believe
that it is infringing the intellectual property rights of others, there can be
no assurance that such claims will not be asserted and, if asserted, would not
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, if the Company acquires or licenses a
portion of the software included in its products from third parties, its
exposure to infringement actions may increase because the Company must rely upon
such third parties for information as to the origin and ownership of such
acquired or licensed software. Although the Company has obtained and intends to
continue to obtain representations as to the origins and ownership of such
acquired or licensed software and obtain indemnification to cover any breach of
any such representations, there can be no assurance that such representations
will be accurate or that such indemnification will provide adequate compensation
for any breach of such representations. In the future, litigation may be
necessary to enforce and protect trade secrets, copyrights and other
intellectual property rights of


                                       31

<PAGE>   33

the Company. The Company may also be subject to litigation to defend against
claimed infringement of the rights of others or to determine the scope and
validity of the intellectual property rights of others. Any such litigation
could be costly and divert management's attention, either of which could have a
materials adverse effect on the Company's business, financial condition and
results of operations. Adverse determinations in such litigation could result in
the loss of the Company's proprietary rights, subject the Company to significant
liabilities, require the Company to seek licenses from third parties or prevent
the Company from selling its products, any one of which would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business - Intellectual Property and Other Proprietary
Technology."

          Expansion of Indirect Channels; Potential for Channel Conflict. The
Company markets its development tools, application products and services
directly through both a direct sales force and telesales, and indirectly through
marketing channels such as VARs, OEMs, channel partners and distributors.
Although VARs, OEMs, channel partners and distributors accounted for an
insignificant percentage of the Company's total revenue in 1995 and a growing
percentage in 1996 and 1997, the Company is increasing resources dedicated to
developing and expanding indirect marketing channels. There can be no assurance
that the Company will be able to attract and retain a sufficient number of
qualified VARs, OEMs, teaming partners and distributors to market successfully
the Company's tools and applications. The failure to retain its VARs, OEMs,
channel partners and distributors could have a material adverse effect on the
Company's business, financial condition and results of operations.

         Relationships with VARs, OEMs, teaming partners and distributors are
usually established through formal reseller agreements. In many cases, these
agreements may be terminated by either party at any time without cause.
Therefore, there can be no assurance that any VAR, OEM, teaming partner or
distributor will continue to represent the Company's products, and the inability
to retain certain VARs, OEMs, teaming partners or distributors could have a
material adverse effect on the Company's business, financial condition and
results of operations.

         Selling through indirect channels may limit the Company's contacts with
its customers. As a result, the Company's ability to accurately forecast sales,
evaluate customer satisfaction and recognize emerging customer requirements may
be hindered. The Company's strategy of marketing its products directly to
end-users and indirectly through VARs, OEMs, teaming partners and distributors
may result in distribution channel conflicts. The Company's direct sales efforts
may compete with those of its indirect channels and, to the extent different
resellers target the same customers, resellers may also come into conflict with
each other. Although the Company has attempted to manage its distribution
channels in a manner to avoid potential conflicts, there can be no assurance
that channel conflicts will not materially adversely affect its relationships
with existing VARs, OEMs, teaming partners or distributors or adversely affect
its ability to attract new VARs, OEMs, teaming partners and distributors. See
"Business - Marketing, Sales and Distribution."

          Voting Control by Management. The executive officers and directors of
the Company beneficially own approximately 56% of the outstanding Common Stock
as of March 10, 1998. As a result, while there is no agreement or understanding
among the officers and directors of the Company with respect to the voting of
their Common Stock, if they vote together, they will effectively be able to
control the outcome of matters requiring a shareholder vote, including the
election of directors, adopting or amending provisions of the Company's Articles
of Incorporation and Bylaws, and approving mergers or other similar
transactions, such as sales of substantially all the Company's assets. Control
by the officers and directors may have the effect of discouraging certain types
of transactions involving an actual or potential change of control of the
Company, including transactions in which the holders of Common Stock might
otherwise receive a premium for their shares over then-current market prices. In
addition, the possibility of such persons exercising such control may limit the
price that certain investors may be willing to pay in the future for shares of
the Company's Common Stock. Moreover, the Company is not prohibited from
engaging in transactions with its management and principal shareholders, or with
entities in which such persons are interested. The Company's Articles of
Incorporation do not provide for cumulative voting in the election of directors.

          Dependence on Key Personnel. The Company's success depends to a
significant extent upon a number of key management and technical personnel,
including its Chief Executive Officer, Marc J. Fratello, its Vice Chairman and
Chief Technology Officer, Roy E. Crippen, III, and its President and Chief
Operating Officer, Michael J. Simmons, the loss of one or more of whom could
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company believes that its future success will
also depend in large part upon its ability to attract and retain highly skilled



                                       32

<PAGE>   34

technical, management, sales and marketing personnel. Competition for such
personnel in the computer software industry is intense, and there can be no
assurance that the Company will be successful in attracting and retaining such
personnel. Departures and additions of key personnel may be disruptive to the
Company's business and could have a materials adverse effect on the Company's
business, financial condition and results of operations.

         Possible Volatility of Stock Price.  The Company's stock price has
fluctuated substantially since its March 1, 1996 initial public offering. The
market price of the Common Stock is subject to significant fluctuations in
response to quarterly and annual operating results of the Company, the gain or
loss of significant customer orders, announcements of technological improvements
or new products by the Company or its competitors, changes in financial
estimates by securities analysts, changes in general conditions in the economy,
the financial markets or the computer software industry, or other developments
affecting the Company, its customers or its competitors, some of which may be
unrelated to the Company's performance and beyond the Company's control. The
stock of many technology companies has experienced extreme price and volume
fluctuations unrelated to the operating performance of those companies. These
market fluctuations have adversely affected and may continue to adversely affect
the market price of the Company's Common Stock.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The Company's Consolidated Financial Statements and Notes thereto and
the report of KPMG Peat Marwick LLP, the Company's independent auditors, are set
forth on the pages indicated in Item 14.


ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

         There were no changes in or disagreements with respect to the Company's
independent accountants during fiscal 1997.


                                       33

<PAGE>   35


                                    PART III

         Certain information required by Part III is omitted from this Report on
Form 10-K since the Company will file a definitive Proxy Statement for its
Annual Meeting of Shareholders to be held on June 2, 1998, pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended (the "Proxy
Statement"), not later than 120 days after the end of the fiscal year covered by
this Report, and certain information included in the Proxy Statement is
incorporated herein by reference.

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The information required by this Item is incorporated by reference from
the section entitled "Directors and Executive Officers" in the Proxy Statement.

ITEM 11.  EXECUTIVE COMPENSATION

         The information required by this Item is incorporated by reference from
the section entitled "Executive Compensation" in the Proxy Statement.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The information required by this Item is incorporated by reference from
the section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information required by this Item is incorporated by reference from
the section entitled "Certain Relationships and Related Transactions" in the
Proxy Statement.


                                       34

<PAGE>   36


                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K


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


<TABLE>
<CAPTION>
          1.  Financial Statements, with Independent Auditors' Report                             PAGE

          <S>                                                                                     <C>
                Independent Auditors' Report ...................................................   37
                Consolidated Balance Sheets as of December 31, 1997 and 1996 ...................   38
                Consolidated Statements of Operations for each of the years in the
                    three year period ended December 31, 1997 ..................................   39
                Consolidated Statements of Shareholders' Equity for each of
                    the years in the three year period ended December 31, 1997 .................   40
                Consolidated Statements of Cash Flows for each of the years in the
                    three year period ended December 31, 1997 ..................................   41
                Notes to Consolidated Financial Statements .....................................   42

          2.  Financial Statement Schedules

                Schedule II - Schedule of Valuation and Qualifying Accounts for each
                    of the years in the three year period ended December 31, 1997...............   59
</TABLE>


          3.  Exhibits


<TABLE>
<CAPTION>
EXHIBIT
NUMBER                            DESCRIPTION
------                            -----------

<S>          <C>
    3.1  --  Articles of Incorporation of the Company effective as of
             January 1, 1996, as amended by the Articles of Amendment dated as
             of January 9, 1996 (incorporated herein by reference to Exhibit
             Number 3.1 to the Company's Registration Statement on Form S-1
             (File No. 333-00250)).

    3.2  --  Bylaws of the  Company  (incorporated  herein by  reference  to
             Exhibit Number 3.2 to the Company's Registration Statement on Form
             S-1 (File No. 333-00250)).

