SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                             ----------------------

                                    FORM 10-K
       FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)

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

                    For the fiscal year ended March 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: 0-27838
                              Forte Software, Inc.
             (Exact name of registrant as specified in its charter)

Delaware                                                     94-3131872
(State or other jurisdiction of                              (I.R.S. Employer
incorporation or organization)                               identification No.)

                 1800 Harrison Street, Oakland, California 94612
              (Address of principal executive offices and Zip Code)

       Registrant's telephone number, including area code: (510) 869-3400

        Securities registered pursuant to Section 12(b) of the Act: None

           Securities registered pursuant to Section 12(g) of the Act:

                          Common Stock, $.01 par value

         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 Registration S-K is not contained herein, and will not be contained,
to the best of  Registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. [X]

         The aggregate  market value of the voting stock held by  non-affiliates
of the Registrant,  based upon the closing sale price of the Common Stock on May
31, 1997 as reported on the Nasdaq  National  Market System,  was  approximately
$200,343,386.  Shares of Common  Stock held by each  officer and director and by
each  person  who owns 5% or more of the  outstanding  Common  Stock  have  been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate  status is not  necessarily  a conclusive  determination  for other
purposes. As of May 31, 1997 the Registrant had outstanding 19,263,884 shares of
Common Stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

           Portions  of the  Registrant's  definitive  Proxy  Statement  for the
Annual Meeting of  Stockholders to be held on August 12, 1997 is incorporated by
reference in Part III of this Form 10-K to the extent stated herein.

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<PAGE>

FORTE SOFTWARE, INC.
1997 REPORT ON FORM 10-K

Table of Contents

PART I

Item 1.  Business

Item 2.  Properties

Item 3.  Legal Proceedings

Item 4.  Submission of Matters to a Vote of Security Holders

PART II

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters

Item 6.  Selected Financial Data

Item 7.  Management's  Discussion  and Analysis of Financial  Condition  and
         Results of Operations

Item 8.  Financial Statements and Supplementary Data

Item 9. Changes In and  Disagreements  with  Accountants  on Accounting  and
         Financial Disclosure

PART III

Item 10.  Directors and Executive Officers of Registrant

Item 11.  Executive Compensation

Item 12.  Security Ownership of Certain Beneficial Owners and Management

Item 13.  Certain Relationships and Related Transactions

Part IV

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

Signatures

                                                                               2
<PAGE>


PART I

This  Annual  Report  on Form 10-K  contains  forward-looking  statements  which
reflect the Company's  current views with respect to future events and financial
performance.  In this report,  the words  "anticipate,"  "believes,"  "expects,"
"intends,"  "future," and other  similar  expressions  identify  forward-looking
statements.  These  forward-looking  statements are subject to certain risks and
uncertainties,  including  those  discussed  in  "Business  Risks"  below and in
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations,"   that  could  cause  actual  results  to  differ  materially  from
historical results or those anticipated.

ITEM 1.  BUSINESS

Introduction

         Forte Software,  Inc. (the "Company")  designs,  develops,  markets and
supports Forte, a software  application  development,  deployment and management
environment  for  distributed  enterprise  applications.  Forte was  designed to
enable  organizations to create  applications with powerful  functionality  that
support up to  hundreds or  thousands  of  concurrent  users with high levels of
reliability,   performance  and  manageability.  Forte  reduces  complexity  for
developers by providing  automatic  application  partitioning,  object-oriented,
component-based  development and independence from specific hardware  platforms,
operating  systems and  databases.  Forte's  multi-tier  architecture  increases
developer productivity,  business flexibility and the efficient use of computing
resources.  Forte allows organizations to use information technology ("IT") more
strategically   and  improve  their  ability  to  compete  in  today's  business
environment.

         Forte is marketed  and sold through the  Company's  direct sales force,
distributors  and value added  resellers  in all major  markets.  Forte has been
adopted  by  customers  in a wide  variety  of  industries,  including  banking,
consumer/retail,   education,   energy,   finance,   healthcare/pharmaceuticals,
insurance, manufacturing, media, technology and telecommunications.

Industry Background

Business Need for More Powerful Applications

         In today's  increasingly  competitive  global markets,  businesses must
rapidly  and  continuously  improve  their  operations.  The  strategic  use  of
information   technology  is  often   critical  to  making  such   improvements.
Information  systems that  automate  simple tasks are no longer  sufficient,  as
business   entities  are  demanding   applications   with  increased  levels  of
functionality to automate  complete  business  processes  spanning across entire
enterprises.

         The growing demand for more powerful computer  applications  presents a
major  challenge  to  corporate  IT  organizations.   These  organizations  have
historically not been able to keep up with the demand for computer applications,
and now they are being asked to build  applications  that are both more powerful
and easy to adapt to  rapidly  changing  business  requirements.  To meet  these
challenges,   new  application   development  techniques  and  technologies  are
required.

Emergence of Distributed Computing

         At the same time that the  demand  for more  powerful  applications  is
growing,  a paradigm  shift in computing  architectures  is  occurring  with the
proliferation  of  inexpensive  PCs,  the  growth  of  the  relational  database
management  system  ("RDBMS")  market  and the  demand  by end  users  for  more
responsive   information  systems  with  access  to  enterprise-wide   data  and
applications.  Many  organizations  began by shifting  from  mainframe  or other
host-based  environments  to two tier model of  computing.  Traditionally,  most
organizations have processed their distributed business critical applications in
mainframe or other host-based computing  environments.  These environments offer
high levels of reliability, centralized management and control, and scaleability
for  large   numbers   of   concurrent   users   running   transaction-intensive
applications.  However,  mainframe and other host-based  systems are inflexible,
require lengthy  development and maintenance cycles, and are closely linked with
rigid,  character-based  user  interfaces.   Partially  as  a  result  of  these
limitations,  much new application  development  began shifting to client/server
environments.

                                                                               3

<PAGE>

         The emergence of the Internet has validated the multi-tier  distributed
computing model of desktop  applications  communicating with application servers
that talk  with  databases.  The PC,  as the  client,  provides  an  easy-to-use
interface  which can include the  Internet or an intranet,  and the RDBMS,  as a
database  server,  provides  simple and  flexible  information  storage.  Today,
organizations want to combine the usability and flexibility of the client/server
model with the  robustness of the mainframe  model to create a new generation of
distributed applications.

Challenges of Implementing Distributed Applications

         Many   organizations   that  have   attempted   to  build   distributed
applications  have concluded that first  generation  client/server  tools do not
provide   sufficient   performance  and   manageability  for  business  critical
applications with large numbers of concurrent users or high transaction volumes.
Performance and  manageability  are limited  because all the  application  logic
resides on the client.  Performance  is  compromised  because this  architecture
requires  large  amounts of data to be sent over the network  from the server to
the client for such business needs as investment  portfolio  analysis or complex
order processing.  A more efficient approach would be to perform the analysis on
the server  where the data is located so that only the  results of the  analysis
would be sent over the network.  Manageability  is limited  because  application
updates need to be deployed on each client PC rather than on a single server.

         To overcome these and other limitations of first generation tools, many
organizations are seeking to augment these tools with complex server programming
in C or C++ and  stored  procedures  in  relational  databases,  along  with the
integration of transaction  processing monitors or other "middleware" to connect
the clients and  servers.  Such an  approach,  however,  introduces  substantial
complexity and requires technical  expertise in a myriad of hardware,  software,
database,  networking  and other  technologies.  Even where such  expertise does
exist in-house,  or where it can be obtained  through a system  integrator,  the
cost and effort of building and maintaining  applications with several different
tools is often prohibitive.

Market Opportunity

         The Company believes that the availability of a distributed application
development,   deployment  and  management   environment  is  required  for  the
widespread adoption of the distributed  computing model. To be successful,  such
an environment must:

o        Reduce  complexity - Allow  programmers  to focus on the business rules
         rather  than the complex  technical  details  involved in building  and
         maintaining distributed applications.

o        Enable advanced applications - Enable programmers to rapidly create and
         easily modify  applications  with more powerful  functionality  to meet
         more demanding business requirements.

o        Provide  distributed  application  support  -  Enable  high  levels  of
         reliability, performance and manageability for deployed applications.

         An application  environment  that  addresses  these  requirements  will
enable  businesses  to more  effectively  address  the  challenges  and  rapidly
changing requirements of today's competitive environment.

The Forte Solution

         The  Company was founded  with the belief  that the  implementation  of
distributed  applications requires dramatically  different approaches from those
offered by previously available technologies.  As a result, the Company designed
and developed  Forte,  an  application  development,  deployment  and management
environment  that  enables   organizations  to  effectively  create  distributed
applications.  Applications  built  with  Forte  can  provide  new and  advanced
functionality to enable a more competitive use of information technology, can be
easily modified as business requirements or the technical infrastructure evolve,
and can provide the high levels of reliability,  performance  and  manageability
required for distributed  applications.  Forte offers the following features and
benefits:

                                                                               4

<PAGE>

Reduced Complexity

         Application   Partitioning.   With   Forte,   programmers   develop  an
application  as if it were  to run on a  single  system  even  though  it may be
deployed on multiple hardware platforms, operating systems, RDBMSs and networks.
Following  development,  Forte  automatically  partitions,  or splits apart, the
application,  placing  the  appropriate  application  logic  on the  appropriate
system.  By using  application  partitioning  to automate  the  distribution  of
application  logic,  Forte  significantly  reduces  the  complexity  of creating
distributed applications.

         By  correctly  partitioning  an  application,  Forte can  substantially
reduce network  traffic,  enabling  applications to run faster and scale better.
Partitioning also improves the management of applications because business rules
can be  enforced  centrally  on a  server  rather  than on each  user's  desktop
computer.  This  allows  organizations  to update  business  rules in one place,
simplifying change management and ensuring consistency.

         Technology   Independence.   Forte  allows   organizations  to  develop
applications that are independent of specific hardware, software, networking and
other system components. Decisions regarding the selection of such components do
not have to be finalized until deployment.  Technology  independence also allows
customers to add or replace  hardware or software to take  advantage of emerging
technologies  without  having to rewrite  their  applications.  To enable  these
capabilities,  Forte supports popular  hardware  platforms,  operating  systems,
RDBMSs, networking equipment and other connectivity software.

         Object-Oriented Development.  Forte's fully object-oriented development
environment  makes  it  easier  to  model  the  business,   simplifies   ongoing
application maintenance and allows organizations to reuse application functions.
With  Forte,  developers  build  high-level  objects,  commonly  referred  to as
application  services,  that represent business processes such as a credit check
function.   This  close  mapping   between  the  business  and  the  application
architecture  enables IT  personnel  to more easily  design,  maintain and reuse
application  services.   Forte's  easy  to  learn  development  language  allows
programmers  to  focus on the  business  logic  rather  than  complex  technical
details.

Advanced Applications

         Multi-Tier   Distributed    Architecture.    Forte   enables   advanced
applications to be built as a set of components.  Small development teams can be
assigned to develop each component,  and the Forte  environment will assure that
the components  work together in a multi-tier  architecture.  Client  components
request actions from application services that, in turn, access one or more data
sources.  Shared  application  services are  installed on one or more servers so
they can be accessed  simultaneously by multiple users. Once a shared service is
developed  and  deployed,  it can be reused in  different  applications.  Shared
application  services  enhance  developer  productivity  through reuse,  ease of
maintenance  provided  by the modular  architecture  and  increased  consistency
created by providing the same view of the business to multiple applications.

         Business Event Notification. Forte incorporates an event model by which
any component of an  application  can notify any other  component of significant
business  occurrences  that  might  call for  immediate  action by users  and/or
application services.  By immediately and automatically  responding to important
events,  businesses  can  rapidly  resolve  problems  or take  advantage  of new
opportunities.

Distributed Application Support

         Performance.  Forte  achieves  high  levels  of  performance  for large
numbers of concurrent  users.  In addition to  application  partitioning,  which
reduces  network  traffic,  Forte employs  various  other  techniques to improve
performance,   such  as  multi-threading  server  requests  to  increase  server
throughput,  compiling  code to improve  server  response  time,  caching system
information to reduce network  traffic and replicating  application  services to
handle a greater load.

         Reliability.  Forte  employs a number of  technologies  to provide high
levels of reliability and eliminate single points of failure.  For example, if a
server or network fails, backup servers can be specified to automatically assume
the workload.  In addition,  Forte incorporates  transaction  support to provide
application consistency in case a transaction is aborted.

                                                                               5

<PAGE>

         Manageability.  Forte incorporates many management capabilities for the
deployment of distributed applications.  Forte provides a performance monitor to
report on key performance statistics, a configuration manager to insure that all
the  distributed  components of an  application  are at a compatible  level,  an
environment  console to manage the  environment  and an interface to third-party
systems  management  tools  such as the  Tivoli  Management  Environment.  These
management  capabilities  are  critical  to  the  successful  implementation  of
distributed applications.

Strategy

         The  Company's   objective  is  to  establish  Forte  as  the  standard
environment  for the  development,  deployment  and  management  of  distributed
applications. The Company's strategy incorporates the following key elements:

Expand Global Sales Capabilities. The Company intends to expand its domestic and
international  sales  capabilities by  significantly  increasing the size of its
direct  sales   organization   in  major  markets  and  continuing  to  leverage
distributors  in other selected  markets.  The Company has direct  operations in
Australia, Canada, France, Germany, the United Kingdom and the U.S.

Promote Successful Customer  Implementation.  The Company's success is dependent
upon its customers' successful  implementation of distributed applications using
Forte.  As a  result,  the  Company  actively  participates  in  the  customer's
development and deployment  efforts.  The Company assigns an account  management
team,  provides  extensive  introductory and advanced training  courses,  offers
advanced  consulting  services  and  provides  extensive  post-sale  support  to
customer accounts.

Extend  Technological  Leadership.  The Company pioneered the use of application
partitioning  and  shared  application  services  for  multi-tier,   distributed
applications.   The  Company  is  now  extending  this  technology,  along  with
production  workflow   capabilities,   to  the  Internet  in  order  to  support
browser-based  access to  mission-critical  business functions written in Forte.
The Company intends to commit substantial  resources to extend its technology in
the  areas  of  open  language   support,   open  component   support  and  open
communications.

Leverage Third-Party Relationships.  The Company seeks to promote the widespread
adoption  of  Forte  through  the  establishment  of  close  relationships  with
development  partners,  system  integrators  and value  added  resellers.  These
partners   often   assist   Forte's   customers  in   implementing   distributed
applications.  To date, the Company has established many relationships with such
third parties and intends to establish additional relationships.

The foregoing  statements  regarding the Company's  strategy,  expectations  and
intentions  are  forward-looking   statements,   and  actual  results  may  vary
substantially depending upon a variety of factors,  including the development of
emerging markets for distributed application development software,  competition,
technological change, changing customer needs, evolving industry standards,  any
product  development delays, and the ability of the Company to manage any future
growth and new  distribution  channels.  There can be no assurance  that any new
products  will be  completed  in a timely basis or that markets will develop for
such products. See the "Business Risks" section below.

Products

         Forte is collection of products  used for the  development,  deployment
and management of distributed applications.  Forte includes tools for developing
applications that are independent of any vendor-specific deployment environment,
generating  systems for specific hardware  platforms and supporting  distributed
deployments.

Forte Application Environment. The Forte Application Environment is comprised of
three facilities.  Developers use the Application  Definition Facility to define
the application's  functionality,  after which Forte automatically generates the
application  using the  System  Generation  Facility  and  deploys  it using the
Distributed Execution Facility.

Application Definition Facility.  For development,  Forte provides an integrated
set of  object-oriented  software  tools  including a graphical  user  interface
("GUI") designer, an object-oriented fourth generation language ("4GL"), a

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<PAGE>

comprehensive   set  of  class  libraries  and  a  repository  to  support  team
development.  Forte provides tight integration between application logic and the
leading relational database  management systems.  Forte also provides interfaces
with external systems such as legacy applications and electronic data feeds.

System  Generation  Facility.  For  system  generation,   Forte  partitions  the
application into a specific deployment environment.  To facilitate this process,
Forte  provides a tool for defining the  hardware in the  environment.  For each
hardware system, the tool records its operating system,  whether or not it has a
user  interface,  what networks are available,  what RDBMS, if any, is available
and whether or not the system  supports  an  interface  to an external  resource
manager such as a bar code scanner.  Using this environment  information,  Forte
automatically  maps the  application  to a specific  set of hardware  platforms,
automatically  deploys the code to these  platforms  and  establishes  efficient
communications among the Forte components.

Distributed  Execution  Facility.  For  deployment,   Forte  supports  a  robust
distributed execution environment. This includes a communications infrastructure
for  delivering  large  numbers of messages and event  notifications  as well as
strategies for optimizing  reliability and performance  such as fail-over,  load
balancing,  and parallel processing.  Forte also includes tools for managing the
deployed  application.   From  an  application  management  console,  a  systems
administrator  can monitor  message and event traffic  entering and leaving each
Forte  component,  start and stop Forte  components  running on remote machines,
monitor the  application  components  running on various  machines,  monitor the
utilization of various machine resources and perform other management functions.

         On the desktop, Forte supports Windows,  Windows NT, Macintosh,  Motif,
Netscape  Navigator  and  Microsoft  Explorer.  Forte  supports the leading open
systems server platforms  including Data General AViiON,  Digital Alpha Open VMS
and UNIX,  Digital VAX Open VMS, HP 9000,  IBM RS/6000,  Sequent  Symmetry,  Sun
SPARC,  and  Windows  NT.  Forte also  supports  the  leading  RDBMSs  including
DB2/6000, Informix, Ingres, Microsoft SQL Server, Oracle, Rdb and Sybase as well
as the Microsoft ODBC interface.

         In December  1996,  the Company  began beta testing  Forte Release 3.0,
which adds integration with Java,  desktop and mainframe  platforms,  as well as
new  features  to  improve  the  management   and   performance  of  distributed
applications.

Forte Express

         In March 1996, the Company began  shipping  Forte Express,  an optional
application   generator   designed  for  use  with  Forte.   Forte  Express  can
significantly  reduce development time by automatically  generating a three-tier
application.  Forte Express  developers  use simple  models and a  drag-and-drop
development  style to create client user interface  components that are portable
across multiple  platforms,  a framework for implementing  business  policies as
shared Forte services and database  access.  The default user  interface  window
definitions generated by Forte Express include window layouts, menus and buttons
and can be later  modified in Forte.  Any  customizations  are  preserved if the
application is later modified in Forte Express.

Forte Web SDK

         In June 1996,  the  Company  began  shipping  the Forte Web SDK,  which
enables World Wide Web ("Web")  access to the Forte  environment.  The Forte Web
SDK enables  Netscape's  Navigator  and other Web  browsers to function as Forte
clients with full access to the Forte environment,  which is designed to support
up to  thousands  of  concurrent  users  with  high  levels of  reliability  and
manageability. The Forte Web SDK provides organizations with the facilities they
need to rapidly deploy Web-accessible,  business-critical  applications, such as
order processing, without duplicating existing systems.

Forte Conductor

         In March 1997,  the  Company  began beta  testing  Forte  Conductor,  a
production  workflow  environment  for  automating   mission-critical   business
processes. Developers will use an intuitive graphical process designer to define
business  processes  which,  in turn,  are managed at runtime by a  distributed,
fault-tolerant  workflow  engine.  Forte  Conductor also provides an easy way to
track and analyze the status of work in progress.  Forte  Conductor  can be used
with Forte and/or non Forte applications.

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<PAGE>

         The Company  licenses its software for both development and deployment.
Development  license  fees are  based  upon the  number  of  developers  and the
complexity of the development  environment.  Deployment  licenses are based upon
the number of  concurrent  users and the number of servers  that will be running
Forte  components.  A core system,  with a U.S. list price of $75,000,  includes
five developer licenses,  ten concurrent user licenses, and support for a single
GUI,  server and RDBMS. A typical  initial  direct sale to an end-user  customer
ranges  from  $300,000  to  $400,000.  This  includes  development  and  initial
deployment licenses, maintenance, training and consulting services.

Technology

Application Partitioning.

         In order to partition an  application,  Forte analyzes the  application
definition  that is  stored  in the  development  repository  and maps it into a
specific target deployment  environment using a description of each machine that
is also stored in the repository.  The partitioning  process involves  splitting
apart  the  application  and  targeting  the  presentation  components  for  the
available  clients  and  shared  business  logic  for  the  available   servers.
Application  components that access an external resource,  such as an RDBMS, are
placed on the machine  where the external  resource  resides.  The  partitioning
process also  involves  converting  the  environment-neutral  definition of each
component into an environment-specific implementation. This produces GUI screens
for each client  machine by using that  client's  native  toolkit  and  converts
RDBMS-neutral database access commands into efficient instructions for accessing
a specific target RDBMS. Once a partitioning scheme is selected, Forte moves the
application  components from the repository to the  appropriate  machines in the
environment.  This  distribution  of  application  code is done at the 4GL level
(often  called  dynamic  partitioning),  allowing  developers to easily test the
application after it has been  partitioned,  while still providing the option to
subsequently  generate  C++ code that can be compiled  into  machine code (often
called static partitioning) for optimizing  deployment  performance.  Forte also
enables developers to easily modify the default partitioning scheme using simple
drag-and-drop  commands on a map that displays the  components  comprising  each
partition and the location of each partition.

Shared Application Services

         Two  enabling  technologies  permit  a  single  copy of an  application
service to be  simultaneously  accessible  by multiple  clients in a  multi-tier
application  architecture.  First, Forte  multi-threads  connections by multiple
users,  queues  requests and  efficiently  manages the  processing of the queue.
Second,  Forte provides  concurrency control to keep users from interfering with
each  other's  work.  In  addition,  Forte  assists  with  managing  the  shared
application services by providing  configuration  management,  system monitoring
and operational controls.

Business Event Notification

         Forte uses  asynchronous  events to notify an application  component of
significant  business  occurrences that might call for immediate action by users
and/or application services. Forte supports a publish-and-subscribe event model.
When a Forte  application  component is  interested  in a particular  event,  it
registers its interest  with a simple  statement.  When the event occurs,  Forte
automatically  sends a  notification  of the event to all  components  that have
registered  an interest in that event.  This event model  obviates  the need for
polling and, in contrast to the broadcast  event model,  it only sends the event
notification  to those  components  that are interested in processing the event,
thereby reducing network traffic.  Forte's  asynchronous  communication  support
includes a  multi-threading  model to enable  Forte  application  components  to
process the  arrival of an event even if it is  processing  another  application
task at the time.

Integration

         For  desktop  integration,  Forte  users  can  leverage  work in  other
personal  productivity  applications by using Microsoft  OLE/DCOM to both import
and export information. For example, users can enter data in a Forte application
and have it automatically update a spreadsheet. Forte offers integration options
via DCE or CORBA/IIOP whereby external clients and servers can interoperate with
Forte services.  Forte can both call external programs and be called by external
programs.  Forte also provides  several options for integrating  with mainframes
using  third-party  tools.  In addition  to these 

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<PAGE>


automated  interfaces,  Forte facilitates external integration through a general
purpose  wrappering  facility.  This  can be used  to  encapsulate  an  external
service, such as a real-time data feed or an existing application,  and treat it
as a Forte component.  These  capabilities  allow  organizations to assemble new
applications from existing Forte and non-Forte  components,  thereby  leveraging
other IT investments.

Replication

         For  increased   reliability  and  performance,   Forte  can  replicate
application  services onto multiple servers and use them for either fail-over or
load-balancing. In fail-over mode, Forte will automatically redirect requests to
the backup server whenever the primary  application  service is unavailable.  In
load-balancing  mode, Forte can allocate service requests across multiple copies
of an application service as a way to increase scaleability.

Support for Transactions

         Forte incorporates transaction support within the application. This can
be used to automate the synchronization of the client component, the application
service  components  and the data  management  component of an  application.  By
automating  transaction  consistency  across  all  components  of  a  multi-tier
application,  Forte  simplifies  the work of developers and provides for greater
reliability of the application.

Rapid Application Development and Optional Code Generation

         By  separating  the  development  process  from  deployment,  Forte can
support  both  rapid  application   development   ("RAD")  via  an  interpretive
development environment and optimal deployment performance via the generation of
C++ code,  which is  compiled  into  machine  code.  During  development,  Forte
supports  an  interpretive  environment  in which the Forte 4GL  source  code is
compiled into an intermediate  pseudo-code that runs with the Forte interpreter.
This approach is similar to most RAD tools that allow developers to rapidly test
and view code  without  having to go through a lengthy  compile  and link cycle.
When Forte partitions the application,  it partitions at the pseudo-code  level,
thereby allowing the developer to test the distributed  application  quickly. If
the application needs to be repartitioned  frequently,  it can be deployed using
the  pseudo-code.  For deployments  that call for maximum  runtime  performance,
Forte  generates  C++ code that is  subsequently  compiled  using the native C++
compiler on each target  computer.  This option is  available  on a partition by
partition basis.


                                                                               9
<PAGE>


Customers and Markets

         The Company's  target end-user  customers  include  organizations  that
utilize sophisticated,  distributed  information systems with numerous users and
diverse,  heterogeneous  operating systems and databases.  As of March 31, 1997,
over 230 end-user  customers have licensed Forte,  including  Andersen  Windows,
Bank of America,  British Telecom,  British Steel, Corning, EDS, Eli Lilly, Fox,
Inc.,  General  Motors,   Hewlett-Packard   Company,  Home  Box  Office,  Kaiser
Permanente,  Kawasaki Steel,  Mitsui Trust Bank, Merrill Lynch Canada,  Montreal
Exchange,  Pacific Bell Information  Services,  Pacific Gas & Electric  Company,
Paging Network, Philip Morris, Reuters,  Telecom Italia Mobile, USAA, World Bank
and Xerox.

         Revenues from U.S West Communications, Inc. accounted for approximately
12% of total  revenue in fiscal year 1997.  No customer  accounted for more than
ten percent of the Company's total revenues for the fiscal years ended March 31,
1995 or 1996.

Sales and Marketing

         Forte  markets its software and services  primarily  through its direct
sales organization  complemented by other sales channels including international
distributors  and value added  resellers.  As of March 31, 1997,  the  Company's
direct sales force  included 51 sales  representatives  located  throughout  the
United States and in international sales offices in Australia,  Canada, Germany,
France,  and the United Kingdom.  The Company intends to expand its direct sales
and support  force.  See  Management's  Discussion  and  Analysis  of  Financial
Condition and Results of Operations for further discussion.

         The Company has licensed  Digital to resell Forte on a worldwide basis.
As  of  March  31,  1997,  the  Company  was  represented  by  17  international
distributors (covering 22 countries), which principally operate in markets where
the Company does not have a direct sales organization.

         The  Company  uses a  consultative  sales  model for  selling  to major
accounts.  This model entails the collaboration of technical and sales personnel
to formulate  proposals that address the specific  requirements of the customer.
Due to the importance of business-critical distributed applications, the Company
focuses its initial sales  efforts on senior IT  department  personnel and other
members of the customer's management team.


Third-Party Relationships

         A key element in Forte's sales and marketing  strategy is the continued
expansion  of  third-party   relationships  to  increase  market  awareness  and
acceptance  of  Forte.  The  goal is to  deliver  complete  customer  solutions,
therefore, Forte partners with industry-leading companies.

         Delivering  complete  customer  solutions  requires  a broad  range  of
capabilities.  Forte's  partners help satisfy these needs by providing  on-going
development  of  Forte  products,   integration  with  complementary   products,
availability of pre-packaged  vertical solutions or pre-built pieces of code, or
additional Forte-knowledgeable resources.

         Several leading multi-national companies have worked closely with Forte
to help develop and extend the Company's  technology.  Apple  Computer  Systems,
Inc., Data General Corp.,  Digital Equipment Corp., IBM Corp.,  Mitsubishi,  and
Sequent  Computer  Systems,  Inc.  have all  sponsored  major joint  engineering
activities with Forte. Many of these relationships date from the Company's early
days  and  demonstrate  early   confirmation  and  adoption  of  its  technology
capabilities and direction.

         The Company has entered into a license and  development  agreement with
Digital,   under   which   Digital  is  granted  a   worldwide,   non-exclusive,
royalty-bearing  license to distribute Forte, to modify and integrate Forte into
Digital products, and to use Forte source code for development,  maintenance and
support. The Company has also entered into a development agreement with Sequent,
under which Sequent is granted a non-exclusive, worldwide, royalty-bearing right
to distribute  Forte for use on Sequent computer systems and to use Forte source
code to support Sequent customers.

                                                                              10

<PAGE>

         The Company has also entered into a license and  development  agreement
with Mitsubishi,  under which Mitsubishi is appointed the exclusive  Japan-based
distributor  of Forte  solely  within  Japan and  granted the right to use Forte
source code to develop a Japanese version of Forte.

         Forte has forged strong relationships with  industry-leading  companies
whose products  complement the Forte product set.  These  relationships  further
simplify the complexities of distributed application development. These partners
help  implement  Forte's  vision of open  integration  by allowing  customers to
choose products which best fit their particular needs.

         This array of complementary  products provide new, unique functionality
as well as  capabilities  which  supplement and deepen  features  already in the
Forte product set.  Through these  relationships,  Forte  customers  have a wide
range of choices of databases,  object oriented CASE tools,  middleware,  report
writers, security tools, system management tools, and testing tools.

         Value-Added  Resellers leverage Forte technology by delivering packaged
business  applications  usually  targeted at vertical  markets.  These  packaged
solutions are a good fit for customers looking for robust, function-rich systems
who do not want to develop the entire systems themselves.  Customers are able to
enjoy the benefits of Forte's  technology and have an off-the-shelf  solution at
the same time.

         Forte's products have several  advantages as a solution for value-added
resellers. They allow resellers to focus on the business functionality and needs
of the vertical market they want to address,  regardless of the technical issues
associated with building their  application for a variety of different  systems.
Forte's platform and technology  independence  lets the customer choose vertical
applications which best fit their needs instead of choosing applications because
they can run in their existing IS  infrastructure.  A bigger potential  customer
base is available to resellers for this same reason.

         Forte System Integration and Consulting partners represent a ready pool
of trained and experienced  Forte  developers  which can be tapped to supplement
customers' own development  teams. These partners often work in conjunction with
Forte's own consultants at a customer site to build end-user  applications.  The
resulting applications satisfy each customer's unique business requirements.