   10.1  --  Management Services Agreement, dated as of January 1, 1996,
             between the Company and PowerCerv Technologies Corporation
             (incorporated herein by reference to Exhibit Number 10.25 to the
             Pre-Effective Amendment No. 1 to the Company's Registration
             Statement on Form S-1 (File No.
             333-00250)).
</TABLE>


                                       35


<PAGE>   37


<TABLE>
<CAPTION>
EXHIBIT
NUMBER                            DESCRIPTION
-------                           -----------
<S>          <C>

   10.2  --  Loan Agreement and related promissory note, security agreements
             and guarantees, each dated October 31, 1996, among NationsBank,
             N.A. (South) and the Company, for a $5,000,000 revolving line of
             credit (incorporated herein by reference from Exhibit Number 10.3
             to the Company's Annual Report on Form 10-K for the year ended
             December 31, 1996).

   10.3  --  NationsBank Commitment Letter dated October 9, 1997, and related
             promissory note, dated October 22, 1997, extending the maturity
             of the Company's $5,000,000 revolving line of credit (filed
             herewith).

   10.4  --  Amendment to Loan Agreement, dated January 26, 1998, among
             NationsBank, N.A. and the Company, related to the Company's
             $5,000,000 revolving line of credit (filed herewith).

   10.5  --  Employment, Noncompetition, Development and Confidentiality
             Agreement, dated April 10, 1997, between PowerCerv Corporation and
             Marc J. Fratello (incorporated herein by reference from Exhibit
             Number 10.2 to the Company's Quarterly Report on Form 10-Q for the
             calendar quarter ended March 31, 1997).

   10.6  --  Employment, Noncompetition, Development and Confidentiality
             Agreement, dated April 10, 1997, between PowerCerv Corporation and
             Roy E. Crippen III (incorporated herein by reference from Exhibit
             Number 10.3 to the Company's Quarterly Report on Form 10-Q for the
             calendar quarter ended March 31, 1997).

   22    --  Subsidiary of the Registrant (incorporated herein by reference
             from Exhibit No. 21 to the Company's Registration Statement on
             Form S-1 (file no. 333-00250)).

   23.1  --  Independent Auditors' Consent.

   27.1  --  Financial Data Schedule.
</TABLE>

     (b)  Reports on Form 8-K

          The Company filed a current report on Form 8-K dated November 24,
          1997, to report under Item 5, Other Events, the resignation Harold
          Ross, the Company's Chairman and CEO and the promotion of Marc
          Fratello from his former role as President and COO to the Company's
          Chairman and CEO. In addition, the Company filed a current report on
          Form 8-K dated February 25, 1998, to report under Item 5, Other
          Events, the hiring of Michael Simmons as President and COO of the
          company.



                                       36

<PAGE>   38



                          INDEPENDENT AUDITORS' REPORT


         The Board of Directors
         PowerCerv Corporation:


         We have audited the accompanying consolidated financial statements of
         PowerCerv Corporation and subsidiary as listed under Item 14 of this
         Form 10-K. In connection with our audits of the consolidated financial
         statements, we also have audited the financial statement schedule as
         listed under Item 14 of this Form 10-K. These consolidated financial
         statements and financial statement schedule are the responsibility of
         the Company's management. Our responsibility is to express an opinion
         on these consolidated financial statements and financial statement
         schedule 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 consolidated financial statements referred to above
         present fairly, in all material respects, the financial position of
         PowerCerv Corporation and subsidiary as of December 31, 1997 and 1996,
         and the results of their operations and their cash flows for each of
         the years in the three-year period ended December 31, 1997, in
         conformity with generally accepted accounting principles. Also, in our
         opinion, the related financial statement schedule, when considered in
         relation to the basic consolidated financial statements taken as a
         whole, presents fairly in all material respects, the information set
         forth therein.

         As discussed in Note 2 to the consolidated financial statements, the
         Company changed its method of accounting for income taxes in 1995.






         Tampa, Florida
         January 26, 1998, except with respect to Notes 9(c) and 10(c) which are
         as of February 25th, 1998






                                       37
<PAGE>   39


                              POWERCERV CORPORATION

                           Consolidated Balance Sheets

                           December 31, 1997 and 1996


<TABLE>
<CAPTION>
                                                                                                         1997          1996
                                                                                                    ------------    ----------
                                     ASSETS
                                     ------
<S>                                                                                                 <C>             <C>
Current assets:
     Cash and cash equivalents                                                                      $  6,360,249    14,637,168
     Accounts receivable, net of allowance of $2,000,000 in 1997 and $550,000 in 1996                  7,480,350    11,474,968
     Inventories                                                                                         155,026       260,689
     Other current assets                                                                                173,478       405,460
                                                                                                    ------------    ----------

                  TOTAL CURRENT ASSETS                                                                14,169,103    26,778,285

Property and equipment, net                                                                            2,527,060     3,110,942
Intangible assets, net                                                                                   974,631     3,243,278
Investment in third-party                                                                              1,500,000     1,500,000
Deposits and other                                                                                        70,812        60,879
Deferred tax asset                                                                                                   1,657,700
                                                                                                    ------------    ----------

                  Total assets                                                                      $ 19,241,606    36,351,084
                                                                                                    ============    ==========


                      Liabilities and Shareholders' Equity
                      ------------------------------------
Current liabilities:
     Accounts payable                                                                               $  1,362,711     1,070,512
     Accrued expenses                                                                                  2,874,690     1,754,930
     Deferred revenue                                                                                  2,047,073     2,333,369
                                                                                                    ------------    ----------

                  Total current liabilities                                                            6,284,474     5,158,811

Common stock with redemption rights, $.001 par value, 50,000 shares issued and outstanding in 1996                     200,000

Shareholders' equity:
     Common stock, $.001 par value, 45,000,000 shares authorized; 13,797,000 shares and 13,783,000
         shares (excluding those with redemption rights) issued and outstanding at
         December 31, 1997 and 1996, respectively                                                         13,797        13,783
     Additional paid-in capital                                                                       50,864,262    50,812,156
     Accumulated deficit                                                                             (37,920,927)  (19,833,666)
                                                                                                    ------------    ----------

                  Total shareholders' equity                                                          12,957,132    30,992,273

Commitments, contingencies and related party transactions
                                                                                                    ------------    ----------


                  Total liabilities and shareholders' equity                                        $ 19,241,606    36,351,084
                                                                                                    ============    ==========
</TABLE>


See accompanying notes to consolidated financial statements.


                                       38

<PAGE>   40


                              POWERCERV CORPORATION

                      Consolidated Statements of Operations

                  Years ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>
                                                                                 1997             1996              1995
                                                                           -------------        ----------       ----------
<S>                                                                        <C>                  <C>             <C>
Revenue:
     License fees                                                          $   6,433,813        11,323,848        8,258,312
     Technology resales                                                        2,385,028         2,860,481        3,367,457
     Service fees                                                             24,267,886        23,171,986       16,572,746
                                                                           -------------        ----------       ----------

                  Total revenue                                               33,086,727        37,356,315       28,198,515
                                                                           -------------        ----------       ----------

Costs and expenses:
     Cost of licenses                                                          2,975,425         1,319,021          438,326
     Cost of technology resales                                                1,871,046         2,336,958        2,650,687
     Cost of services                                                         19,634,554        15,972,901       10,341,068
     General and administrative                                                7,686,842         5,255,869        4,761,271
     Sales and marketing                                                      11,075,102        10,730,429        4,829,125
     Research and development                                                  5,787,529         6,688,520        3,082,017
     Work force reduction and other                                            1,010,000             -                -
     In-process research and development                                           -               100,000        6,913,300
                                                                           -------------        ----------       ----------

                  Total costs and expenses                                    50,040,498        42,403,698       33,015,794
                                                                           -------------        ----------       ----------

                  Operating loss                                             (16,953,771)       (5,047,383)      (4,817,279)
                                                                           -------------        ----------       ----------

Other income (expense):
     Interest expense                                                            (13,966)         (177,687)        (222,296)
     Interest income                                                             615,126           859,459           67,073
     Miscellaneous expense                                                       (23,150)           (7,154)          (2,400)
                                                                           -------------        ----------       ----------

                  Total other income (expense)                                   578,010           674,618         (157,623)
                                                                           -------------        ----------       ----------

                  Loss before income taxes                                   (16,375,761)       (4,372,765)      (4,974,902)

Income tax expense (benefit)                                                   1,711,500        (1,657,700)           -
                                                                           -------------        ----------       ----------

                  Net loss                                                 $ (18,087,261)       (2,715,065)      (4,974,902)
                                                                           =============        ==========       ==========

Basic and diluted net loss per share                                       $       (1.31)            (0.21)
                                                                           =============        ==========

Weighted average shares outstanding                                           13,839,000        12,950,000
                                                                           =============        ==========

Pro forma net loss data:
     Loss before income taxes                                                                                   $(4,974,902)

     Pro forma income tax benefit                                                                                  (550,000)
                                                                                                                -----------

     Pro forma net loss                                                                                        $ (4,424,902)
                                                                                                                ===========

     Pro forma basic and diluted net loss per share                                                            $       (.52)
                                                                                                                ===========

     Pro forma weighted average shares outstanding                                                                8,451,000
                                                                                                                ===========
</TABLE>

See accompanying notes to consolidated financial statements.