         Component   Providers  use  Forte  to  deliver   pre-built   pieces  of
applications.  The use of  components  for  application  development  is growing
rapidly since purchasing components can be an easier and less expensive solution
than building them from scratch.  While not complete  systems,  these  pre-built
subassemblies  help speed the  development  process  for Forte  customers  since
developers do not have to start from scratch. These robust components, which are
easily  built  in  Forte  or  other  tools,  are  then  "wrappered"  into  Forte
applications.

Customer Service and Support

         The Company believes that a high level of customer support is important
to  the  successful  marketing  and  sale  of  Forte.  Substantially  all of the
Company's direct sales to customers include  maintenance and support  contracts,
which typically have  twelve-month  terms and entitle the customers to upgrades,
if and when available,  and technical support.  In addition,  the Company offers
introductory  and  advanced  classes  and  training  programs  available  at the
Company's  headquarters,  local training  centers and customer sites.  Telephone
hotline  support is  complemented  by a bulletin  board  system that  provides a
repository  for  technical  tips and  skills.  Users of Forte can also attend an
annual user group  conference  where  knowledge of Forte skills and solutions is
exchanged.

         The  Company's  consulting   organization  provides  a  full  range  of
consulting   services  to  customers   developing   and  deploying   distributed
applications  with Forte.  Such  consulting  services are offered to promote the
successful  development  and deployment of  applications  built with Forte,  and
include  prototyping  assistance,   mentoring  and  technology  transfer,  Forte
methods, analysis and design assistance and performance tuning. Fees charged for
consulting  services vary depending on the nature and quantity of services to be
performed.  The Company believes that the  availability of effective  consulting
services is an important factor in achieving widespread market acceptance.

                                                                              11
<PAGE>

Product Development

         The Company  believes that its future success will depend in large part
on its ability to enhance Forte,  develop new products,  maintain  technological
leadership  and  satisfy  an  evolving  range  of  customer  requirements  for a
distributed   application   environment.   The  Company's  product   development
organization  is  responsible  for product  architecture,  core  technology  and
functionality,  product  testing,  user interface  development and expanding the
ability of Forte to  operate  with the  leading  hardware  platforms,  operating
systems, relational database management systems and networking and communication
protocols. This organization is also responsible for new product development.

         Since  inception,  the  Company  has made  substantial  investments  in
product development and related  activities.  Forte has been developed primarily
by the Company's  internal  development  staff and, in some instances,  with the
assistance of external consultants.  Certain technologies have been acquired and
integrated into Forte through licensing arrangements.

         As of March 31, 1997, the Company's  product  development  organization
consisted of 77 employees.  In fiscal 1995, 1996 and 1997,  product  development
expenses were $5.5 million,  $8.1 million and $10.6  million,  respectively.  To
date, the Company has not  capitalized any software  development  costs and does
not anticipate  capitalizing any software  development  costs in connection with
future releases of Forte or other products.  See Note 1 of Notes to Consolidated
Financial  Statements.  The Company  expects to  continue to devote  substantial
resources to its product development activities, including the continued support
of existing and  emerging  hardware  platforms,  operating  systems,  relational
database management systems and networking and communication protocols.

Competition

         The market for distributed software used in the development, deployment
and  management  of  distributed   applications  is  intensely  competitive  and
characterized  by rapidly  changing  technology,  evolving  industry  standards,
frequent new product  introductions and rapidly changing customer  requirements.
Distributed  applications that can be developed and deployed using the Company's
Forte  environment  can  also  be  implemented  using  a  combination  of  first
generation  application  development tools and more powerful server  programming
techniques  such  as  stored  procedures  in  relational  databases,  C  or  C++
programming,  and  networking  and  database  middleware  to connect the various
components. As such, the Company effectively experiences its primary competition
from potential  customers'  decisions to pursue this type of approach as opposed
to utilizing an application  environment such as Forte. As a result, the Company
must  continuously  educate  existing  and  prospective   customers  as  to  the
advantages  of the  Company's  products.  There can be no  assurance  that these
customers or potential customers will perceive sufficient value in the Company's
products to justify purchasing them.

         The Company  has  experienced  and  expects to  continue to  experience
increased  competition  from current and future  competitors,  many of whom have
significantly greater financial,  technical,  marketing and other resources than
the Company.  The Company's current competitors,  include among others,  Dynasty
Technologies,   Inc.,   IBM   Corporation,   Informix   Corporation,   Microsoft
Corporation,  NAT Systems, Inc., Oracle Corporation,  Powersoft (a subsidiary of
Sybase,  Inc.),  Seer  Technologies,  Inc. and Texas Instruments  Software.  The
Company  expects to compete  increasingly  with  middleware  companies  that are
advocating a middleware-centric approach to building Internet applications, many
companies that have recently  introduced,  or are about to introduce,  Web-based
tools targeting  production  Internet  applications and other companies offering
packaged  applications  with  specialized   modification  tools.  The  Company's
competitors may be able to respond more quickly to new or emerging  technologies
and  changes  in  customer  requirements  or  devote  greater  resources  to the
development,  promotion and sale of their products than the Company.  Also, many
current  and  potential  competitors  have  greater  name  recognition  and more
extensive  customer bases that could be leveraged,  thereby gaining market share
to the Company's detriment.  The Company expects to face additional  competition
as other  established and emerging  companies enter the distributed  application
development  market and new products and technologies are introduced.  Increased
competition  could result in price  reductions,  fewer customer orders,  reduced
gross margins and loss of market share, any of which could materially  adversely
affect the Company's  business,  operating results and financial  condition.  In
addition,  current and potential competitors may make strategic  acquisitions or
establish  cooperative  relationships  among  themselves or with third  parties,
thereby  increasing  the  ability of their  products to address the needs of the
Company's  prospective   customers.   Accordingly,   it  is  possible  that  new
competitors  or  alliances  among  current  and new  competitors  may emerge and
rapidly  gain  significant  market  share.  Such  competition  could  materially
adversely  affect  the  Company's  ability  to  sell 

                                                                              12
<PAGE>

additional  licenses and maintenance and support  renewals on terms favorable to
the Company. Further,  competitive pressures could require the Company to reduce
the price of Forte  licenses  and related  products  and  services,  which could
materially  adversely  affect the  Company's  business,  operating  results  and
financial condition.  There can be no assurance that the Company will be able to
compete successfully against current and future competitors,  and the failure to
do so  would  have a  material  adverse  effect  upon  the  Company's  business,
operating results and financial condition.

         The principal  competitive  factors  affecting the market for Forte are
ease of application  development,  deployment and management  functionality  and
features,   product   architecture,   product   performance,   reliability   and
scaleability,  product quality, price and customer support. The Company believes
it presently competes favorably with respect to each of these factors.  However,
the Company's  market is still  evolving and there can be no assurance  that the
Company  will  be  able to  compete  successfully  against  current  and  future
competitors and the failure to do so successfully  will have a material  adverse
effect upon the Company's business, operating results and financial condition.

Intellectual Property and Other Proprietary Rights

         The Company relies primarily on a combination of patent,  copyright and
trademark  laws,  trade  secrets,  confidentiality  procedures  and  contractual
provisions  to protect its  proprietary  rights.  The Company also believes that
factors such as the technical and creative skills of its personnel,  new product
developments,  frequent  product  enhancements,  name  recognition  and reliable
product  maintenance are essential to establishing  and maintaining a technology
leadership  position.  The Company seeks to protect its software,  documentation
and other written  materials under trade secret and copyright laws, which afford
only limited  protection.  The Company  currently  has one issued  United States
patent that expires in 2012 and  corresponding  patent  applications  pending in
Canada, Australia, Japan and several member countries within the European Patent
Organization.  There can be no assurance  that the Company's  patent will not be
invalidated, circumvented or challenged, that the rights granted thereunder will
provide  competitive  advantages  to the  Company  or that any of the  Company's
pending or future patent applications, whether or not being currently challenged
by applicable  governmental  patent examiners,  will be issued with the scope of
the  claims  sought  by the  Company,  if at all.  Furthermore,  there can be no
assurance that others will not develop technologies that are similar or superior
to the  Company's  technology or design around the patents owned by the Company.
The Company has obtained  registration of the FORTE trademark in one country and
has  trademark   registration   applications   pending  in  numerous  additional
countries.  Despite the  Company's  efforts to protect its  proprietary  rights,
unauthorized parties may attempt to copy aspects of the Company's products or to
obtain and use information  that the Company  regards as  proprietary.  Policing
unauthorized use of the Company's  products is difficult,  and while the Company
is unable to  determine  the  extent to which  piracy of its  software  products
exists, software piracy can be expected to be a persistent problem. In addition,
the laws of some  foreign  countries  do not protect the  Company's  proprietary
rights as fully as do the laws of the United  States.  There can be no assurance
that the Company's  means of  protecting  its  proprietary  rights in the United
States or abroad  will be adequate or that  competition  will not  independently
develop  similar  technology.  The Company  has entered  into source code escrow
agreements  with a  limited  number of its  customers  and  resellers  requiring
release  of source  code in certain  circumstances.  Such  agreements  generally
provide that such parties will have a limited,  non-exclusive  right to use such
code in the event  that  there is a  bankruptcy  proceeding  by or  against  the
Company,  if the Company  ceases to do business or if the Company  fails to meet
its support  obligations.  In addition,  Digital,  Sequent and  Mitsubishi  each
currently  possesses  copies of Forte source code for certain limited  purposes,
subject to the terms of separate  written  agreements  each  company has entered
into with the  Company.  Digital  and  Sequent  each has an option to purchase a
non-exclusive,  fully-paid  license of the Forte source code.  Digital's  option
becomes  exercisable  if the Company is acquired and the acquiror fails to agree
to assume the Company's contractual obligations to Digital, and Sequent's option
becomes  exercisable if the Company is acquired by certain Sequent  competitors.
The provision of source code may increase the likelihood of  misappropriation by
third parties.

         The Company is not aware that it is infringing any  proprietary  rights
of third parties.  There can be no assurance,  however,  that third parties will
not claim infringement by the Company of their intellectual property rights. The
Company expects that software product developers will increasingly be subject to
infringement  claims as the number of products and  competitors in the Company's
industry segment grows and the  functionality of products in different  industry
segments  overlaps.  Any  such  claims,  with or  without  merit,  could be time
consuming to defend, result in costly litigation,  divert management's attention
and  resources,  cause product  shipment  delays or require the Company to enter
into royalty or licensing agreements.  Such royalty or licensing agreements,  if
required, may not be available on terms acceptable to the 

                                                                              13

<PAGE>

Company,  if at all. In the event of a successful claim of product  infringement
against  the  Company  and  failure or  inability  of the Company to license the
infringed or similar technology,  the Company's business,  operating results and
financial condition would be materially adversely affected.

         The Company  relies upon certain  software  that it licenses from third
parties,  including  software that is integrated  with the Company's  internally
developed  software and used in Forte to perform key functions.  There can be no
assurance that these third-party software licenses will continue to be available
to the Company on commercially  reasonable  terms.  The loss of, or inability to
maintain,  any such  software  licenses  could  result  in  shipment  delays  or
reductions until equivalent  software could be developed,  identified,  licensed
and integrated which would materially  adversely affect the Company's  business,
operating results and financial condition.

Employees

         As of  March  31,  1997,  the  Company  had a total  of 351  employees,
including 77 in product  development,  42 in technical support, 192 in sales and
marketing and related  customer support  services and 40 in  administration.  Of
these  employees,  286 were  located in the United  States,  60 were  located in
Europe and five were located in Australia.  None of the  Company's  employees is
represented  by  a  collective  bargaining   agreement,   nor  has  the  Company
experienced  any work  stoppage.  The Company  considers its relations  with its
employees to be good.

         The  Company's  success  depends  to  a  significant  degree  upon  the
continuing  contributions  of its key  management,  sales,  marketing,  customer
support  and  product  development  personnel.  The  loss of key  management  or
technical  personnel could adversely  affect the Company.  The Company  believes
that its future  success  will  depend in large part upon its ability to attract
and retain  highly-skilled  managerial,  sales,  customer  support  and  product
development  personnel.  The Company has at times  experienced  and continues to
experience   difficulty  in  recruiting  and  retaining   qualified   personnel.
Competition  for qualified  software  development,  sales and other personnel is
intense,  and there can be no assurance  that the Company will be  successful in
attracting and retaining such  personnel.  In addition,  the Company  intends to
continue to expand its domestic and international  direct sales force. There can
be no assurance that the Company can retain its existing sales personnel or that
it  can  attract,  assimilate  and  retain  additional  highly  qualified  sales
personnel in the future.  Competitors and others have in the past and may in the
future attempt to recruit the Company's employees. Failure to attract and retain
key personnel  could have a material  adverse effect on the Company's  business,
operating results and financial condition.

                                                                              14
<PAGE>

<TABLE>
Executive Officers

         The executive officers and directors of the company,  and their ages as
of May 31, 1997, are as follows:

<CAPTION>

                     Name                        Age                              Position
                     ----                        ---                              --------
<S>                                              <C>   <C>                                                            
Martin J. Sprinzen..........................     48    President, Chief Executive Officer and Chairman of the Board
                                                       of Directors
Paul Butterworth............................     46    Senior Vice President and Chief System Architect
Michael Hedger..............................     45    Senior Vice President, European Operations
Jay Shiveley................................     40    Senior Vice President, North American and Australian Operations
James Wambach...............................     43    Vice President, Sales - North America
Rodger Weismann.............................     55    Senior Vice President, Finance & Administration, Chief
                                                       Financial Officer and Secretary
Christos M. Cotsakos.......................      48    Director
Promod Haque ...............................     49    Director
Thomas A. Jermoluk .........................     40    Director
David N. Strohm ............................     49    Director
William H. Younger, Jr......................     47    Director
                                                    
</TABLE>

         Martin J.  Sprinzen  co-founded  the Company in  February  1991 and has
served as its President,  Chief  Executive  Officer and Chairman of the Board of
Directors since inception.  Mr. Sprinzen also served as the Company's  Secretary
from inception to January 1996. From May 1988 to November 1990, Mr. Sprinzen was
employed  by Ingres  Corp.,  an RDBMS  company,  as  Executive  Vice  President,
International  Operations.  From  October  1986 to May 1988,  Mr.  Sprinzen  was
President  and Chief  Executive  Officer  of  NASTEC,  Corp.,  a  computer-aided
software engineering  company.  From July 1984 to October 1986, Mr. Sprinzen was
employed by Ingres Corp. as Vice President,  Engineering.  From December 1979 to
June 1984,  Mr.  Sprinzen was  employed by Candle  Corp.,  a mainframe  software
management   tools  company,   where  his  last  position  was  Vice  President,
Technology.  Mr. Sprinzen holds a B.S. degree in electrical engineering from The
Cooper Union.

         Paul  Butterworth  has served as Senior Vice President and Chief System
Architect of the Company since March 1991.  From  September  1990 to March 1991,
Mr.  Butterworth was employed by Servio Corp., a manufacturer of object-oriented
database management systems, most recently as Vice President,  Engineering. From
September 1980 to September  1990, Mr.  Butterworth was employed by Ingres Corp.
where he  served  as Vice  President,  Engineering,  and  Chief  Scientist.  Mr.
Butterworth  holds a B.S.  degree and an M.S. degree in information and computer
science from the University of California, Irvine.

         Michael   Hedger  has  served  as  Senior  Vice   President,   European
Operations,  Managing  Director-U.K.  of the Company since  September 1995. From
September  1994 to May 1995,  Mr. Hedger was employed by Oracle  Corporation,  a
database software company, where his last position was Vice President, Marketing
Operations for Europe,  the Middle East and Africa.  From May 1989 to July 1994,
Mr.  Hedger  was  employed  by  The  ASK  Group,  Inc.,  a  database  tools  and
applications  company,  most recently as Managing  Director of the UK subsidiary
and  Northern  Europe.  Mr.  Hedger  holds a degree  in  business  studies  from
Sheffield  Polytechnic  and a  post-graduate  degree in  marketing  studies from
Kingston Polytechnic.

         Jay Shiveley has served as Senior Vice  President,  North  American and
Australian  Operations of the Company since  December  1996.  From March 1992 to
December 1996, Mr. Shiveley served as Vice President,  Sales - North America and
Australia.  From November 1986 to February  1992,  Mr.  Shiveley was employed by
Oracle Corp.,  most recently as Group Director,  Federal  Contractors and System
Integrators.  From 1983 to 1986,  Mr.  Shiveley  was National  Sales  Manager at
Lawson  Associates,  a supplier  of  financial  application  software  for IBM's
System/38 and AS/400  market.  From 1980 to 1983,  Mr.  Shiveley was employed by
Burroughs  Corp. Mr. Shiveley holds a B.S. degree in finance and accounting from
Mankato State University.

                                                                              15

<PAGE>

         Jim Wambach has served as Vice President of Sales - North America since
December  1996.  From January 1990 to December 1996, Mr. Wambach was employed by
Sybase,  Inc., a database software company.  Most recently he was Vice President
and General Manager for the Alliance  Solutions  Division.  Previously at Sybase
Mr.  Wambach  held the  positions  of  regional  sales  director  and area  vice
president.  During his 20 year sales career,  Mr.  Wambach was vice President of
U.S.  sales  and  support  for  Authorware,  a  vendor  of  multimedia  business
solutions,  a regional  sales manager for Oracle  Corporation;  and held various
sales and management positions with D&B Computing Services.  Mr. Wambach holds a
B.S. degree in business administration from Ohio State University.

         Rodger  Weismann  has  served as Senior  Vice  President,  Finance  and
Administration  and Chief Financial  Officer of the Company since February 1993.
Mr.  Weismann has also served as Secretary of the Company  since  January  1996.
From January 1986 to January 1993, Mr.  Weismann was employed by Banyan Systems,
Inc., a computer networking company,  most recently as Executive Vice President,
Corporate  Development  and prior to that as Chief  Financial  Officer and Chief
Operating Officer.  From May 1981 to November 1985, Mr. Weismann was employed by
McCormack & Dodge, a financial  application software company, as Chief Financial
Officer.  Mr. Weismann holds a B.S. degree in economics from Cornell University,
an M.B.A. from Dartmouth College and is a Certified Public Accountant.

         Christos M.  Cotsakos has been a director of the Company  since October
1996.  Since March 1996, Mr.  Cotsakos has served as President,  Chief Executive
Officer and a member of the board of directors of E*TRADE  Group,  a provider of
Internet-based  stock brokerage  services.  From March 1995 to January 1996, Mr.
Cotsakos  was  employed by AC Nielsen,  Inc. as  President,  Co-Chief  Executive
Officer,  Chief Operating  Officer and a member of the board of directors.  From
September 1993 to March 1995,  Mr.  Cotsakos was employed as President and Chief
Executive Officer of Nielsen  International.  From March 1992 to September 1993,
Mr. Cotsakos was President and Chief Operating Officer of Nielsen Europe, Middle
East and Africa.  From 1973 to 1992,  Mr.  Cotsakos  was employed by the Federal
Express  Corporation and from 1988 to 1992 he held a number of senior  executive
positions in the United States and Europe.  Mr. Cotsakos  currently  serves as a
director of National Processing,  Inc., a processor of merchant credit and debit
card  transactions  and a provider  of check  acceptance  services in the United
States.  A decorated  Vietnam  Veteran,  Mr. Cotsakos holds a B.A.  degree,  cum
laude,  from William  Patterson  College,  and an M.B.A.,  summa cum laude, from
Pepperdine University.

         Promod  Haque has been a director  of the Company  since May 1992.  Dr.
Haque joined Norwest Venture Capital  Management,  Inc., a venture capital firm,
in  November  1990 and  currently  serves as its Vice  President,  and is also a
General  Partner of Itasca  Partners,  which is the  General  Partner of Norwest
Equity Partners IV, L.P., a Minnesota Limited  Partnership.  Dr. Haque currently
serves as a director of Transaction Systems  Architects,  Inc., Prism Solutions,
Inc., Raster Graphics,  Inc., Optical Sensors, Inc. and Connect, Inc.. Dr. Haque
holds a  B.S.E.E.  from the  University  of Delhi,  India;  and an  M.S.E.E.,  a
Ph.D.E.E. and an M.B.A. from Northwestern University.

         Thomas A.  Jermoluk has been a director of the Company  since  February
1996. Mr. Jermoluk currently serves as President, Chief Executive Officer and as
Chairman of the board of directors of @Home,  Inc., a distributor  of high-speed
interactive  services to residences  and businesses  using the cable  industry's
hybrid-fiber coaxial (HFC) infrastructure and its own network architecture. From
1986  to  1996,  Mr.  Jermoluk  was  employed  by  Silicon  Graphics,   Inc.,  a
manufacturer of high performance  visual computing  systems,  as President and a
member  of its board of  directors  from  1994 to 1996,  and as Chief  Operating
Officer from 1992 to 1996. Mr.  Jermoluk's  other positions at Silicon  Graphics
included  Executive Vice President from 1991 to 1992 and Vice  President/General
Manager,  Advanced Systems Division,  from 1988 to 1991. Mr. Jermoluk  currently
serves as a director of Pure Atria. Mr. Jermoluk holds a B.S. degree in computer
science/electrical  engineering  and an M.S.  degree in  computer  science  from
Virginia Tech.

         David N. Strohm has been a Director of the Company since February 1991.
Mr.  Strohm  joined  Greylock  Management  Corporation  ("Greylock"),  a venture
capital management  company, in 1980 and is a general partner of several venture
capital  funds  affiliated  with  Greylock.  Mr.  Strohm  currently  serves as a
director of Banyan  Systems,  Inc.,  Legato  Systems,  Inc. and MDL  Information
Systems,  Inc. Mr.  Strohm  holds a B.A.  degree from  Dartmouth  College and an
M.B.A. from Harvard University.

                                                                              16

<PAGE>

         William H.  Younger,  Jr.,  has been a director  of the  Company  since
February 1991. Mr. Younger is a general partner of Sutter Hill Ventures, L.P., a
venture  capital  management  firm,  where he has been employed  since 1981. Mr.
Younger  currently serves as a director of COR  Therapeutics,  Inc.,  Celeritek,
Inc., and Oasis Health Care Systems.  Mr.  Younger holds a B.S.E.E.  degree from
the University of Michigan and an M.B.A. from Stanford University.


BUSINESS RISKS

         In evaluating the Company's business, readers should carefully consider
the  business  risks  discussed  in  this  section  in  addition  to  the  other
information  presented in this Annual Report on Form 10-K. This Annual Report on
Form 10-K  contains  forward-looking  statements  which  reflect  the  Company's
current views with respect to future events and financial  performance.  In this
report, the words "anticipate,"  "believes," "expects," "intends," "future," and
other   similar   expressions   identify   forward-looking   statements.   These
forward-looking  statements  are  subject  to certain  risks and  uncertainties,
including  those  discussed  below,  that could cause  actual  results to differ
materially from historical results or those anticipated.

Limited Operating History;  History of Operating Losses. The Company was founded
in  February  1991 and first  shipped  product  in  August  1994.  Although  the
Company's  revenues have  increased in each of the last eleven  quarters and the
Company had net income in each of the quarters  ended  December 31, 1995 through
March 31, 1997,  the Company  incurred net losses in each quarter from inception
through the quarter ended September 30, 1995, and had an accumulated  deficit of
$15.5  million as of March 31, 1997. A  substantial  portion of the  accumulated
deficit is due to the  significant  commitment  of  resources  to the  Company's
product development and sales organizations.  The Company expects to continue to
devote  substantial  resources  in  these  areas  and as a result  will  need to
recognize significant quarterly revenues to achieve and maintain  profitability.
There can be no assurance that any of the Company's business  strategies will be
successful or the Company will be profitable in any future quarter or period.

Potential  Fluctuations in Quarterly  Operating  Results;  Uncertainty of Future
Operating Results; Seasonality;  Potential Loss in Quarter Ending June 30, 1997.
The Company's quarterly operating results have varied  significantly in the past
and are likely to vary significantly in the future, depending on factors such as
the size and timing of significant orders and their fulfillment,  demand for the
Company's  products,   changes  in  pricing  policies  by  the  Company  or  its
competitors, the number, timing and significance of product enhancements and new
product  announcements  by the Company and its  competitors,  the ability of the
Company  to  develop,  introduce  and market new and  enhanced  versions  of the
Company's  products  on a  timely  basis,  changes  in the  level  of  operating
expenses,  changes in the Company's sales incentive  plans,  budgeting cycles of
its customers,  customer order  deferrals in anticipation of enhancements or new
products offered by the Company or its competitors, the cancellation of licenses
during the warranty period or nonrenewal of maintenance agreements, product life
cycles,  software bugs and other product quality  problems,  personnel  changes,
changes  in the  Company's  strategy,  the  level  of  international  expansion,
seasonal trends and general  domestic and  international  economic and political
conditions,  among others. A significant  portion of the Company's revenues have
been,  and the Company  believes  will  continue to be,  derived  from a limited
number of orders  placed by large  organizations,  and the timing of such orders
and  their   fulfillment  has  caused  and  could  continue  to  cause  material
fluctuations  in the Company's  operating  results,  particularly on a quarterly
basis.  In addition,  the Company intends to continue to expand its domestic and
international  direct sales force.  Competition  for sales personnel is intense,
and there can be no  assurance  that the Company can retain its  existing  sales
personnel  or that it can  attract,  assimilate  and  retain  additional  highly
qualified  sales  personnel in the future.  The timing of such expansion and the
rate at which new sales  people  become  productive  could also  cause  material
fluctuations in the Company's quarterly operating results.  Due to the foregoing
factors,  quarterly  revenues and  operating  results are difficult to forecast.
Revenues  are also  difficult  to forecast  because  the market for  distributed
application  development  software is rapidly evolving,  and the Company's sales
cycle,  from  initial  evaluation  to  purchase  and the  provision  of  support
services, is lengthy and varies substantially from customer to customer. Product
orders are typically  shipped  shortly after receipt,  and  consequently,  order
backlog at the beginning of any quarter has in the past represented only a small
portion of that quarter's revenues. As a result, license revenues in any quarter
are substantially dependent on orders booked and shipped in that quarter. Due to
all of the foregoing,  revenues for any future quarter are not predictable  with
any  significant  degree of accuracy.  Accordingly,  the Company  believes  that
period-to-period  comparisons  of its  operating  results  are  not  necessarily
meaningful and should not be relied upon as  indications of future  performance.
Although the Company has recently experienced revenue growth, such

                                                                              17

<PAGE>

growth should not be considered  indicative of future revenue growth, if any, or
of future operating results. Failure by the Company, for any reason, to increase
revenues  would  have a  material  adverse  effect  on the  Company's  business,
operating results and financial condition.

         To achieve its quarterly revenue  objectives,  the Company is dependent
upon  obtaining  orders in any  given  quarter  for  shipment  in that  quarter.
Furthermore,  the  Company has often  recognized  a  substantial  portion of its
revenues in the last month,  or even weeks or days, of a quarter.  The Company's
expense levels are based, in significant part, on the Company's  expectations as
to future  revenues and are  therefore  relatively  fixed in the short term.  If
revenue   levels   fall  below   expectations,   net  income  is  likely  to  be
disproportionately  adversely affected because a proportionately  smaller amount
of the Company's  expenses  varies with its revenues.  There can be no assurance
that  the  Company  will be able  to  achieve  or  maintain  profitability  on a
quarterly or annual basis in the future. Due to all the foregoing factors, it is
likely that in some future quarter the Company's operating results will be below
the  expectations  of public market analysts and investors.  In such event,  the
price of the  Company's  Common  Stock  would  likely  be  materially  adversely
affected.

         The  operating  results of many  software  companies  reflect  seasonal
trends, and the Company expects to be affected by such trends in the future. The
Company believes that it is likely that it will experience lower revenues in its
quarter  ending June 30 as a result of efforts by its direct sales force to meet
fiscal  year-end  sales  quotas.  As a result of this  decline  coupled with the
growth in operating  expenses,  the Company  expects to incur a net loss for the
quarter  ending June 30,  1997.  Since  international  operations  constitute  a
significant  percentage of the Company's total revenues, the Company anticipates
that it may also  experience  relatively  weaker  demand in the  quarter  ending
September 30 as a result of reduced  sales  activity in Europe during the summer
months.

Dependence  on Key  Personnel.  The Company's  success  depends to a significant
degree  upon  the  continuing  contributions  of  its  key  management,   sales,
marketing,  customer support and product development personnel.  The loss of key
management or technical  personnel  could  materially  and adversely  affect the
Company.  The Company believes that its future success will depend in large part
upon its  ability  to  attract  and  retain  highly-skilled  managerial,  sales,
customer support and product  development  personnel.  In addition,  the Company
intends to continue to expand its domestic and international direct sales force.
Competition for sales  personnel is intense,  and there can be no assurance that
the Company can retain its  existing  sales  personnel  or that it can  attract,
assimilate and retain additional highly qualified sales personnel in the future.
The  timing of such  expansion  and the rate at which new  sales  people  become
productive  could also cause material  fluctuations  in the Company's  quarterly
operating  results.  The  Company  has at times  experienced  and  continues  to
experience   difficulty  in  recruiting  and  retaining   qualified   personnel.
Competition  for qualified  software  development,  sales and other personnel is
intense,  and there can be no assurance  that the Company will be  successful in
attracting and retaining such personnel. Competitors and others have in the past
and may in the future  attempt to recruit the  Company's  employees.  Failure to
attract and retain key  personnel  could have a material  adverse  effect on the
Company's business, operating results and financial condition.

Product   Concentration;   Dependence   on  Emerging   Market  for   Distributed
Applications.  All of the Company's  revenues have been attributable to sales of
Forte and related products and services. The Company currently expects Forte and
related  products  and services to account for all or  substantially  all of the
Company's future revenues. As a result,  factors adversely affecting the pricing
of  or  demand  for  Forte  and  related   products,   such  as  competition  or
technological  change,  could have a material  adverse  effect on the  Company's
business,  operating  results and  financial  condition.  The  Company's  future
financial  performance  will depend,  in  significant  part,  on the  successful
development,  introduction and customer  acceptance of new and enhanced versions
of Forte and related  products.  There can be no assurance that the Company will
continue to be successful in marketing the Forte  product,  related  products or
other products. Although the Company has recently experienced growth in sales of
Forte,  there can be no assurance that the market for  distributed  applications
will continue to grow. If the distributed  applications market fails to grow, or
grows  more  slowly  than  the  Company  currently  anticipates,  the  Company's
business,  operating  results and financial  condition  would be materially  and
adversely affected.