                                       39
<PAGE>   41


                              POWERCERV CORPORATION

                 Consolidated Statements of Shareholders' Equity

                  Years ended December 31, 1997, 1996 and 1995




<TABLE>
<CAPTION>
                                        COMMON STOCK       ADDITIONAL                      TOTAL
                                   ---------------------    PAID-IN     ACCUMULATED     SHAREHOLDERS'
                                     SHARES    PAR VALUE    CAPITAL       DEFICIT     EQUITY (DEFICIT)
                                   --------    ---------   --------     -----------   ----------------
<S>                                <C>         <C>         <C>          <C>           <C>
Balance, December 31, 1994         8,400,000   $  8,400          --       2,015,132     2,023,532

Issuance expenses of
     redeemable preferred
     stock and convertible
     preferred stock                    --         --            --         (74,710)      (74,710)

Issuance of common stock             280,000        280     1,119,720          --       1,120,000

Shareholders' distributions             --         --            --     (14,084,121)  (14,084,121)

Net loss                                --         --            --      (4,974,902)   (4,974,902)
                                  ----------   --------    ----------    ----------    ----------

Balance, December 31, 1995         8,680,000      8,680     1,119,720   (17,118,601)  (15,990,201)

Preferred stock conversion         1,600,000      1,600     5,498,400          --       5,500,000

Issuance of common stock,
     net of offering costs         3,553,000      3,553    44,393,986          --      44,397,539

Granting of redemption
     privileges on common stock      (50,000)       (50)     (199,950)         --        (200,000)

Net loss                                --         --            --      (2,715,065)   (2,715,065)
                                  ----------   --------    ----------    ----------    ----------

Balance, December 31, 1996        13,783,000     13,783    50,812,156   (19,833,666)   30,992,273

Issuance of common stock              14,000         14        52,106          --          52,120

Net loss                                --         --            --     (18,087,261)  (18,087,261)
                                  ----------   --------    ----------    ----------    ----------

Balance, December 31, 1997        13,797,000   $ 13,797    50,864,262   (37,920,927)   12,957,132
                                  ==========   ========    ==========    ==========    ==========
</TABLE>



See accompanying notes to consolidated financial statements.



                                       40


<PAGE>   42


                              POWERCERV CORPORATION

                      Consolidated Statements of Cash Flows

                  Years ended December 31, 1997, 1996 and 1995




<TABLE>
<CAPTION>
                                                                                1997               1996             1995
                                                                           -------------        ----------        ---------

<S>                                                                        <C>                  <C>              <C>
Cash flows from operating activities:
     Net loss                                                              $  (18,087,261)       (2,715,065)      (4,974,902)
     Adjustments to reconcile net loss to net cash
         provided by (used in) operating activities:
              Depreciation and amortization                                    3,420,837         1,594,000          398,448
              Accretion of imputed interest                                       -                140,674           40,295
              Write-off of in-process research and development                    -                100,000        6,913,300
              Deferred income taxes                                            1,657,700          (462,700)      (1,195,000)
              Deferred revenue                                                  (286,296)          873,973        1,146,699
              Provision for uncollectible accounts                             2,011,453           268,000          259,000
              Changes in assets and liabilities, net of effect of acquisition:
                  Accounts receivable                                          1,783,165        (3,268,454)      (4,480,553)
                  Refundable income taxes                                        103,170           703,723         (823,000)
                  Inventories                                                    105,663          (213,715)         165,531
                  Deposits and other                                             (12,873)         (145,884)        (179,455)
                  Accounts payable and accrued expenses                        1,714,114          (477,519)         679,422
                  Due to affiliate                                                -                (11,343)         (45,884)
                  Noncurrent income taxes payable                                 -             (1,195,000)       1,195,000
                                                                           -------------        ----------        ---------

                      Net cash used in operating activities                   (7,590,328)       (4,809,310)        (901,099)
                                                                           -------------        ----------        ---------

Cash flows from investing activities:
     Purchases of property and equipment, net                                   (738,711)       (1,731,889)      (1,461,309)
     Investment in third-party                                                    -             (1,500,000)          -
     Acquisition of assets, net of cash received                                  -               (126,386)      (2,348,740)
                                                                           -------------        ----------        ---------

                      Net cash used in investing activities                     (738,711)       (3,358,275)      (3,810,049)
                                                                           -------------        ----------        ---------

Cash flows from financing activities:
     Net borrowings (repayments) on lines of credit                               -             (3,617,673)       3,171,513
     Proceeds from notes payable                                                  -                 -             1,000,000
     Repayments on notes payable                                                  -            (11,540,613)        (300,000)
     Net proceeds from issuance of preferred stock                                -                 -            10,925,290
     Redemption of preferred stock                                                -             (5,500,000)           -
     Net proceeds from issuance of common stock, net of offering costs            52,120        43,462,539          200,000
     Shareholders' distributions                                                  -                 -           (10,372,121)
                                                                           -------------        ----------        ---------

                      Net cash provided by financing activities                   52,120        22,804,253        4,624,682
                                                                           -------------        ----------        ---------

Net increase (decrease) in cash and cash equivalents                          (8,276,919)       14,636,668          (86,466)

Cash and cash equivalents, beginning of year                                  14,637,168               500           86,966
                                                                           -------------        ----------        ---------

Cash and cash equivalents, end of year                                     $   6,360,249        14,637,168              500
                                                                           =============        ==========        =========
</TABLE>


See accompanying notes to consolidated financial statements.

                                       41

<PAGE>   43

                              POWERCERV CORPORATION

                   Notes to Consolidated Financial Statements

                           December 31, 1997 and 1996


(1)    ORGANIZATION AND OPERATIONS

       PowerCerv Corporation was formed as a Florida holding company and, in a
       share exchange effected as of January 1, 1996, acquired the stock of
       PowerCerv Technologies Corporation (the "Operating Subsidiary"). The
       Operating Subsidiary was organized in April 1992, and develops, markets,
       licenses, implements, and supports open modifiable "ERP/back-office" and
       "front-office" enterprise application software solutions to mid-size
       U.S. discrete manufacturing companies.  In addition, PowerCerv provides
       a wide range of professional and business consulting services as well as
       software development tools and third party resale products to its
       customers. The Operating Subsidiary has offices throughout the United
       States and markets its software products outside the United States
       through distributors.  PowerCerv Corporation and the Operating
       Subsidiary are herein referred to as the "Company".

       On March 1, 1996, the Company completed an initial public offering
       ("IPO") of its common stock (see Note 8).


(2)    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

       (a)    USE OF ESTIMATES

              The preparation of consolidated financial statements in conformity
              with generally accepted accounting principles requires management
              to make estimates and assumptions that affect the reported amounts
              of assets and liabilities and disclosure of contingent assets and
              liabilities at the date of the consolidated financial statements
              and the reported amounts of revenues and expenses during the
              reporting period. Actual results could differ from those
              estimates. To the extent management's estimates prove to be
              incorrect, financial results for future periods may be adversely
              affected.

              Significant estimates contained in the accompanying consolidated
              financial statements include management's estimate of the
              allowance for uncollectible accounts receivable and the
              recoverability of long term assets including investments,
              property and equipment and intangible assets.

       (b)    INVENTORIES

              Inventories are valued at the lower of cost (first-in, first-out
              method) or market, and consist of technology resale products and
              educational materials.

       (c)    PROPERTY AND EQUIPMENT

              Property and equipment are recorded at cost. Depreciation and
              amortization are calculated on a straight-line basis over the
              estimated useful lives of the respective assets. Upon retirement
              or sale, cost and accumulated depreciation or amortization on such
              assets are removed from the accounts and any gains or losses are
              reflected in the consolidated statement of operations.
              Maintenance and repairs are charged to expense as incurred.

              During the fourth quarter of 1997, the Company implemented actions
              to reduce its work force. As a result of these actions, certain
              property and equipment was determined to be impaired and was
              written down to its estimated net realizable value (see Note 3).


                                       42

<PAGE>   44


                              POWERCERV CORPORATION

                   Notes to Consolidated Financial Statements


       (d)    REVENUE RECOGNITION

              License fees represent revenue from the licensing of the Company's
              software development tools and application products. The Company
              licenses its development tools and application products pursuant
              to non-exclusive and non-transferable license agreements.
              Technology resales represent revenue from the resale of
              third-parties' software products. Service fees represent revenue
              from consulting, education, and support services.