Risks Associated with Expanding Distribution.  To date, the Company has sold its
products through its direct sales force, distributors and value added resellers.
The Company's ability to achieve  significant  revenue growth in the future will
depend in large part on its success in recruiting and training sufficient direct
sales   personnel  and   establishing   and   maintaining   relationships   with
distributors,   resellers  and  system  integrators.  Although  the  Company  is
currently  investing,  and plans to continue to invest significant  resources to
expand its direct sales force and to develop distribution relationships with

                                                                              18
<PAGE>

third-party distributors and resellers, the Company has at times experienced and
continues to experience  difficulty in recruiting and retaining  qualified sales
personnel and in establishing necessary third-party relationships.  There can be
no  assurance  that the Company will be able to  successfully  expand its direct
sales  force or other  distribution  channels  or that any such  expansion  will
result in an  increase  in  revenues.  Any  failure by the Company to expand its
direct sales force or other  distribution  channels would  materially  adversely
affect the Company's business, operating results and financial condition.

Lengthy  Sales  Cycle.  The  Company's  products are  typically  used to develop
applications that are critical to a customer's  business and the purchase of the
Company's  products  is  often  part of a  customer's  larger  business  process
reengineering  initiative or  implementation  of client/server  computing.  As a
result,  the license  and  implementation  of the  Company's  software  products
generally  involves  a  significant   commitment  of  management  attention  and
resources by prospective customers.  Accordingly, the Company's sales process is
often subject to delays  associated with a long approval  process that typically
accompanies significant initiatives or capital expenditures. For these and other
reasons,  the sales cycle associated with the license of the Company's  products
is often  lengthy and subject to a number of  significant  delays over which the
Company has little or no  control.  There can be no  assurance  that the Company
will not experience these and additional  delays in the future.  Therefore,  the
Company  believes  that its  quarterly  operating  results  are  likely  to vary
significantly in the future.

Competition.  The  market  for  distributed  software  used in the  development,
deployment and management of distributed  applications is intensely  competitive
and characterized by rapidly changing  technology,  evolving industry standards,
frequent new product  introductions and rapidly changing customer  requirements.
Distributed  applications that can be developed and deployed using the Company's
Forte  environment  can  also  be  implemented  using  a  combination  of  first
generation  application  development tools and more powerful server  programming
techniques  such  as  stored  procedures  in  relational  databases,  C  or  C++
programming,  and  networking  and  database  middleware  to connect the various
components. As such, the Company effectively experiences its primary competition
from potential  customers'  decisions to pursue this type of approach as opposed
to utilizing an application  environment such as Forte. As a result, the Company
must  continuously  educate  existing  and  prospective   customers  as  to  the
advantages  of the  Company's  products.  There can be no  assurance  that these
customers or potential customers will perceive sufficient value in the Company's
products to justify purchasing them.

         The Company  has  experienced  and  expects to  continue to  experience
increased  competition  from current and future  competitors,  many of whom have
significantly greater financial,  technical,  marketing and other resources than
the Company.  The Company's current competitors,  include among others,  Dynasty
Technologies,   Inc.,   IBM   Corporation,   Informix   Corporation,   Microsoft
Corporation,  NAT Systems, Inc., Oracle Corporation,  Powersoft (a subsidiary of
Sybase,  Inc.),  Seer  Technologies,  Inc. and Texas Instruments  Software.  The
Company  expects to compete  increasingly  with  middleware  companies  that are
advocating a middleware-centric approach to building Internet applications, many
companies that have recently  introduced,  or are about to introduce,  Web-based
tools targeting  production  Internet  applications and other companies offering
packaged  applications  with  specialized   modification  tools.  The  Company's
competitors may be able to respond more quickly to new or emerging  technologies
and  changes  in  customer  requirements  or  devote  greater  resources  to the
development,  promotion and sale of their products than the Company.  Also, many
current  and  potential  competitors  have  greater  name  recognition  and more
extensive  customer bases that could be leveraged,  thereby gaining market share
to the Company's detriment.  The Company expects to face additional  competition
as other  established and emerging  companies enter the distributed  application
development  market and new products and technologies are introduced.  Increased
competition  could result in price  reductions,  fewer customer orders,  reduced
gross margins and loss of market share, any of which could materially  adversely
affect the Company's  business,  operating results and financial  condition.  In
addition,  current and potential competitors may make strategic  acquisitions or
establish  cooperative  relationships  among  themselves or with third  parties,
thereby  increasing  the  ability of their  products to address the needs of the
Company's  prospective   customers.   Accordingly,   it  is  possible  that  new
competitors  or  alliances  among  current  and new  competitors  may emerge and
rapidly  gain  significant  market  share.  Such  competition  could  materially
adversely  affect  the  Company's  ability  to  sell  additional   licenses  and
maintenance  and support  renewals on terms  favorable to the Company.  Further,
competitive  pressures  could  require  the Company to reduce the price of Forte
licenses and related  products and services,  which could  materially  adversely
affect the Company's business,  operating results and financial condition. There
can be no  assurance  that  the  Company  will be able to  compete  successfully
against  current and future  competitors,  and the failure to do so would have a
material  adverse  effect upon the  Company's  business,  operating  results and
financial condition.

                                                                              19

<PAGE>

         The principal  competitive  factors  affecting the market for Forte are
ease of application  development,  deployment and management  functionality  and
features,   product   architecture,   product   performance,   reliability   and
scaleability,  product quality, price and customer support. The Company believes
it presently competes favorably with respect to each of these factors.  However,
the Company's  market is still  evolving and there can be no assurance  that the
Company  will  be  able to  compete  successfully  against  current  and  future
competitors and the failure to do so successfully  will have a material  adverse
effect upon the Company's business, operating results and financial condition.

Risk Associated with New Versions and New Products;  Rapid Technological Change.
The  software  market in which the Company  competes is  characterized  by rapid
technological  change,  frequent  introductions  of  new  products,  changes  in
customer demands and evolving industry  standards.  The introduction of products
embodying  new  technologies  and the  emergence of new industry  standards  can
render existing products obsolete and unmarketable.  For example,  the Company's
customers  have  adopted  a  wide  variety  of  hardware,   software,  database,
networking and Internet-based  platforms,  and as a result, to gain broad market
acceptance,  the Company has had to support Forte on many of such platforms. The
Company's  customers  use the  Company's  proprietary  development  language  to
develop  applications using the Company's products,  and customers may desire to
utilize other widely-used  programming  languages to develop  Internet-based and
other  distributed  applications.  The Company's future success will depend upon
its ability to address the increasingly  sophisticated needs of its customers by
supporting  existing  and emerging  hardware,  software,  programming  language,
database,   networking  and  Internet-based  platforms  and  by  developing  and
introducing enhancements to Forte, related products and new products on a timely
basis that keep pace with such technological  developments and emerging industry
standards and changing customer requirements. There can be no assurance that the
Company will be successful in developing and marketing enhancements to Forte and
related  products  that  respond  to  technological  change,  evolving  industry
standards  or  changing  customer  requirements,   that  the  Company  will  not
experience  difficulties that could delay or prevent the successful development,
introduction  and  sale of such  enhancements  or that  such  enhancements  will
adequately meet the  requirements of the marketplace and achieve any significant
degree of market  acceptance.  The Company has in the past experienced delays in
the release dates of enhancements to Forte. If release dates of any future Forte
enhancements  or new  products  are  delayed  or if when  released  they fail to
achieve  market  acceptance,  the  Company's  business,  operating  results  and
financial  condition would be materially  adversely affected.  In addition,  the
introduction  or  announcement  of new product  offerings or enhancements by the
Company  or the  Company's  competitors  may cause  customers  to defer or forgo
purchases of current  versions of Forte and related  products,  which could have
material  adverse  effect  on the  Company's  business,  operating  results  and
financial condition.

Limited Deployment;  Dependence on System Integrators. The Company first shipped
Forte in August 1994. To date, only a limited number of the Company's  customers
have completed the development and deployment of distributed  applications using
Forte and related  products.  If any of the Company's  customers are not able to
successfully develop and deploy distributed  applications with Forte and related
products, the Company's reputation could be damaged, which could have a material
adverse  effect on the  Company's  business,  operating  results  and  financial
condition. In addition, the Company expects that a significant percentage of its
future  revenues will be derived from sales to existing  customers.  If existing
customers have difficulty  deploying  applications  built with Forte and related
products or for any other  reason are not  satisfied  with Forte  products,  the
Company's   business,   operating  results  and  financial  condition  would  be
materially  adversely affected.  The Company's customers and potential customers
often rely on  third-party  system  integrators  to  develop,  deploy and manage
distributed  applications.  If the  Company  is  unable  to  adequately  train a
sufficient number of system integrators or if, for any reason, a large number of
such  integrators  adopt a product or technology other than Forte, the Company's
business,  operating  results and financial  condition  would be materially  and
adversely affected.

Risk of Software Defects.  Software products as internally  complex as Forte and
related  products  frequently  contain errors or defects,  especially when first
introduced  or when new  versions  or  enhancements  are  released.  The Company
introduced  Release 2.0 of Forte in November  1995.  Despite  extensive  product
testing by the Company,  the Company has discovered  software  errors in Release
2.0 and earlier versions of Forte after their introduction. Although the Company
has not experienced  material adverse effects resulting from any such defects or
errors to date,  there can be no assurance that,  despite testing by the Company
and by current and potential customers,  defects and errors will not be found in
current versions, new versions, new product or enhancements to existing products
after commencement of commercial shipments, resulting in loss

                                                                              20


<PAGE>

of revenues or delay in market  acceptance,  which could have a material adverse
effect upon the Company's business, operating results and financial condition.

Product  Liability.  The Company markets Forte to customers for the development,
deployment  and management of distributed  applications.  The Company's  license
agreements with its customers typically contain provisions designed to limit the
Company's  exposure to  potential  product  liability  claims.  It is  possible,
however,  that the limitation of liability provisions contained in the Company's
license  agreements  may not be  effective  as a result  of  existing  or future
federal,  state or local laws or ordinances or unfavorable  judicial  decisions.
Although the Company has not experienced any product  liability  claims to date,
the sale and support of Forte by the Company may entail the risk of such claims,
which  are  likely  to  be   substantial  in  light  of  the  use  of  Forte  in
business-critical  applications.  A successful  product  liability claim brought
against  the Company  could have a material  adverse  effect upon the  Company's
business, operating results and financial condition.

Risks   Associated  with   International   Operations.   Revenues  from  foreign
subsidiaries  and export sales  accounted  for 17%, 26% and 36% of the Company's
total  revenues  in  fiscal  1995,  1996 and  1997,  respectively.  The  Company
currently has international sales offices located in Australia, Belgium, Canada,
France,  Germany,  Switzerland,  and the United  Kingdom  which  have  generated
substantially  all direct  international  revenues  recognized by the Company to
date.  The Company  believes that in order to increase sales  opportunities  and
profitability  it will be  required  to  continue  to expand  its  international
operations.  The Company  has  committed  and  continues  to commit  significant
management  time and  financial  resources  to  developing  direct and  indirect
international  sales and support channels.  There can be no assurance,  however,
that the  Company  will be able to maintain  or  increase  international  market
demand for Forte and related products.  To the extent that the Company is unable
to do so in a timely manner, the Company's  international sales will be limited,
and the Company's  business,  operating results and financial condition would be
materially and adversely affected.

         International  operations are subject to inherent risks,  including the
impact of possible  recessionary  environments  in economies  outside the United
States,  costs of localizing  products for foreign markets,  longer  receivables
collection  periods and greater  difficulty in accounts  receivable  collection,
unexpected  changes  in  regulatory  requirements,  difficulties  and  costs  of
staffing and managing foreign  operations,  reduced  protection for intellectual
property  rights in some countries,  potentially  adverse tax  consequences  and
political and economic  instability.  There can be no assurance that the Company
or  its   distributors  or  resellers  will  be  able  to  sustain  or  increase
international  revenues from licenses or from  maintenance and service,  or that
the foregoing  factors will not have a material  adverse effect on the Company's
future  international  revenues and,  consequently,  on the Company's  business,
operating results and financial  condition.  The Company's direct  international
revenues are generally  denominated  in local  currencies.  The Company does not
currently  engage in hedging  activities.  Revenues  generated by the  Company's
distributors  and resellers  are generally  paid to the Company in United States
dollars.   Although   exposure  to  currency   fluctuations  to  date  has  been
insignificant,  there can be no assurance that fluctuations in currency exchange
rates in the future will not have a material  adverse  impact on  revenues  from
international  sales and thus the  Company's  business,  operating  results  and
financial condition.

Proprietary Rights,  Risks of Infringement and Source Code Release.  The Company
relies primarily on a combination of patent, copyright and trademark laws, trade
secrets,  confidentiality  procedures and contractual  provisions to protect its
proprietary  rights.  The  Company  also  believes  that  factors  such  as  the
technological  and creative skills of its personnel,  new product  developments,
frequent product enhancements, name recognition and reliable product maintenance
are essential to establishing and maintaining a technology  leadership position.
The  Company  seeks to protect its  software,  documentation  and other  written
materials  under trade  secret and  copyright  laws,  which  afford only limited
protection.  The Company  currently  has one issued  United  States  patent that
expires  in 2012  and  corresponding  patent  applications  pending  in  Canada,
Australia,  Japan and  several  member  countries  within  the  European  Patent
Organization.  There can be no assurance  that the Company's  patent will not be
invalidated, circumvented or challenged, that the rights granted thereunder will
provide  competitive  advantages  to the  Company  or that any of the  Company's
pending or future patent applications, whether or not being currently challenged
by applicable  governmental  patent examiners,  will be issued with the scope of
the  claims  sought  by the  Company,  if at all.  Furthermore,  there can be no
assurance that others will not develop technologies that are similar or superior
to the  Company's  technology or design around the patents owned by the Company.
The Company has obtained  registration of the FORTE trademark in one country and
has  trademark   registration   applications   pending  in  numerous  additional
countries.  Despite the  Company's  efforts to protect its  proprietary  rights,
unauthorized parties may attempt to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. Policing

                                                                              21

<PAGE>

unauthorized use of the Company's  products is difficult,  and while the Company
is unable to  determine  the  extent to which  piracy of its  software  products
exists, software piracy can be expected to be a persistent problem. In addition,
the laws of some  foreign  countries  do not protect the  Company's  proprietary
rights as fully as do the laws of the United  States.  There can be no assurance
that the Company's  means of  protecting  its  proprietary  rights in the United
States or abroad  will be adequate or that  competition  will not  independently
develop  similar  technology.  The Company  has entered  into source code escrow
agreements  with a  limited  number of its  customers  and  resellers  requiring
release  of source  code in certain  circumstances.  Such  agreements  generally
provide that such parties will have a limited,  non-exclusive  right to use such
code in the event  that  there is a  bankruptcy  proceeding  by or  against  the
Company,  if the Company  ceases to do business or if the Company  fails to meet
its support obligations. In addition, Digital Equipment Corporation ("Digital"),
Sequent  Computer   Systems,   Inc.   ("Sequent")  and  Mitsubishi   Corporation
("Mitsubishi")  each currently possesses copies of Forte source code for certain
limited  purposes,  subject to the terms of  separate  written  agreements  each
company  has entered  into with the  Company.  Digital  and Sequent  each has an
option to purchase a non-exclusive, fully-paid license of the Forte source code.
Digital's option becomes exercisable if the Company is acquired and the acquiror
fails to agree to assume the Company's  contractual  obligations to Digital, and
Sequent's  option is exercisable  if the Company is acquired by certain  Sequent
competitors.  The  provision  of source  code may  increase  the  likelihood  of
misappropriation by third parties.

         The Company is not aware that it is infringing any  proprietary  rights
of third parties.  There can be no assurance,  however,  that third parties will
not claim infringement by the Company of their intellectual property rights. The
Company expects that software product developers will increasingly be subject to
infringement  claims as the number of products and  competitors in the Company's
industry segment grows and the  functionality of products in different  industry
segments  overlaps.  Any  such  claims,  with or  without  merit,  could be time
consuming to defend, result in costly litigation,  divert management's attention
and  resources,  cause product  shipment  delays or require the Company to enter
into royalty or licensing agreements.  Such royalty or licensing agreements,  if
required, may not be available on terms acceptable to the Company, if at all. In
the event of a successful claim of product  infringement against the Company and
failure  or  inability  of the  Company  to  license  the  infringed  or similar
technology,  the Company's  business,  operating results and financial condition
would be materially adversely affected.

         The Company  relies upon certain  software  that it licenses from third
parties,  including  software that is integrated  with the Company's  internally
developed  software and used in Forte to perform key functions.  There can be no
assurance that these third-party software licenses will continue to be available
to the Company on commercially  reasonable  terms.  The loss of, or inability to
maintain,  any such  software  licenses  could  result  in  shipment  delays  or
reductions until equivalent  software could be developed,  identified,  licensed
and integrated which would materially  adversely affect the Company's  business,
operating results and financial condition.

Volatility  of  Stock  Price.   The  Company's   Common  Stock  has  experienced
significant  price  volatility  and such  volatility  may  occur in the  future.
Factors,  such as  announcements  of the  introduction  of new  products  by the
Company or its  competitors and  quarter-to-quarter  variations in the Company's
operating  results,  as well as market conditions in the technology and emerging
growth company sectors, may have a significant impact on the market price of the
Company's  Common  Stock.  Further,  the stock  market has  experienced  extreme
volatitility  that  has  particularly  affected  the  market  prices  of  equity
securities of many high  technology  companies and that often has been unrelated
or disproportionate to the operating performance of such companies. These market
fluctuations may adversely affect the price of the Common Stock.

Effect of Certain  Charter  Provisions;  Anti-takeover  Effects of Rights  Plan,
Certificate of Incorporation, Delaware Law and Certain Agreements. The Company's
Board  of  Directors  has the  authority  to  issue up to  5,000,000  shares  of
Preferred Stock and to determine the price, rights, preferences,  privileges and
restrictions, including voting and conversion rights of such shares, without any
further vote or action by the Company's stockholders.  The rights of the holders
of Common Stock will be subject to, and may be adversely affected by, the rights
of the  holders of any  Preferred  Stock that may be issued in the  future.  The
issuance of  Preferred  Stock could have the effect of making it more  difficult
for a third party to acquire a majority of the  outstanding  voting stock of the
Company.  The Company has no current  plans to issue shares of Preferred  Stock.
Further,  the Company has adopted a stockholder rights plan that, in conjunction
with certain  provisions of the Company's  Certificate of  Incorporation  and of
Delaware law,  could delay or make more  difficult a merger,  tender  offer,  or
proxy contest involving the Company. In addition,  under certain  circumstances,
including an acquisition, the Company may be required to release its source code
to third  parties.  This  requirement  could  discourage  potential  acquisition
proposals for the Company.

                                                                              22

<PAGE>

ITEM 2.  PROPERTIES

         The Company's principal  administrative,  sales, marketing, and product
development  facility  occupies  approximately  68,800  square  feet in Oakland,
California   pursuant  to  a  lease  and  sublease   which  expires  June  2000.
Additionally,  the  company has a contract  to lease an  additional  60,800 feet
commencing  in February  1998 and expiring in June 2000,  for a total of 129,600
square  feet leased and  occupied  at the Oakland  location by the end of fiscal
year 1998. The Company also leases sales and support offices in Phoenix, AZ, Los
Angeles, CA, San Diego, CA, Denver, CO, Shelton, CT, Atlanta, GA, Oakbrook,  IL,
Wakefield,  MA, Rockville,  MD,  Southfield,  MI,  Minneapolis,  MN, Iselin, NJ,
NewYork,  NY, Syracuse,  NY, W. Conshohocken,  PA, Dallas,  TX, Houston,  TX and
Bellevue,  WA. The Company also  maintains  international  offices in Australia,
Canada,  France,  Germany, and the United Kingdom. The Company believes that its
existing  facilities  are  adequate  for its  current  needs  and that  suitable
additional or alternative  space will be available in the future on commercially
reasonable terms as needed.


ITEM 3.  LEGAL PROCEEDINGS

         The Company is not aware of any pending or threatened  litigation  that
could have a material  adverse  effect upon the  Company's  business,  operating
results or financial condition.

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 fiscal 1997.


PART II

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

         The  Company's  Common Stock is traded  over-the-counter  on the Nasdaq
National  Market  under the symbol  "FRTE."  The Company  commenced  its initial
public  offering  of Common  Stock on March 11,  1996 at a price $21 per  share.
Prior to such  date,  there was no  public  market  for the  Common  Stock.  The
following  table sets forth the high and low closing  sale prices for the Common
Stock for the periods indicated, as reported on the Nasdaq National Market.

                                                                 High       Low
                                                                 ----       ---
Fourth Quarter of fiscal year 1996 (from March 12, 1996)....    $40.50    $35.88
First Quarter of fiscal year 1997...........................    $81.75    $37.75
Second Quarter of fiscal year 1997..........................    $56.00    $27.25
Third Quarter of fiscal year 1997...........................    $45.25    $31.50
Fourth Quarter of fiscal year 1997..........................    $38.13    $21.88

         At May 31, 1997,  there were 433  stockholders of record,  representing
approximately 9000 shareholder accounts, of the Company's common stock, as shown
in the records of the  Company's  transfer  agent.  The Company has not paid any
cash dividends on its capital stock since its inception,  and does not expect to
pay cash dividends on its Common Stock in the foreseeable future.

         On May 16,  1997,  the Board of  Directors  of the  Company  declared a
dividend  distribution of one Preferred Share Purchase Right on each outstanding
share of its  common  stock.  Each Right will  entitle  stockholders  to buy one
one-thousandth  of a share  of  newly  created  Series  A  Junior  Participating
Preferred Stock of the Company at an exercise price of $125.00.  The Rights will
be exercisable if a person or group  hereafter  becomes the beneficial  owner of
15% or more of the Common Stock of the Company or announces a tender or exchange
offer  for 15% or more of the  Common  Stock.  The  Board of  Directors  will be
entitled  to redeem the Rights at one cent per Right at any time before any such
person hereafter  becomes the beneficial owner of 15% or more of the outstanding
Common Stock.

                                                                              23

<PAGE>

         The Rights are not being distributed in response to any specific effort
to acquire the Company.  The Rights are designed to assure that all stockholders
of the Company  receive  fair and equal  treatment  in the event of any proposed
takeover of the Company and to guard against  two-tier or partial tender offers,
open market  accumulations  and other  tactics  designed to gain  control of the
Company without paying all shareholders a fair price.

         If a person  hereafter  becomes the beneficial  owner of 15% or more of
the outstanding Common Stock of the Company,  each Right will entitle its holder
to purchase,  at the Right's  exercise price, a number of shares of common Stock
having a market value of twice the Right's  exercise  price.  Rights held by the
15% holder will become  void and will not be so  exercisable.  If the Company is
acquired in a merger or other business  combination  transaction  after a person
becomes the beneficial owner of 15% or more of the Company's Common Stock,  each
Right will entitle its holder to purchase,  at the Right's then-current exercise
price, a number of the acquiring  company's common shares having at that time of
twice the Right's exercise price. The dividend  distribution  will be payable to
stockholders  of record on June 3, 1997.  The Rights  will  expire in 2007.  The
Rights  distribution is not taxable to  shareholders.  See the section  entitled
"Business  Risks"  in  Item 1 under  the  caption  "Effect  of  Certain  Charter
Provisions;  Anti-takeover Effects of Rights Plan, Certificate of Incorporation,
Delaware Law and Certain Agreements."

                                                                              24
<PAGE>

<TABLE>

ITEM 6.  SELECTED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction
with the Company's  consolidated  financial statements and related notes thereto
and "Management's  Discussion and Analysis of Financial Condition and Results of
Operations"  included in Item 7. The  consolidated  statement of operations data
for  each of the  three  years  in the  period  ended  March  31,  1997  and the
consolidated  balance sheet data at March 31, 1996 and 1997 are derived from the
audited  consolidated  financial  statements  included  elsewhere in Item 8. The
consolidated  statement  of  operations  data for  each of the two  years in the
period ended March 31, 1994 and the consolidated balance sheet data at March 31,
1993, 1994 and 1995 are derived from audited  consolidated  financial statements
not included in this Annual Report on Form 10-K.

<CAPTION>

                                                                                      Years Ended March 31,
                                                                                      ---------------------
                                                                    1993          1994           1995           1996           1997
                                                                    ----          ----           ----           ----           ----
                                                                                   (in thousands, except per share data)
<S>                                                                <C>           <C>           <C>           <C>           <C>     
Consolidated Statement of Operations Data:
Revenues:
   License ...................................................           $_            $_      $  7,974      $ 21,357      $ 43,595
   Maintenance and service ...................................            _            39         2,033         8,688        19,456
                                                                   --------      --------      --------      --------      --------
      Total revenues .........................................            _            39        10,007        30,045        63,051

Cost of revenues:
   License ...................................................            _             _           142           456           665
   Maintenance and service ...................................            _            36         2,000         5,452        11,796
                                                                   --------      --------      --------      --------      --------
      Total cost of revenues .................................            _            36         2,142         5,908        12,461
                                                                   --------      --------      --------      --------      --------

Gross profit .................................................            _             3         7,865        24,137        50,590
                                                                   --------      --------      --------      --------      --------

Operating expenses:
   Sales and marketing .......................................        1,112         2,594         7,869        15,060        28,560
   Product development and engineering .......................        2,324         4,679         5,515         8,069        10,611
   General and administrative ................................          745           887         1,874         3,168         5,119
                                                                   --------      --------      --------      --------      --------
      Total operating expenses ...............................        4,181         8,160        15,258        26,297        44,290
                                                                   --------      --------      --------      --------      --------

Income (loss) from operations ................................       (4,181)       (8,157)       (7,393)       (2,160)        6,300
Other income, net ............................................           94            97           147           286         1,988
                                                                   --------      --------      --------      --------      --------

Income (loss) before income taxes ............................       (4,087)       (8,060)       (7,246)       (1,874)        8,288
Provision for income taxes ...................................            _             _          (104)         (114)       (1,039)
                                                                   --------      --------      --------      --------      --------

Net income (loss) ............................................     $ (4,087)     $ (8,060)     $ (7,350)     $ (1,988)     $  7,249
                                                                   --------      --------      --------      --------      --------

Pro forma net income (loss) per share (1) ....................                                 $  (0.45)     $  (0.11)     $   0.34
                                                                                               ========      ========      ========

Shares used in pro forma income (loss) per share (1) .........                                   16,248        17,517        21,110
</TABLE>

<TABLE>
<CAPTION>

                                                                                                March 31,
                                                                                                ---------
                                                                      1993           1994          1995           1996          1997
                                                                      ----           ----          ----           ----          ----
                                                                                              (in thousands)
<S>                                                                  <C>           <C>           <C>           <C>           <C>    
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term investments ............       $ 3,064       $ 5,937       $12,775       $41,317       $48,257
Working capital ..............................................         2,634         3,044        10,070        39,714        43,655
Total assets .................................................         3,864         7,131        18,142        57,291        73,749
Capital lease obligations, due after one year ................           361           583           834         1,714           849
Total stockholders' equity ...................................           810         1,821         7,449        40,044        48,674

<FN>
(1) See Note 1 to Notes to Consolidated Financial Statements
</FN>
</TABLE>
                                                                              25

<PAGE>


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

This Management's  Discussion and Analysis of Financial Condition and results of
Operations  includes a number of  forward-looking  statements  which reflect the
Company's current views with respect to future events and financial performance.
In this  report,  the  words  "anticipate,"  "believes,"  "expects,"  "intends,"
"future," and other similar  expressions  identify  forward looking  statements.
These forward-looking statements are subject to certain risks and uncertainties,
including those discussed below and in "Business Risks," that could cause actual
results to differ materially from historical results or those anticipated.

Overview

         The Company was founded in February 1991 to design,  develop and market
a distributed client/server  application development,  deployment and management
environment.  To date,  all of the  Company's  revenues  have been  derived from
licenses of the Company's primary product, Forte and related products as well as
related  maintenance,  training  and  consulting  revenues.  The  Company  began
shipping  Release 1.0 of Forte in August 1994 and Release 2.0 in November  1995.
The Company has announced  Release 3.0 which is currently in beta  testing.  The
Company  currently  expects that  revenues  from Forte and related  products and
services  will  continue  to  account  for  substantially  all of the  Company's
revenues for fiscal 1998. As a result,  factors adversely  affecting the pricing
of or demand for Forte and related  products and services  could have a material
adverse  effect on the  Company's  business,  operating  results  and  financial
condition.

         Although  the  Company's  revenues  have  increased in each of the last
eleven  quarters  and the Company had net income in each of the  quarters  ended
December 31, 1995 through  March 31, 1997,  the Company  expects to incur a loss
for the  quarter  ending  June 30, 1997 due  primarily  to an expected  seasonal
decline in revenues as compared  to the quarter  ending  March 31, 1997  coupled
with more rapid growth in sales and marketing  expenses.  The Company's  limited
operating  history makes the prediction of future operating  results  difficult.
Accordingly,  although the Company has recently experienced revenue growth, such
growth should not be considered  indicative of future revenue growth, if any, or
of future operating results. There can be no assurance that any of the Company's
business  strategies  will be  successful  or that the  Company  will be able to
maintain profitability on a quarterly or annual basis.

         The Company's total headcount was 119, 221 and 351 March 31, 1995, 1996
and 1997, respectively. The growth in headcount is attributable to the Company's
significant  expansion  in  all of  its  operations,  especially  in  sales  and
marketing.

         Forte   licenses   its   software   through  its  direct  sales  force,
distributors and value added resellers. Revenues from distributors and resellers
accounted for approximately 15%, 18% and 20% of the Company's total revenues for
fiscal  1995,  1996 and 1997,  respectively.  The  Company's  ability to achieve
significant  revenue  growth in the  future  will  depend  in large  part on its
success in  recruiting  and  training  sufficient  direct  sales  personnel  and
establishing  additional  relationships with distributors,  resellers and system
integrators.