              The Company recognizes revenue in accordance with the American
              Institute of Certified Public Accountants' Statement of Position
              91-1, Software Revenue Recognition ("SOP 91-1"). Software license
              fees are recognized upon shipment to the customer if collection is
              probable and remaining Company obligations are insignificant. The
              Company provides for potential product returns and allowances at
              the time of shipment. Historically, product returns and allowances
              have been immaterial. Technology resales are recognized at the
              time of product shipments. Consulting and education revenue is
              recognized as services are performed. Revenue for maintenance is
              recognized ratably over the term of the support period.
              Unrecognized amounts are recorded as deferred revenue in the
              accompanying consolidated balance sheet.

              On October 31, 1997, the American Institute of Certified Public
              Accountants issued Statement of Position 97-2, Software Revenue
              Recognition ("SOP 97-2") which supersedes SOP 91-1. SOP 97-2 is
              effective for transactions entered into in fiscal years beginning
              after December 15, 1997 (see Note 14).

       (e)    SOFTWARE DEVELOPMENT COSTS

              Software development costs are accounted for in accordance with
              Statement of Financial Accounting Standards No. 86, Accounting for
              the Costs of Computer Software to be Sold, Leased, or Otherwise
              Marketed. Costs associated with the planning and design phase of
              software development, including coding and testing activities
              necessary to establish technological feasibility, are classified
              as research and development and expensed as incurred. Once
              technological feasibility has been determined, additional costs
              incurred in development, including coding, testing, and product
              quality assurance, are capitalized when material. During the years
              ended December 31, 1997, 1996 and 1995, the Company did not
              capitalize any internal software development costs.

              In connection with the Synergistic Technologies Business Systems,
              Inc. ("STI"), Reliance Electric Industrial Company ("Reliance")
              and Visual Systems Development Group of Michigan, Inc. ("Visual")
              transactions (see Note 13), the Company acquired software
              technology. The acquired software technology is being amortized,
              on a product-by-product basis, at the greater of the straight-line
              basis utilizing the estimated economic life, generally three to
              five years, or the ratio of the current product revenue to total
              expected revenue over the life of the product.

              The Company periodically reviews the carrying value of its
              software development costs and the remaining life to determine if
              impairment has occurred. This review and assessment is done by
              comparing the net book value of the intangible assets to the
              undiscounted net cash flows of the related assets.


                                       43


<PAGE>   45


                              POWERCERV CORPORATION

                   Notes to Consolidated Financial Statements


        Acquired software technology and its amortization are summarized
        as follows:

<TABLE>
<CAPTION>
                                                        AMORTIZATION               ACCUMULATED
               YEAR                 COST                   EXPENSE                AMORTIZATION
               ----                 ----                ------------              -------------

<S>           <C>               <C>                   <C>                     <C>
              1997              $    2,907,000            1,555,000                2,445,000
              1996                   2,907,000              759,000                  890,000
              1995                   2,907,000              131,000                  131,000
</TABLE>

              During the fourth quarter of 1997, the Company recorded an
              additional $808,000 in amortization expense to reduce the carrying
              value of the acquired software technology to its net realizable
              value.

       (f)    GOODWILL AND OTHER INTANGIBLE ASSETS

              The Company amortizes goodwill and other intangible assets on a
              straight-line basis over a seven-year period. The Company
              periodically reviews the value of goodwill and other intangible
              assets and their remaining life to determine if impairment has
              occurred. This review and assessment is done by comparing the net
              book value of the intangible assets to the undiscounted future net
              cash flows of the related assets.

              Goodwill and other intangible assets and amortization amounts are
              summarized as follows:

<TABLE>
<CAPTION>
                                                        AMORTIZATION               ACCUMULATED
               YEAR                 COST                   EXPENSE                AMORTIZATION
               ----                 ----                ------------              ------------

<S>           <C>               <C>                     <C>                     <C>
              1997              $    1,453,000              736,000                  941,000
              1996                   1,431,000              196,000                  205,000
              1995                     426,000                9,000                    9,000
</TABLE>

              During the fourth quarter of 1997, the Company recorded an
              additional $530,000 in amortization expense to reduce the carrying
              value of goodwill to its net realizable value.

       (g)    INVESTMENT IN THIRD-PARTY

              During December 1996, the Company acquired a 5% fully-diluted
              equity interest in a closely-held entity, through a $1,500,000
              investment in the entity's Series B convertible preferred stock.
              The cost of the investment was based upon a valuation of the
              entity done for the Company by an independent firm. During the
              year ended December 31, 1997, the Company's investment interest
              was diluted to approximately 4% as a result of additional equity
              transactions by the investee company. The investee company
              develops, markets and licenses accounting software. Based upon
              management's evaluations of the investee company's projection of
              undiscounted future cash flows, the Company is of the opinion that
              its investment is recorded at the lower of cost or market value as
              of December 31, 1997.


                                       44

<PAGE>   46


                              POWERCERV CORPORATION

                   Notes to Consolidated Financial Statements


              In a separate transaction with this entity, the Company entered
              into a partnering agreement in June 1996. Under this agreement,
              the Company granted this entity original equipment manufacturer
              (OEM) development and distribution rights to one of its
              application products in exchange for a license fee of $2,000,000.
              In addition to the OEM license fee, the Company is entitled to
              royalties based upon future licensing of the OEM products. The
              partnering agreement also provided for the entity to have
              value-added reseller rights for certain of the Company's other
              products. During December 1997, the Company amended the
              partnering agreement by expanding the OEM license rights for a
              license fee of $250,000. This amendment also provides evaluation
              license rights to other application products of the Company and
              reduces the total royalties due under the partnering agreement to
              $1.75 million from $2 million.

       (h)    INCOME TAXES

              Prior to May 15, 1995, the Company had elected to be treated as a
              small business corporation ("S Corporation") for income tax
              purposes. Accordingly, the Company's taxable income and all tax
              credits were reportable by the shareholders on their individual
              tax returns.

              Effective May 15, 1995, the Company converted to a C Corporation,
              and adopted Statement of Financial Accounting Standards No. 109,
              Accounting for Income Taxes ("Statement 109"). Statement 109
              requires the use of the asset and liability method of accounting
              for income taxes. Under this method, deferred tax assets and
              liabilities are recognized for the future tax consequences
              attributable to differences between the financial statement
              carrying amounts of existing assets and liabilities and their
              respective tax bases. Deferred tax assets and liabilities are
              measured using enacted tax rates expected to apply to taxable
              income in the years in which those temporary differences are
              expected to be recovered or settled. Under Statement 109, the
              effect on deferred tax assets and liabilities of a change in tax
              rates is recognized in operations in the period that includes the
              enactment date.

              The pro forma income tax benefit presented in the 1995
              consolidated statement of operations has been calculated using the
              statutory tax rate in effect during the period, as if the Company
              was taxable as a C Corporation. For pro forma income tax purposes,
              it was assumed that the adoption of Statement 109 occurred as of
              April 20, 1992 (the date of the Company's inception).

       (i)    CONCENTRATIONS OF CREDIT RISK

              Financial instruments, which potentially subject the Company to
              concentrations of credit risk, consist principally of accounts
              receivable from customers. This risk, however, is limited due to
              the large number of customers comprising the Company's customer
              base and their dispersion.


       (j)    STOCK BASED COMPENSATION

              Prior to January 1, 1996, the Company accounted for its stock
              option plan in accordance with the provisions of Accounting
              Principles Board Opinion No. 25, Accounting for Stock Issued to
              Employees ("APB 25"), and related interpretations. As such,
              compensation expense would be recorded on the date of granting of
              stock options only if the current market price of the underlying
              stock exceeded the exercise price. Effective as of January 1,
              1996, the Company adopted


                                       45


<PAGE>   47


                              POWERCERV CORPORATION

                   Notes to Consolidated Financial Statements


              Statement of Financial Accounting Standards No. 123, Accounting
              for Stock-Based Compensation ("Statement 123"), which stipulates
              that entities recognize as expense over the vesting period the
              fair value of all stock-based awards on the date of grant.
              Alternatively, Statement 123 allows entities to continue to apply
              the provisions of APB 25 and provide pro forma net income and pro
              forma net earnings per share disclosures for employee stock
              options granted in 1995 and subsequent years as if the
              fair-value-based method defined in Statement 123 had been applied.
              The Company has elected to continue to apply the provisions of APB
              25 and provide the pro forma disclosure information required by
              Statement 123.

       (k)    NET LOSS PER SHARE

              During the year ended December 31, 1997, the Company adopted
              Statement of Financial Accounting Standards No. 128, Earnings Per
              Share, which sets forth the computation, presentation, and
              disclosure requirements for earnings per share ("EPS") for
              entities with publicly-held common stock.

              The basic net loss per share is computed by dividing the net loss
              available to common stockholders by the weighted-average number of
              common shares outstanding. Common stock equivalents in each of the
              years in the three year period ended December 31, 1997 were
              anti-dilutive due to the net losses sustained by the Company, thus
              the diluted net loss per share in these years is the same as the
              basic net loss per share.

       (l)     SUPPLEMENTAL CASH FLOW INFORMATION

              The Company considers all highly liquid investments with maturity
              dates at date of purchase of three months or less to be cash
              equivalents. At December 31, 1997 and 1996, cash equivalents
              totaled approximately $4,986,000 and $13,343,000, respectively.

              In May 1995, the Company declared a $3,712,000 distribution to
              shareholders, which was paid by issuance of promissory notes.

              In November 1995, the Company issued 230,000 shares of common
              stock (valued at $4.00 per share) as part of the consideration for
              the acquisition of substantially all of the net assets of STI.

              In December 1995, the Company acquired the intellectual property
              rights related to manufacturing and customer order software
              applications owned by Reliance in exchange for a promissory note
              in the amount of $7,128,615.

              In January 1996, the Company issued 110,000 shares of common stock
              (valued at $8.50 per share) as consideration for the acquisition
              of the net assets of Visual.

              Interest paid during the years ended December 31, 1997, 1996 and
              1995 was approximately $14,000, $240,600 and $148,500,
              respectively.


                                       46

<PAGE>   48


                              POWERCERV CORPORATION

                   Notes to Consolidated Financial Statements


              Income taxes paid during the years ended December 31, 1997, 1996
              and 1995 were approximately $37,000, $4,000 and $825,400,
              respectively. Income tax refunds totaled approximately $89,000 and
              $708,000 during the years ended December 31, 1997 and 1996,
              respectively.

(3)     WORK FORCE REDUCTION AND OTHER CHARGE

        During the fourth quarter of 1997, the Company initiated actions to
        reduce its work force and undertook additional cost cutting measures in
        line with its objective to return to profitability. The other measures
        included, but were not limited to, the closing of the Company's
        international office in Amsterdam. As a result, the Company recorded a
        charge totaling $1,010,000 in its consolidated statement of operations
        for the year ended December 31, 1997, which consists of the following:

<TABLE>
              <S>                                                                   <C>
              Severance and related costs (50 employees)                            $  411,000
              Office closing costs                                                     113,000
              Impairment of property and equipment primarily related to
                assets used by severed employees                                       192,000
              Other costs, primarily related to previous contractual commitments       294,000
                                                                                    ----------

                                                                                    $1,010,000
                                                                                    ==========
</TABLE>

                The above actions were initiated by the Company during the
       fourth quarter of 1997. Office closings and certain other actions are
       anticipated to be completed during the early part of the year ending
       December 31, 1998.

(4)     PROPERTY AND EQUIPMENT

       Property and equipment consists of the following at December 31, 1997 and
       1996:

<TABLE>
<CAPTION>
                                                                                               Estimated
                                                                                             useful lives
                                                            1997              1996              (years)
                                                            ----              ----              -------

          <S>                                         <C>                  <C>             <C>
          Leasehold improvements                      $    101,276            97,088             3
          Furniture and fixtures                           707,603           682,075           5 - 7
          Computer equipment                             3,548,248         2,860,960           3 - 7
          Equipment                                        493,160           480,561           5 - 7
                                                      ------------         ---------

                                                         4,850,287         4,120,684
          Less accumulated depreciation
              and amortization                           2,323,227         1,009,742
                                                      ------------         ---------

                                                      $  2,527,060         3,110,942
                                                      ============         =========
</TABLE>


       Depreciation and amortization expense was approximately  $1,131,000,
       $639,000 and $258,000 during the years ended December 31, 1997, 1996,
       and 1995, respectively.


                                       47


<PAGE>   49


                              POWERCERV CORPORATION

                   Notes to Consolidated Financial Statements


(5)    LINES OF CREDIT AND NOTES PAYABLE

       The Company entered into a $5,000,000 unsecured revolving bank line of
       credit that expires on February 15, 1999. The line of credit has an
       interest rate equal to the 90 day floating LIBOR rate plus 150 to 200
       basis points depending on a ratio of the Company's total liabilities to
       tangible net worth, as defined (7.22% and 7.06% at December 31, 1997 and
       1996, respectively). The line of credit agreement requires the Company to
       adhere to certain restrictive financial ratios. The Company was in
       compliance with these financial ratios at December 31, 1997. There were
       no outstanding balances on the line of credit as of December 31, 1997 and
       1996. During January, 1998, the Company and its bank amended the terms of
       this line of credit providing for the application of a $300,000 sublimit
       for the purpose of supporting letters of credit.

(6)    ACCRUED EXPENSES

       Accrued expenses consist of the following at December 31, 1997 and 1996:

<TABLE>
<CAPTION>
                                                                    1997                 1996
                                                                    ----                 ----

                <S>                                           <C>                      <C>
                Compensation                                  $    1,369,603           1,268,511
                Severance and related costs                          411,000               -
                Other                                              1,094,087             486,419
                                                              --------------           ---------
                                                              $    2,874,690           1,754,930
                                                              ==============           =========
</TABLE>


(7)    INCOME TAXES

       As discussed in Note 2, the Company adopted Statement 109 as of May 15,
       1995. The effect of the adoption of Statement 109 was $850,000, and has
       been reported as a component of income taxes for the year ended December
       31, 1995.

       Income tax expense (benefit) for the years ended December 31, 1997, 1996
       and 1995 consists of the following:

<TABLE>
<CAPTION>
                                                           1997            1996            1995
                                                           ----            ----            ----

             Current:
             <S>                                       <C>              <C>                <C>
                Federal                                $   45,300       (1,005,000)        1,005,000
                State                                       8,500         (190,000)          190,000
                                                       ----------        ---------         ---------

                                                           53,800       (1,195,000)        1,195,000
                                                       ----------        ---------         ---------

             Deferred:
                Federal                                 1,395,700         (390,700)       (1,005,000)
                State                                     262,000          (72,000)         (190,000)
                                                       ----------        ---------         ---------

                                                        1,657,700         (462,700)       (1,195,000)
                                                       ----------        ---------         ---------

             Total income tax expense (benefit)        $1,711,500       (1,657,700)            -
                                                       ==========        =========         =========
</TABLE>


                                       48

<PAGE>   50


                              POWERCERV CORPORATION

                   Notes to Consolidated Financial Statements


       Income tax expense (benefit) for the years ended December 31, 1997, 1996
       and 1995 differed from the amount computed by applying the U.S. federal
       income tax rate of 34 percent to loss before income taxes as a result of
       the following:

<TABLE>
<CAPTION>
                                                                  1997             1996              1995
                                                             -----------         ---------        ---------

        <S>                                                  <C>                <C>              <C>
        "Expected" income tax benefit                        $(5,568,000)       (1,487,000)      (1,691,000)
        State taxes exclusive of effect of conversion
              to C Corporation, net of federal benefit          (648,000)         (173,000)        (224,000)
        Effect of S Corporation earnings                               -                 -         (260,000)
        Effect of conversion to C Corporation                          -                 -          850,000
        Change in the valuation allowance
             for deferred tax assets                           7,936,000                 -        1,295,000
        Other, net                                                (8,500)            2,300           30,000
                                                             -----------         ---------        ---------

                                                             $ 1,711,500        (1,657,700)               -
                                                             ===========         =========        =========
</TABLE>

       The tax effects of temporary differences that give rise to significant
       components of the deferred tax assets and deferred tax liabilities at
       December 31, 1997 and 1996 are presented below:

<TABLE>
<CAPTION>
                                                                                1997             1996
                                                                             ----------       ---------
        <S>                                                                  <C>              <C>

        Deferred tax assets:
           Deferred revenue                                                  $  271,000         406,000
           Provision for uncollectible accounts                                    -            209,000
           Accrued expenses                                                     171,000         133,000
           Operating losses                                                   6,146,000         144,000
           Intangible assets                                                  3,192,000       2,766,700
                                                                             ----------       ---------

               Total gross deferred tax assets                                9,780,000       3,658,700

               Less valuation allowance                                      (9,231,000)     (1,295,000)
                                                                             ----------       ---------

               Net deferred tax assets                                          549,000       2,363,700
                                                                             ----------       ---------

        Deferred tax liabilities:
           Section 481 cash to accrual conversion                               292,000         544,000
           Depreciation and amortization of property and equipment              257,000         162,000
                                                                             ----------       ---------

             Gross deferred tax liabilities                                     549,000         706,000

             Total net deferred tax assets                                   $    -           1,657,700
                                                                             ==========       =========
</TABLE>


                                       49

<PAGE>   51


                              POWERCERV CORPORATION

                   Notes to Consolidated Financial Statements


       The Company increased its deferred income tax asset valuation allowance
       by $7,936,000 during the year ended December 31, 1997 to offset deferred
       tax benefits previously recognized and reduce the deferred tax asset
       balance to zero. The decision to fully reserve the deferred income tax
       asset was primarily the result of the Company's continued losses from
       operations. At December 31, 1997, the Company has a net operating loss
       carryforward of approximately $16,174,000 for federal income tax purposes
       that expires at various times from years 2010 to 2012.