Results of Operations

Revenues.  The Company's  total  revenues  consist of license fees for its Forte
application  environment and related products as well as associated  maintenance
and service revenues. The Company licenses software under non-cancelable license
agreements and provides services including maintenance, training and consulting.
License revenues are recognized when a non-cancelable license agreement has been
signed,  the product has been shipped,  the fees are fixed and  determinable and
collectibility  is probable.  Fees for services are charged  separately from the
license of the Company's software products. Maintenance revenues consist of fees
for ongoing support and product updates and are recognized ratably over the term
of the contract,  which is typically  twelve months.  Revenues from training are
recognized upon completion of the related  training class.  Consulting  revenues
are  recognized  as  the  services  are  performed.  See  Note  1  to  Notes  to
Consolidated  Financial Statements Allowances for credit risks and for estimated
future  returns are  provided for upon  shipment.  Returns to date have not been
material.  Actual  credit  losses  and  returns  may differ  from the  Company's
estimates and such differences could be material to the financial statements.


                                                                              26

<PAGE>

         The Company's  total  revenues  increased  from $10.0 in fiscal 1995 to
$30.0  million  in fiscal  1996 and by 110% to $63.1  million  in  fiscal  1997.
License  revenues  increased  168% to $21.4  million  in  fiscal  1996 from $8.0
million in fiscal 1995 and  increased  by 104% to $43.6  million in fiscal 1997.
These  increases in license fees are primarily as a result of an increase in the
number of licenses sold reflecting  increased market awareness and acceptance of
Forte  software and related  products,  expansion of the Company's  direct sales
organization   both  domestic  and   international   and  increased  sales  from
international distributors.

         Maintenance and service revenues  increased from $2.0 million in fiscal
1995 to $8.7 million in fiscal 1996,  and  increased by 124% to $19.5 million in
fiscal 1997.  These increases in maintenance and service revenues were primarily
a result of the growing  installed  base of Forte and related  products  and the
associated increase in demand for maintenance, training and consulting services.

         International  revenues include all revenues other than from the United
States.  International revenues from the Company's direct sales organizations in
Europe and  Australia  and export sales  through  distributors  and resellers in
Europe,  Asia and other areas of the world, as well as international  sales made
by the domestic  direct sales  organization,  accounted  for 17%, 26% and 36% of
total revenues in fiscal 1995, 1996 and 1997, respectively. Direct sales through
the  Company's  European and  Australian  subsidiaries  totaled  $796,000,  $2.4
million and $13.0  million for the years  ended March 31,  1995,  1996 and 1997,
respectively.  The table below sets forth the  Company's  export sales data from
the U.S. for the years ended March 31, 1995,  1996 and 1997. See Note 1 of Notes
to Consolidated Financial Statements.

                                         Years Ended March 31,
                                         ---------------------
                                1995             1996               1997
                                ----             ----               ----
Export Sales:
   Asia.................      $187,000        $1,031,000          $3,068,000
   Europe...............       351,000         2,593,000           2,650,000
   Canada...............       168,000           876,000           2,977,000
   Other................       184,000           812,000           1,216,000
                               -------           -------           ---------
Total                         $890,000        $5,312,000          $9,911,000


         The Company expects that international  license and related maintenance
and service  revenues will continue to account for a significant  portion of its
total  revenues in the future.  The Company  believes  that in order to increase
sales  opportunities  and  profitability  it  will be  required  to  expand  its
international  operations.  The Company has  committed  and  continues to commit
significant  management  time and financial  resources to developing  direct and
indirect  international  sales and support channels.  There can be no assurance,
however,  that the Company  will be able to  maintain or increase  international
market demand for Forte and related products.  To the extent that the Company is
unable to do so in a timely manner,  the Company's  international  sales will be
limited,  and the Company's business,  operating results and financial condition
would be materially adversely affected.

         The Company's  license  agreements  typically  require the payment of a
nonrefundable,  one-time license fee for a license of perpetual term.  Customers
make separate payments for annual maintenance and other services.  Customers can
terminate  the  license  at any time but do not have a right to a refund  of the
fees for  licenses and for services  that have been  performed.  The Company can
terminate the license  agreement only upon a material breach by the other party,
provided that the breach is not cured within a specified cure period.

 Cost of Revenues

 Cost of  License  Revenues.  Cost of license  revenues  consists  primarily  of
royalties paid to third-party  vendors,  product  packaging,  documentation  and
production  and  shipping  costs.  Cost of license  revenues  was  $142,000  and
$456,000  and  $665,000  in  fiscal  1995,  1996 and  1997,  respectively,  each
representing 2% of license revenues for the respective periods.

                                                                              27

<PAGE>

Cost of  Maintenance  and  Service  Revenues.  Cost of  maintenance  and service
revenues consists primarily of  personnel-related  and facilities costs incurred
in providing  customer  support,  training and consulting  services,  as well as
third-party costs incurred in providing training and consulting  services.  Cost
of  maintenance  and service  revenues was $2.0 million,  $5.5 million and $11.8
million in fiscal 1995, 1996 and 1997,  respectively,  representing 98%, 63% and
61% of  maintenance  and service  revenues in the respective  periods.  The high
percentage of cost of  maintenance  and service  revenues as a percentage of the
related revenue for fiscal 1995 resulted from the addition of training,  support
and consulting  personnel in anticipation of an increase in the demand for these
services.  The decrease in cost of maintenance  and service  revenues for fiscal
1996 and 1997 as a percentage of maintenance and service  revenues was primarily
due to improved economies of scale of the technical support center and increased
productivity  from a  significant  number of newly hired  training,  support and
consulting  personnel.  The Company does not expect its cost of maintenance  and
service  revenues  to  continue  to  decrease  materially  as  a  percentage  of
maintenance and service revenues.

 Operating Expenses

Sales and Marketing. Sales and marketing expenses consist primarily of salaries,
commissions  and bonuses earned by sales and marketing  personnel,  field office
expenses, travel and entertainment and promotional expenses. Sales and marketing
expenses  increased  from $7.9 million in fiscal 1995 to $15.1 million in fiscal
1996 and to $28.6 million in fiscal 1997. These increases  reflect the hiring of
additional  sales and marketing  personnel,  and their related costs, as well as
increased  costs  associated  with expanded  promotional  activities.  Sales and
marketing  expenses  represented  79%,  50% and 45% of total  revenues in fiscal
1995, 1996 and 1997, respectively.  The decrease in sales and marketing expenses
for fiscal 1996 and 1997 as a percentage  of total  revenue was primarily due to
revenue  growth.  The Company  expects that sales and  marketing  expenses  will
continue  to  increase  in  dollar  amount  as the  Company  continues  to  hire
additional sales and marketing personnel and increase promotional  activities in
fiscal 1998.  The company  expects to increase  hiring in the direct sales force
and as a result,  sales  expense as a  percentage  of revenue is  expected to be
greater in the first and second  quarter of fiscal year 1998  compared to fiscal
1997.

Product Development. The Company believes that a significant level of investment
for product development is required to remain  competitive.  Product development
expenses  increased  from $5.5  million in fiscal 1995 to $8.1 million in fiscal
1996 and to $10.6  million  in  fiscal  1997.  These  increases  were  primarily
attributable  to additional  hiring of product  development  personnel.  Product
development  expenses  represented  55%, 27% and 17% of total revenues in fiscal
1995,  1996 and 1997,  respectively.  The decrease in research  and  development
expenses as a percentage of total  revenue was primarily due to revenue  growth.
The Company anticipates that it will continue to devote substantial resources to
product  development  and that product  development  expenses  will  increase in
dollar  amount in fiscal  1998.  Because all costs  incurred in the research and
development of software  products and enhancements to existing software products
have  been  expensed  as  incurred,   cost  of  license  revenues   includes  no
amortization of capitalized  software  development costs. See Note 1 of Notes to
Consolidated Financial Statements.

General and Administrative.  General and administrative  expenses increased from
$1.9  million in fiscal 1995 to $3.2  million in fiscal 1996 and to $5.1 million
in fiscal 1997.  These  increases were  primarily due to increased  staffing and
associated  expenses  necessary  to manage and support the  Company's  increased
scale of operations.  General and administrative  expenses  represented 19%, 11%
and 8% of total  revenues  in  fiscal  1995,  1996 and 1997,  respectively.  The
decrease in general and administrative expenses as a percentage of total revenue
was primarily due to revenue growth and improved economies of scale. The Company
believes  that its general and  administrative  expenses will increase in dollar
amount  in  fiscal  1998  as  a  result  of  an  expansion   of  the   Company's
administrative  staff and  information  systems  infrastructure  to support  the
Company's growth.

Other Income,  Net. Other income, net, represents interest earned by the Company
on its cash and cash equivalents and short-term  investments  offset by interest
expense on capitalized  leases.  See Note 6 of Notes to  Consolidated  Financial
Statements.

Provision for Income Taxes.  The effective tax rate for the year ended March 31,
1997 was 13%.  The  provision  for  income  taxes was due to state  and  federal
alternative  minimum taxes and foreign withholding taxes. The effective tax rate
differs from the federal  statutory rate primarily due to the utilization of net
operating loss carryovers and tax credits.


                                                                              28
<PAGE>

         At March 31, 1997, the Company had net operating loss carryforwards for
federal  income tax purposes of  approximately  $13,266,000  which expire in tax
years  2007  through  2010,  a  federal  research  and  development  tax  credit
carryforward of approximately $1,719,000 which expires in tax years 2005 through
2011 and a foreign  tax credit  carryforward  of  approximately  $757,000  which
expires in tax years 1999 through 2001.


Liquidity and Capital Resources

         The Company has funded its operations and  investments in furniture and
equipment  through an initial public  offering of common stock on March 11, 1996
with net  proceeds  of $34.3  million,  the  private  sale of equity  securities
totaling  approximately  $28.3  million,   furniture  and  equipment  leases  of
approximately  $4.1 million and cash advances from development  partners.  Since
inception,  the Company has received $6.9 million from development  partners and
as of March 31, 1997,  the Company had repaid,  through a variety of royalty and
other  arrangements,  an aggregate of $5.7  million of such  advances.  Net cash
generated by operating  activities was $11.5 million in fiscal 1997 and net cash
used in  operating  activities  was $5.1 million and $3.4 million in fiscal 1995
and 1996,  respectively.  Net cash  generated in fiscal 1997 resulted  primarily
from  net  income,  depreciation  and  amortization,  increases  in  short  term
liabilities,  somewhat offset by an increase in accounts receivable.  For fiscal
1995 and 1996, net cash used in operating activities resulted primarily from net
losses and  increases  in  accounts  receivable  associated  with  increases  in
revenues,  partially offset by increases in deferred revenues,  accounts payable
and accrued liabilities.  The Company's accounts receivable balance decreased to
91% of total  revenues  for the  quarter  ended March 31, 1997 from 99% of total
revenues for the quarter ended March 31, 1996. This decrease resulted  primarily
from  increased  collection  efforts and the timing of payments  received.  This
percentage  could vary  significantly on a quarterly or yearly basis and may not
be indicative of future operating results.

         In  1995,  1996 and  1997,  the  Company's  investing  activities  have
consisted  primarily  of purchases of furniture  and  equipment  and  short-term
investments. Capital expenditures, including those under capital leases, totaled
$1.3  million,  $3.4  million and $5.0  million in fiscal  1995,  1996 and 1997,
respectively,  to acquire  furniture and equipment and computer hardware for the
Company's   growing   employee  base.  The  Company  expects  that  its  capital
expenditures  will increase as the Company's  employee base grows.  At March 31,
1997 the Company did not have any material commitments for capital expenditures.

         At March 31,  1997,  the  Company  had $48.3  million  in cash and cash
equivalents and short term investments and $43.7 million in working capital. The
Company  believes  that its  existing  cash,  cash  equivalents  and  short-term
investments  will be  adequate  to meet its cash  needs for at least the next 12
months.  Thereafter,  the Company may  require  additional  funds to support its
working  capital  requirements  or for other purposes and may seek to raise such
additional  funds  through  public or private  equity  financings  or from other
sources.  There can be no assurance that additional  financing will be available
at all or  that,  if  available,  such  financing  will be  obtainable  on terms
favorable to the Company and would not be dilutive.

                                                                              29
<PAGE>

<TABLE>

Quarterly Results

         The following tables set forth certain unaudited consolidated statement
of operations  data for the eight quarters ended March 31, 1997, as well as such
data  expressed as a percentage of the Company's  total revenues for the periods
indicated.  This data has been derived  from  unaudited  condensed  consolidated
financial statements that, in the opinion of management, include all adjustments
(consisting  only  of  normal  recurring   adjustments)  necessary  for  a  fair
presentation  of such  information.  Such statement of operations data should be
read in conjunction with the Company's audited consolidated financial statements
and notes thereto.  See the section entitled "Business Risks" in Item 1 for risk
factors.
<CAPTION>

                                                                                Quarter Ended
                                                                                -------------
                                                                    (in thousands except per share data)
                                         June 30,   Sept. 30,    Dec. 31,   March 31,   June 30,   Sept. 30,    Dec. 31,  March 31,
                                           1995        1995        1995        1996       1996        1996        1996       1997
                                           ----        ----        ----        ----       ----        ----        ----       ----
<S>                                        <C>         <C>         <C>        <C>         <C>         <C>        <C>        <C>    
Consolidated Statement of 
Operations Data:
Revenues:
   License........                         $3,071      $3,623      $6,196     $8,467      $8,023      $9,833     $12,205    $13,534
   Maintenance and service                  1,309       2,174       2,530      2,675       3,657       4,381       5,368      6,050
                                            -----       -----       -----      -----       -----       -----       -----      -----

      Total revenues                        4,380       5,797       8,726     11,142      11,680      14,214      17,573     19,584
                                            -----       -----       -----     ------      ------      ------      ------     ------

Cost of revenues:
   License........                             95         110         127        124         138         128         228        171
   Maintenance and service                    946       1,236       1,446      1,824       2,378       2,542       3,211      3,665
                                              ---       -----       -----      -----       -----       -----       -----      -----

      Total cost of revenues                1,041       1,346       1,573      1,948       2,516       2,670       3,439      3,836
                                            -----       -----       -----      -----       -----       -----       -----      -----

Gross profit                                3,339       4,451       7,153      9,194       9,164      11,544      14,134     15,748
                                            -----       -----       -----      -----       -----      ------      ------     ------

Operating expenses:
   Sales and marketing                      2,980       3,117       3,820      5,143       5,765       6,601       7,697      8,497
   Product development and engineering      1,688       1,980       2,155      2,246       2,284       2,565       2,784      2,978
   General and administrative                 631         823         831        883       1,279       1,248       1,250      1,342
                                              ---         ---         ---        ---       -----       -----       -----      -----

 Total operating expenses                   5,299       5,920       6,806      8,272       9,328      10,414      11,731     12,817
                                            -----       -----       -----      -----       -----      ------      ------     ------

Income (loss) from  operations            (1,960)     (1,469)         347        922       (164)       1,130       2,403      2,931
Other income (expense), net                   104          60          10        112         489         520         488        491
                                              ---          --          --        ---         ---         ---         ---        ---