       The Company's Federal income tax returns for the years ended December 31,
       1996 and 1995 are currently subject to a routine examination by the
       Internal Revenue Service. Management of the Company is of the opinion
       that the ultimate outcome of this examination will have no impact on the
       consolidated financial position of the Company reported as of December
       31, 1997.

(8)    SHAREHOLDERS' EQUITY

       On March 1, 1996, the Company completed its IPO and issued 2,900,000
       shares of its common stock at a price of $14.00 per share. The Company
       received approximately $36,900,000 of cash, net of offering expenses and
       underwriting discounts and commissions. On April 3, 1996, the Company
       received approximately $6,400,000, net of underwriting discounts and
       commissions, in connection with the issuance of 495,000 shares of its
       common stock pursuant to the underwriter's exercise of the over-allotment
       option granted by the Company in connection with the IPO.

       During 1995, the Company sold 50,000 shares of common stock along with
       registration rights, at a price of $4 per share, to a then officer of the
       Company. In 1996, these shares were used to secure a note receivable
       related to a $200,000 advance made to this individual at the time of his
       separation from the Company. In exchange for the former officer foregoing
       his registration rights on these shares at the time of his departure he
       was granted a right to require the Company to repurchase these shares at
       a price equal to fair value as defined, until November 1, 1997. In
       September 1997, this individual exercised this right and the Company
       repurchased the shares for approximately $189,000. In 1997, the Company
       also considered the former officer to have provided consulting services
       to the Company in the amount of approximately $11,000. This repurchase of
       the shares and the compensation for the consulting services provided were
       used to offset and repay in 1997 the former officer's outstanding note
       receivable.

       On May 5, 1995, the Company's Board of Directors declared an 84,000-for-1
       stock split. This stock split resulted in the issuance of 8,399,900
       additional shares of common stock. Retroactive effect has been given to
       the stock split in the shareholders' equity accounts, and in all share
       and per share data included in the accompanying consolidated financial
       statements.

       The Company declared and paid a $10,000,000 distribution, and declared a
       $3,712,000 distribution of previously undistributed S Corporation
       earnings during the year ended December 31, 1995. In addition, the
       Company paid $372,121 in S Corporation distributions in the first four
       months of 1995. The $3,712,000 distribution was paid by issuance of
       non-interest bearing promissory notes. These notes were paid after the
       completion of the Company's IPO.

                                       50

<PAGE>   52


                              POWERCERV CORPORATION

                   Notes to Consolidated Financial Statements


(9)    COMMITMENTS AND CONTINGENCIES

       (a)    LEASES

              The Company conducts its operations in leased facilities. The
              lease terms range from one month to five years. Rental expenses
              under operating leases approximated $1,167,000, $1,020,000 and
              $520,000, during the years ended December 31, 1997, 1996 and 1995,
              respectively.

              Future minimum lease payments under noncancelable operating lease
              agreements during the years following December 31, 1997 are as
              follows:

<TABLE>
<CAPTION>
                 YEAR ENDING
                DECEMBER 31,                     COMMITMENT
                ------------                     ----------

                <S>                              <C>
                   1998                          $  866,000
                   1999                             828,000
                   2000                             503,000
                   2001                              83,000
                   2002                              83,000
                Thereafter                           24,000
                                                 ----------

                                                 $2,387,000
                                                 ==========
</TABLE>

       (b)    LITIGATION

              A complaint was filed on July 24, 1997 in the United States
              District Court for the Middle District of Florida, captioned J.
              Conrad Lifsey vs. Harold R. Ross, Gerald R. Wicker, Marc J.
              Fratello, Roy E. Crippen, III, Donald B. Hebb, Jr., Thomas S.
              Roberts, PowerCerv Corporation, Alex Brown & Sons, Inc.,
              Robertson, Stephens & Company, ABS Capital Partners, L.P., Summit
              Investors II, L.P., and Summit Ventures III, L.P. The complaint


                                       51

<PAGE>   53


                              POWERCERV CORPORATION

                   Notes to Consolidated Financial Statements


              purports to be a class action on behalf of those persons who
              purchased shares of the Company's common stock from March 1, 1996
              (the date of the Company's IPO) through July 24, 1996. The
              complaint alleges, among other things, that the defendants
              violated the Securities Act of 1933 and the Securities Exchange
              Act of 1934 in connection with the Company's IPO and in its
              subsequent securities filings, press releases and other public
              statements. The plaintiff seeks damages of an unspecified amount,
              rescission of certain securities sales and certain other remedies.
              On March 19, 1998, the defendants filed their motions to dismiss
              this complaint.  An effect of this motion filing is to postpone
              any discovery on this case until after the motions are ruled on by
              the Court.  No ruling has yet been handed down. The defendants
              deny any wrongdoing and intend to contest the suit vigorously.

       (c)    EMPLOYMENT AGREEMENTS

              Effective April 10, 1997, each of Harold Ross (a co-founder of the
              Company who, in April 1997, was Chairman and CEO), Marc Fratello
              (a co-founder of the Company who, in April 1997, was the President
              and COO, and is currently the Chairman and CEO) and Roy E. Crippen
              III (a co-founder of the Company who, in April 1997, was the Chief
              Technology Officer, and is currently the Vice Chairman and Chief
              Technology Officer) entered into an Employment, Noncompetition,
              Development and Confidentiality Agreement with the Company. Each
              of these agreements is for a period of one year plus renewable
              one-year extensions subject to either the Company's or the
              executive's right of cancellation. These agreements provide for an
              annual base salary of $180,000, target annual bonus of up to
              $120,000, and certain other benefits. These agreements also
              provide certain piggy-back registration rights to each of these
              executives. In addition, the Company agreed to pay the executives
              twelve months of severance pay, including base salary and bonus,
              in the event their employment is terminated (i) by mutual
              agreement of the executive and the Company, (ii) by either party
              after the agreements' twelve month term has elapsed, (iii) by the
              Company following a disability determination of the executive, or
              following the Company's early termination of the agreement on
              certain notice, or (iv) by the executive if the Company breaches
              the agreement, upon certain changes of control of the Company, or
              following the executive's formal notice of termination during or
              after April 1998. Each of these agreements also contains a
              one-year non-compete provision following its expiration or earlier
              termination. Effective December 31, 1997, Harold Ross retired as
              the Chairman and CEO of the Company. Mr. Ross remained in his
              capacity as a member of the Board of Directors. The Company is
              obligated under an employment termination agreement with Mr. Ross
              to pay him a severance of $300,000 during fiscal 1998, which
              amount was expensed during December 1997. Effective January 1,
              1998 and


                                       52


<PAGE>   54


                              POWERCERV CORPORATION

                   Notes to Consolidated Financial Statements


              for the entirety of the Company's 1998 fiscal year, the Company
              and Messrs. Fratello and Crippen each amended their employment
              agreements whereby each of the executive's annual salary during
              1998 was reduced to $80,000. Messrs. Fratello and Crippen received
              a stock option from the Company for 200,000 shares of the
              Company's common stock in connection with their salary reductions.

              Effective December 16, 1996, Stephen Wagman (who, in December
              1996, was Senior Vice President, Administration, General Counsel,
              Treasurer and Secretary, and subsequent to December 31, 1997 was
              named as the Company's Chief Financial Officer) entered into an
              employment agreement with the Company. The term of this agreement
              runs through December 31, 1998, plus renewable one-year extensions
              subject to either the Company's or the executive's right of
              cancellation. The agreement provides for an annual base salary of
              $120,000, a discretionary bonus and certain other benefits. In
              addition, the Company agreed to pay the executive twelve months
              base salary and vest his outstanding stock options if (i) the
              Company is merged or acquired resulting in the elimination of his
              role, (ii) he is terminated without cause, or (iii) he is
              constructively terminated. Mr. Wagman's employment agreement was
              amended as of December 16, 1997 to provide for an annual base
              salary of $150,000, a $50,000 target bonus, and certain other
              benefits.

              On February 25, 1997, the Company entered into an employment
              agreement with Ronald Nall to serve in the capacity of Senior
              Vice President of Research and Development of the Company.  The
              employment agreement is for a period of one year plus renewable
              one-year extensions subject to either the Company's or Mr. Nall's
              right of cancellation.  In addition to a stock option award, the
              agreement provides for an annual base salary of $175,000, an
              annual draw of $20,000, an annual target bonus of $125,000, and
              certain other benefits.  In addition, the Company agreed to pay
              Mr. Nall twelve months base salary and extend the expiration of
              his stock options for one year as follows: (i) upon a change of
              control where Mr. Nall is not offered an equal or better position
              and compensation package, (ii) if the Company terminated Mr. Nall
              without cause, or (iii) if Mr. Nall were constructively
              terminated by the Company.  This employment agreement also
              contains a one-year non-compete provision.  On January 14, 1998,
              the Company and Mr. Nall entered into an amendment to his
              employment agreement pursuant to which Mr. Nall was promoted to
              the position of Senior Vice President of Services and Products.
              Also pursuant to this amendment, the terms of Mr. Nall's annual
              target bonus were made consistent with other members of the
              Company's executive management team and Mr. Nall received
              additional stock options.

              On February 19, 1998, the Company entered into an employment
              agreement with Michael J. Simmons to serve in the capacity of
              President and Chief Operating Officer.  The employment agreement
              is for a period commencing in March 1998 and expiring December
              31, 2000, plus renewable one-year extensions subject to either
              the Company's or Mr. Simmons' right of cancellation.  In addition
              to the stock options granted to Mr. Simmons, the agreement
              provides for an annual base salary of $175,000 in fiscal 1998,
              and $225,000 in each of fiscal 1999 and 2000, an annual target
              bonus of $200,000 (of which the Company is obligated to pay a
              minimum of $50,000 in fiscal 1998), and certain other benefis.
              The terms of Mr. Simmons' annual target bonus are consistent with
              other members of the Company's executive management team.  In
              addition, the Company agreed to pay Mr. Simmons twelve months
              base salary and vest certain of his outstanding stock options as
              follows: (i) upon a change of control where Mr. Simmons is not
              offered an equal or better position and compensation package,
              (ii) if the Company terminated Mr. Simmons without "cause," or
              (iii) if Mr. Simmons were constructively terminated by the
              Company.  This employment agreement also contains a one-year
              non-compete provision.

(10)   EMPLOYEE BENEFIT PLANS

       (a)    DEFINED CONTRIBUTION PLAN

              The Company has a 401(k) plan covering employees who meet
              established eligibility requirements. Under the plan provisions,
              the Company may match participant contributions. During
              1997, 1996 and 1995, the Company matched 50% of participant
              contributions to a maximum matching amount of 6% of participant
              base compensation. Total Company contributions were approximately
              $342,000, $257,000 and $195,000, during the years ended December
              31, 1997, 1996 and 1995, respectively. During the year ended
              December 31, 1997, this match occurred in the form of Company
              common stock purchased in the open market.

              Effective January 1, 1998, the Company's matching policy was
              changed to a formula which is based upon the Company's revenues
              and performance.

       (b)    STOCK OPTION PLAN

              In June 1995, the Company established a stock option plan, which
              provides for the granting of both incentive stock options and
              non-statutory stock options. Only employees are eligible to
              receive grants of incentive stock options.

              Generally, options granted under this stock option plan expire 10
              years after the date of grant, are exercisable over a four-year
              period and are granted at fair market value on the date of the
              grant. A total of 800,000 shares were originally reserved for
              issuance under the plan. In January 1996, the Company increased
              the number of shares reserved to 1,250,000 and in January 1997,
              the Company increased the number of shares reserved to 2,250,000.


                                       53

<PAGE>   55


                              POWERCERV CORPORATION

                   Notes to Consolidated Financial Statements


              Activity with respect to stock options is summarized as follows:

<TABLE>
<CAPTION>
                                                                               OPTIONS OUTSTANDING
                                                                           -----------------------------
                                                                                        WEIGHTED-AVERAGE
                                                                                             OPTION
                                                                                            PRICE PER
                                                                             SHARES          SHARE
                                                                           --------     ----------------

              <S>                                                          <C>              <C>
              Balance at December 31, 1994                                   -                  -

                  Options granted                                            672,033          $3.61
                  Options canceled                                           (12,400)         $3.50
                                                                           ---------

              Balance at December 31, 1995                                   659,633          $3.61

                  Options granted                                            474,812          $6.69
                  Options exercised                                          (47,809)         $3.50
                  Options canceled                                          (165,714)         $4.76
                                                                           ---------

              Balance at December 31, 1996                                   920,922          $5.00

                  Options granted                                            835,014          $3.28
                  Options exercised                                          (13,958)         $3.73
                  Options canceled                                          (439,576)         $5.15
                                                                           ---------

              Balance at December 31, 1997                                 1,302,402          $3.86
                                                                           =========
</TABLE>



              Subsequent to December 31, 1997, the Company granted options to
              purchase 797,000 shares of common stock (excluding those discussed
              in Note 10 (c)) and cancelled 240,000 options that had been
              outstanding at December 31, 1997.

              The range of exercise prices, shares, weighted-average contractual
              life and weighted-average exercise price for the options
              outstanding at December 31, 1997 is presented below:

<TABLE>
<CAPTION>
                  Range of                                     Weighted-average         Weighted-average
              exercise prices              Shares              contractual life          exercise price
              ---------------              ------              ----------------          --------------

              <S>                         <C>                  <C>                      <C>
               $ 2.00 - 4.00              1,075,946                 9 yrs                       $3.22
                 4.25 - 5.75                146,681                 9 yrs                        4.94
                 7.00 - 10.00                59,225                 8 yrs                        9.33
                12.75 - 16.75                20,550                 8 yrs                       13.98
                                          ---------
                 2.00 - 16.75             1,302,402                 9 yrs                        3.86
                                          =========
</TABLE>


                                       54

<PAGE>   56


                              POWERCERV CORPORATION

                   Notes to Consolidated Financial Statements


              The range of exercise prices, shares and weighted-average exercise
              price for the options exercisable at December 31, 1997 are
              presented below:

<TABLE>
<CAPTION>
                 Range of                   Shares              Weighted-average
              exercise prices            exercisable             exercise price
              ---------------            -----------            ----------------

              <S>                        <C>                    <C>
              $ 2.00 -  4.00                 281,475                   $3.49
                4.25 -  5.75                  36,915                    4.91
                7.00 - 10.00                  33,833                    9.43
               12.75 - 16.75                   6,662                   13.89
                                             -------
                2.00 - 16.75                 358,885                    4.39
                                             =======
</TABLE>


              The per share weighted-average fair value of stock options granted
              during 1997, 1996 and 1995 was $1.63, $2.34 and $1.28,
              respectively on the date of grant using the Black Scholes
              option-pricing model with the following weighted-average
              assumptions: 1997 - expected dividend yield of 0%, risk-free
              interest rate of 5.8%, expected volatility rate of 103%, and an
              expected life of 3.5 years; 1996 - expected dividend yield of 0%,
              risk-free interest rate of 6.4%, expected volatility rate of 135%,
              and an expected life of 3.5 years; 1995 - expected dividend yield
              of 0%, risk-free interest rate of 6.5%, expected volatility rate
              of 135%, and an expected life of 4.0 years.

              The Company applies APB 25 in accounting for its stock options
              and, accordingly, no compensation cost has been recognized for its
              stock options in the consolidated financial statements. Had the
              Company determined compensation cost based on the fair value at
              the grant date for its stock options under Statement 123, the
              Company's net loss would have been as follows:

<TABLE>
<CAPTION>
                                                  1997                     1996                   1995
                                        ------------------------   --------------------    ---------------------
                                                          NET                    NET                      NET
                                              NET       LOSS PER      NET      LOSS PER       NET       LOSS PER
                                             LOSS        SHARE       LOSS        SHARE       LOSS        SHARE
                                        -------------   --------   ----------  --------    ----------   --------

              <S>                       <C>            <C>        <C>         <C>         <C>          <C>
              As reported                $(18,087,261)   (1.31)    (2,715,065)   (0.21)    (4,424,902)*  (0.52)*

              Statement 123
               compensation, net of tax      (849,000)   (0.06)      (437,000)   (0.03)      (187,000)   (0.03)
                                         ------------    -----     ----------    -----     ----------    -----

              Pro forma disclosure       $(18,936,261)   (1.37)    (3,152,065)   (0.24)    (4,611,902)   (0.55)
                                         ============    =====     ==========    =====     ==========    =====
</TABLE>


              *     Pro forma with respect to income taxes (See Note 7)

        (c)   OTHER STOCK OPTIONS GRANTS

              During February 1998, the Company granted stock options for
              1,000,000 shares of common stock at fair value in conjunction with
              the hiring of its President/COO.

                                       55

<PAGE>   57


                              POWERCERV CORPORATION

                   Notes to Consolidated Financial Statements


(11)   RELATED PARTY TRANSACTIONS

       The Company has used the services of an entity owned by the Company's
       three founding shareholders to recruit sales and consulting personnel for
       the Company. The expense incurred by the Company for these services
       approximated $319,000, $414,000 and $301,000, respectively, during the
       years ended December 31, 1997, 1996 and 1995.

       During the year ended December 31, 1996, an officer of the Company was
       appointed to the Board of Directors of the investee company discussed in
       Note 2(g).

       As discussed in Note 8, during the year ended December 31, 1997, the
       Company repurchased common stock from, and was provided consulting
       services by a former officer. The amount paid for this stock and services
       was $200,000 in total and was used to offset and repay a note receivable
       in the same amount from the former officer.

(12)   PREFERRED STOCK

       The Company's Articles of Incorporation authorize and permit the
       Company's Board of Directors to issue up to 5,000,000 shares of preferred
       stock (par value of $.001 per share) in one or more series, and to fix
       the relative rights, preferences and limitations of each series.

       On May 15, 1995, the Company authorized the creation of two series of
       preferred stock, consisting of 55,000 shares of Series A Redeemable
       Preferred Stock (Series A Stock) and 1,600,000 shares of Series B
       Convertible Preferred Stock (Series B Stock). The series of preferred
       stock were then sold to two investors for an aggregate price of
       $11,000,000. The net proceeds to the Company, after issuance expenses,
       were approximately $10,925,000.

       The Series A Stock was redeemed at $100 per share, which totaled
       $5,500,000 after the completion of the Company's IPO. The Series B Stock
       was converted to common stock at a ratio of one-to-one at the same time
       as the Company's IPO.

(13)   ACQUISITIONS

       In November 1995, the Company acquired substantially all of the net
       assets of STI, including intellectual property rights to its accounting
       software application product. The purchase consideration was $2,250,000
       in cash and 230,000 shares of the Company's common stock (valued at $4.00
       per share). In addition, the Company granted options to purchase 100,000
       shares of the Company's common stock to certain employees of STI in
       connection with their employment with the Company. The exercise price for
       the options was equal to the IPO price. During the year ended  December
       31, 1996 the Company paid approximately $106,000 representing additional
       consideration for STI.

       In December 1995, the Company acquired the intellectual property rights
       related to manufacturing and customer order software applications owned
       by Reliance. The purchase price was $7,128,615 and was paid by issuance
       of a promissory note. In November 1993, the Company had entered into a
       two-year agreement with Reliance to market the above software
       applications for a percentage of the licensing fees. This marketing
       agreement was discontinued effective with the closing of the acquisition.



                                       56


<PAGE>   58


                              POWERCERV CORPORATION

                   Notes to Consolidated Financial Statements


       Effective January 1, 1996, the Company acquired substantially all of the
       net assets of Visual including the rights to a client/server development
       tool. The purchase consideration was $935,000 in the form of 110,000
       shares of the Company's common stock (valued at $8.50 per share).

       The STI, Reliance and Visual transactions resulted in the acquisition of
       research and development related to projects that had not yet reached
       technological feasibility and had no future alternative use at the date
       of acquisition. Such in-process research and development, in the amount
       of $100,000 and $6,913,300, has been expensed in the Company's
       consolidated statement of operations for the years ended December 31,
       1996 and 1995, respectively.

       The aforementioned transactions also resulted in the acquisition of
       software technology, goodwill and other intangible assets, all of which
       have been capitalized. The STI and Reliance transactions resulted in the
       acquisition of software technology totaling approximately $2,907,000 and
       goodwill and other intangible assets in the amount of $534,000. The
       Visual transaction resulted in goodwill and other intangible assets of
       approximately $893,000.

       Remaining net assets of Visual acquired were as follows (in thousands):

<TABLE>
                      <S>                                           <C>
                      Accounts receivable                           $   518
                      Property and equipment                            162
                      Other assets                                       52
                      Lines of credit                                   125
                      Notes payable                                     176
                      Accounts payable and accrued expenses             365
                      Deferred revenue                                   26
</TABLE>

(14)    NEW ACCOUNTING PRONOUNCEMENTS

       During 1997, the Financial Accounting Standards Board ("FASB") issued
       certain Statements of Financial Accounting Standards ("Statements") which
       are pending implementation by the Company. They are as follows:

       Statement 130 - Reporting Comprehensive Income. Statement 130 establishes
       standards for reporting comprehensive income. The Statement defines
       comprehensive income as the change in equity of an enterprise except for
       those changes resulting from shareholder transactions. All components of
       comprehensive income are required to be reported in a new financial
       statement that is displayed with equal prominence as existing financial
       statements. The Company will be required to adopt this Statement as of
       January 1, 1998. As the Statement addresses reporting and presentation
       issues only, there will be no impact on earnings from its adoption.

       Statement 131 - Disclosures about Segments of an Enterprise and Related
       Information. Statement 131 establishes standards for disclosures about
       products and services, geographic areas, and major customers.


                                       57

<PAGE>   59


                              POWERCERV CORPORATION

                   Notes to Consolidated Financial Statements


       The Company has identified its operating segments as its services and its
       license products segments. The Company will be required to adopt this
       Statement for the 1998 fiscal year. As the Statement addresses reporting
       and presentation issues only, there will be no impact on earnings from
       adoption.

       In October 1997, the American Institute of Certified Public Accountants
       issued Statement of Position 97-2: Software Revenue Recognition ("SOP
       97-2") which is effective for software transactions entered into in
       fiscal years beginning after December 15, 1997. Accordingly, the Company
       adopted SOP 97-2 beginning in fiscal 1998. The Company has evaluated the
       effect of SOP 97-2, and does not anticipate that it will have a material
       impact on its operating results. Revenue is recognized from licenses of
       the Company's software products when the contract has been executed, the
       product(s) has been shipped, collectibility is probable and the software
       license fees are fixed or determinable. The Company generally accounts
       for consulting services separate from software license fees for those
       arrangements where services are separately stated on a time and materials
       basis and are not essential to the customer's functionality requirements.
       If any portion of the software license fees is subject to forfeiture or
       refund, the Company will postpone revenue recognition until the
       contingency has been removed. Revenues from consulting services are
       recognized as those services are performed. Revenues from maintenance and
       support are recognized ratably over the term of the maintenance period.


                                       58

<PAGE>   60


                                                                     Schedule II


                 SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS


<TABLE>
<CAPTION>
                                                                 ADDITIONS
                                                                 CHARGED TO
                                             BALANCE AT          COSTS AND                          BALANCE AT END OF
                                          BEGINNING OF YEAR       EXPENSES          WRITE-OFFS             YEAR
                                          ------------------  -----------------  -----------------  ------------------
                                                                        (In Thousands)

<S>                                       <C>                 <C>                <C>                <C>
Allowance For Uncollectible Accounts
   Year ended December 31, 1997                $   550             $2,011           $  (561)              $2,000
   Year ended December 31, 1996                $   425             $  268           $  (143)              $  550
   Year ended December 31, 1995                $   250             $  259           $   (84)              $  425
</TABLE>

































                                    * * * * *


INTERGY and  ADAPTlications are registered trademarks of the Company, and
AppSync, BatchBuilder, EnPower Series, GrowthPlan, PADlock, PFCtool, PowerCOM,
PowerMAN, PowerPerformance Series, PowerTOOL, Response, Xceed and the PowerCerv
logo are trademarks of the Company. This Form 10-K also includes product names,
trade names and marks of companies other than the Company. All other company or
product names are trademarks or registered trademarks of their respective
owners.

                                       59


<PAGE>   61

                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized, in the City of Tampa,
State of Florida, on March 31, 1998.

                                       POWERCERV CORPORATION


                                       By: /s/ Marc J. Fratello
                                          -----------------------------------
                                          Marc J. Fratello
                                          Chief Executive Officer

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of this
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
         SIGNATURE                                            TITLE                              DATE
         ---------                                            -----                              ----
<S>                                               <C>                                       <C>

/s/ MARC J. FRATELLO
----------------------------------                         Chairman,                        March 31, 1998
MARC J. FRATELLO                                   Chief Executive Officer and
                                                            Director
                                                     (Principal Executive Officer)

/s/ STEPHEN M. WAGMAN
----------------------------------                   Chief Financial Officer                March 31, 1998
STEPHEN M. WAGMAN                                 (Principal Financial Officer)

/s/ MICHAEL J. SIMMONS
----------------------------------                      President, Chief                    March 31, 1998
MICHAEL J. SIMMONS                                    Operating Officer and
                                                            Director

/s/ ROY E. CRIPPEN, III
----------------------------------                       Vice Chairman,                     March 31, 1998
ROY E. CRIPPEN, III                                Chief Technology Officer,
                                                          and Director

/s/ O.G. GREENE
----------------------------------                          Director                        March 31, 1998
O.G. GREENE

/s/ STUART C. JOHNSON
----------------------------------                          Director                        March 31, 1998
STUART C. JOHNSON

/s/HAROLD R. ROSS
----------------------------------                          Director                        March 31, 1998
HAROLD R. ROSS
</TABLE>



                                       60