Income (loss) before income taxes         (1,856)     (1,409)         357      1,034         325       1,650       2,891      3,422
Provision for income taxes                   (17)         (6)        (12)       (79)        (32)       (205)       (342)      (460)
                                             ----         ---        ----       ----        ----       -----       -----      -----

Net income (loss).......                  $(1,873)    $(1,415)        $345       $955        $293      $1,445      $2,549     $2,962
                                         ========    ========        ====       ====        ====      ======      ======     ======

                                                                    $0.02      $0.05       $0.01       $0.07       $0.12      $0.14
                                                                    =====      =====       =====       =====       =====      =====
Net income per share

                                                                   18,920     19,225      21,136      21,078      21,156     21,068
                                                                   ======     ======      ======      ======      ======     ======
</TABLE>
<TABLE>
Shares used in per share calculation
<CAPTION>

                                                                      As a Percentage of Total Revenues
<S>                                     <C>         <C>            <C>        <C>         <C>        <C>         <C>         <C>  
Revenues:
   License........                         70.1 %      62.5 %      71.0%      76.0%       68.7%       69.2%       69.4%       69.1%
   Maintenance and service                 29.9        37.5        29.0       24.0        31.3        30.8        30.6        30.9
                                           ----        ----        ----       ----        ----        ----        ----        ----

      Total revenues                      100.0       100.0       100.0      100.0       100.0       100.0       100.0       100.0
                                          -----       -----       -----      -----       -----       -----       -----       -----

Cost of revenues:
   License........                          2.2         1.9         1.5        1.1         1.2         0.9         1.3         0.9
   Maintenance and service                 21.6        21.3        16.5       16.4        20.4        17.9        18.3        18.7
                                           ----        ----        ----       ----        ----        ----        ----        ----

      Total cost of revenues               23.8        23.2        18.0       17.5        21.5        18.8        19.6        19.6
                                           ----        ----        ----       ----        ----        ----        ----        ----

Gross profit......                         76.2        76.8        82.0       82.5        78.5        81.2        80.4        80.4
                                           ----        ----        ----       ----        ----        ----        ----        ----

Operating expenses:
   Sales and marketing                     68.0        53.8        43.8       46.2        49.4        46.5        43.8        43.4
   Product development and engineering     38.5        34.1        24.7       20.2        19.6        18.0        15.8        15.2
   General and administrative              14.4        14.2         9.5        7.9        10.9         8.8         7.1         6.8
                                           ----        ----         ---        ---        ----         ---         ---         ---

      Total operating expenses            120.9       102.1        78.0       74.3        79.9        73.3        66.7        65.4
                                          -----       -----        ----       ----        ----        ----        ----        ----

Income (loss) from operations            (44.7)      (25.3)         4.0        8.3       (1.4)         7.9        13.7        15.0
Other income (expense), net                 2.4         1.0         0.1        1.0         4.2         3.7         2.8         2.5
                                            ---         ---         ---        ---         ---         ---         ---         ---

Income (loss) before income taxes        (42.4)      (24.3)         4.1        9.3         2.8        11.6        16.5        17.5
Provision for income taxes                (0.4)       (0.1)       (0.1)      (0.7)       (0.3)       (1.4)       (1.9)       (2.4)
                                          -----       -----       -----      -----       -----       -----       -----       -----

Net income (loss)..............          (42.8)%     (24.4)%        4.0%       8.6%        2.5%       10.2%       14.6%       15.1%
                                        =======     =======        ====       ====        ====       =====       =====       =====
</TABLE>

                                                                         

<PAGE>

         The Company's  total revenues have increased in each quarter  following
commercial  release of its software in August 1994. The increase in each quarter
is due to increased market  awareness and acceptance of the Company's  software,
expansion of the Company's direct and indirect sales organizations and increased
maintenance  and service  revenues  reflecting the growth in the installed base.
Operating  expenses have generally  increased in dollar amount over the quarters
shown as the Company has  increased  staffing  in sales and  marketing,  product
development and general and administrative functions.

         Revenues in the quarter  ended  March 31, 1997  increased  76% to $19.6
million  from $11.1  million in the  quarter  ended March 31,  1996,  reflecting
increased sales to new and existing customers primarily as a result of increased
market  awareness and  acceptance of the  Company's  products,  expansion of the
Company's direct salesforce and increased sales through  distributors.  Revenues
for the quarter  ended March 31, 1997  included a follow-on  sale to an existing
customer for $5.5 million. License revenues in the fourth quarter of fiscal 1997
increased  to $13.5  million (69% of total  revenues)  from $8.5 million (76% of
total  revenues) in the fourth quarter of fiscal 1996.  Maintenance  and service
revenues  increased  to $6.1  million in the fourth  quarter of fiscal 1997 from
$2.7  million  in the  fourth  quarter of fiscal  1996.  International  revenues
increased to $6.7 million in the fourth quarter of fiscal 1997 from $3.3 million
in the fourth  quarter of fiscal 1996  primarily as a result of expanded  direct
and indirect international operations.

         Cost of revenues  for the fourth  quarter of fiscal 1997  increased  to
$3.8 million (20% of total  revenues) from $1.9 million (17% of total  revenues)
in the fourth  quarter of fiscal  1996,  primarily as a result of an increase in
cost of services attributable to the hiring of additional  consulting,  customer
service and  training  personnel  during  fiscal 1997 as well as the addition of
facilities for training and consulting operations.

         Sales and marketing  expenses  increased to $8.5 million for the fourth
quarter of fiscal 1997 from $5.1  million in the fourth  quarter of fiscal 1996.
The increase was due primarily to costs  associated  with expanded  domestic and
international sales operations.  Product development and engineering and general
and  administrative  expenses  increased  in  dollar  amounts  primarily  due to
increased hiring to support the Company's growth.

         As a result of the  foregoing,  income  before taxes  increased to $3.4
million for the fourth  quarter of fiscal  1997 from $1.0  million in the fourth
quarter of fiscal  1996,  and net income  increased  to $3.0  million  from $1.0
million.

                                                                              31


<PAGE>


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Item  14(a)  for an  index to the  financial  statements  and  supplementary
financial information which are attached hereto.

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

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information  regarding  directors is  incorporated  herein by reference from the
section entitled  "Election of Directors" of the Company's proxy statement to be
filed pursuant to Regulation 14A for its Annual Stockholders  Meeting to be held
August 12, 1997.

ITEM 11.  EXECUTIVE COMPENSATION

Information  regarding  directors is  incorporated  herein by reference from the
section entitled "Executive Compensation" of the Company's proxy statement to be
filed pursuant to Regulation 14A for its Annual Stockholders  Meeting to be held
August 12, 1997.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information  regarding  directors is  incorporated  herein by reference from the
section entitled "Stock Ownership of Certain  Beneficial  Owners and Management"
of the Company's  proxy statement to be filed pursuant to Regulation 14A for its
Annual Stockholders Meeting to be held August 12, 1997.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information  regarding  directors is  incorporated  herein by reference from the
section entitled "Stock Ownership of Certain  Beneficial Owners and Management,"
"Executive  Compensation,"  and "Transactions  with Management" of the Company's
proxy  statement  to  be  filed  pursuant  to  Regulation  14A  for  its  Annual
Stockholders Meeting to be held August 12, 1997.

                                                                              32
<PAGE>



PART IV

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

(a)      The following documents are filed as part of this Annual Report on Form 10-K:

<CAPTION>
<S>                                                                                               <C>
     1.  Financial Statements                                                                     Page Number

         Report of Ernst & Young, LLP, Independent Auditors Consolidated Balance
         Sheets as of March 31, 1997 and 1996

         Consolidated Income Statements for each of the
         three years in the period ended March 31, 1997

         Consolidated Statements of Stockholders' Equity for
         each of the three years in the period ended
         March 31, 1997

         Consolidated  Statements  of Cash Flows for each of the three  years in
         the period ended March 31, 1997

         Notes to Consolidated Financial Statements


         2.  Financial Statement Schedule:

         Schedule II - Valuation and Qualifying Accounts

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


         3. Exhibits - See Item 14(c) below

(b)      Reports on Form 8-K

         No reports on Form 8-K have been filed  during the quarter  ended March
         31, 1997.

</TABLE>
                                                                              33
<PAGE>

<TABLE>

(c)  Exhibits
<CAPTION>

   Exhibit No.                                                        Description
   -----------                                                        -----------
<S>                <C>
 2.1               Agreement and Plan of Merger dated January 22, 1996, for the reincorporation merger of Forte Software, Inc., a
                   California corporation, into Forte Software, Inc., a Delaware corporation (the "Registrant").(1)
 3.1               Certificate of Incorporation of Registrant, as amended to date.(1)
 3.2               Bylaws of Registrant.(1)
 4.1               Specimen Common Stock certificate.(1)
 4.3               Amended and Restated Investors' Rights Agreement among Registrant and the Founders and Investors specified
                   therein dated as of October 6, 1994. (1)
 4.3               Rights Agreement dated May 16, 1997.
 4.4               1997 Stock Plan.
10.1               Form of Indemnification Agreement entered into by and between Registrant and its officers and directors.(1)
10.2               Registrant's 1991 Equity Incentive Plan.(1)
10.3               Registrant's 1996 Stock Option Plan.(1)
10.4               Registrant's Employee Stock Purchase Plan.(1)
10.5               Loan and Security Agreement by and between Registrant and Silicon Valley Bank dated as of September 20, 1994, as
                   modified August 1, 1994. (1)
10.6               Real property lease by and between Registrant and State of California Public Employee's Retirement System dated
                   December 1, 1994. (1)
10.7               Master Lease Agreement and Warrant Agreement by and between Registrant and Comdisco,
                   Inc. dated as of December 28, 1992, as modified by subsequent Equipment Schedules and
                   Warrant Agreements dated May 9, 1994 and February 15, 1995, and Equipment Schedule
                   dated January 17, 1996. (1)
10.8               Software Agreement between Digital Equipment Corporation and Registrant dated July 21,
                   1992, as amended. (1) (2)
10.9               Source Code License and Master Distributor Agreement between Registrant and Mitsubishi
                   Corporation dated September 26, 1994. (1) (2)
10.10              Strategic Software Development and Distribution Agreement between Sequent Computer
                   Systems, Inc. and Registrant dated August 6, 1992, as amended. (1) (2)
10.11              Amendment to Real property lease by and between Registrant and State of California Public Employee's Retirement
                   System dated December 1, 1994 and amended on January 16, 1997.
10.12              Real property sublease by and between Registrant and ICF Kaiser Engineers, Inc. dated January 16, 1997.
11.1               Computation of net income (loss) per share.
16.1               Letter regarding change in certifying accountant (3)
21.1               Subsidiaries of Registrant. (3)
23.1               Consent of Ernst & Young, LLP, Independent Auditors. (3)
23.2               Consent of Counsel. Reference is made to Exhibit 5.1 (1)
24.1               Power of Attorney.
27.1               Financial data schedule
<FN>
(1)   Incorporated by reference to the exhibit of the same number filed with Registrant's Form S-1 Registration  Statement (File No.
      333-598).

(2)   Confidential  treatment has been requested with respect to certain portions of this exhibit.  Omitted portions have been filed
      separately with the Securities and Exchange Commission.

(3)   Previously  filed in the  Company's  1996  Report on Form 10-K and has  either no change  from the prior  year or is no longer
      required.
</FN>
</TABLE>
                                                                              34

<PAGE>




                                   SIGNATURES

         Pursuant to the requirements of the Securities Act of 1934, as amended,
the  Registrant  has duly  caused  this  Report on Form 10-K to be signed on its
behalf by the undersigned,  thereunto duly  authorized,  in the City of Oakland,
State of California, on this 26th day of June, 1997.

                              FORTE SOFTWARE, INC.

                              By:        /s/ RODGER E. WEISMANN



                              Rodger E. Weismann
                              Senior Vice President, Finance and Administration,
                              Chief Financial Officer and Secretary

         KNOW BY ALL  PERSONS  BY THESE  PRESENTS  that  each  individual  whose
signature  appears below  constitutes and appoints Martin J. Sprinzen and Rodger
E. Weismann, and each of them, his true and lawful  attorneys-in-fact and agents
with full power of  substitution,  for him and in his name,  place and stead, in
any and all  capacities,  to sign any and all  amendments to this Report on Form
10-K,  and to file  the  same,  with  all  exhibits  thereto  and all  documents
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing  requisite  and necessary to be done
in and about the  premises,  as fully to all intents and purposes as he might or
could  do  in  person,   hereby   ratifying   and   confirming   all  that  said
attorneys-in-fact  and  agents  or any of them,  or his or their  substitute  or
substitutes, may lawfully do or cause to be done by virtue hereof.

<TABLE>
         Pursuant to the requirements of the Securities Act of 1934, as amended,
this report has been signed by the following  persons in the  capacities  and on
the date indicated.
<CAPTION>

                     Signature                                              Title                                    Date
                     ---------                                              -----                                    ----
<S>                                                  <C>                                                        <C>
               /s/ MARTIN J. SPRINZEN                President, Chief Executive Officer and Director            June 26, 1997
           ---------------------------------         (Principal Executive Officer)
                 Martin J. Sprinzen

               /s/ RODGER E. WEISMANN                Senior Vice President, Finance and Administration,         June 26, 1997
           ---------------------------------         Chief Financial Officer and Secretary (Principal
                 Rodger E. Weismann                  Financial and Accounting Officer)
                 

              /s/ CHRISTOS M. COTSAKOS               Director                                                   June 26, 1997
           --------------------------------- 
                Christos M. Cotsakos

                  /s/ PROMOD HAQUE                   Director                                                   June 26, 1997
           --------------------------------- 
                    Promod Haque

               /s/ THOMAS A. JERMOLUK                Director                                                   June 26, 1997
           --------------------------------- 
                 Thomas A. Jermoluk

                /s/ DAVID N. STROHM                  Director                                                   June 26, 1997
           --------------------------------- 
                  David N. Strohm

            /s/ WILLIAM H. YOUNGER, JR.              Director                                                   June 26, 1997
           --------------------------------- 
              William H. Younger, Jr.
</TABLE>

                                                                              35
<PAGE>




                Report of Ernst & Young LLP, Independent Auditors

The Board of Directors and Stockholders
Forte Software, Inc.

We have audited the accompanying  consolidated balance sheets of Forte Software,
Inc. as of March 31, 1996 and 1997, and the related  consolidated  statements of
operations,  stockholders' equity, and cash flows for each of the three years in
the period ended March 31, 1997. Our audits also include the financial  schedule
listed in the Index at Item 14(a).  These financial  statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and 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 consolidated  financial position of Forte
Software,  Inc. at March 31, 1996 and 1997, and the consolidated  results of its
operations  and its cash flows for each of the three  years in the period  ended
March 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 financial  statements taken as a whole,  present fairly
in all material respects the information set forth therein.




Walnut Creek, California
April 24, 1997


<PAGE>
<TABLE>

                              Forte Software, Inc.

                           Consolidated Balance Sheets
               (in thousands, except share and per share amounts)
<CAPTION>
                                                                                    March 31,
                                                                              ----------------------
                                                                                 1996        1997
                                                                              ----------   ---------
<S>                                                                             <C>         <C>     
Assets
Current assets:
    Cash and cash equivalents                                                   $ 35,081    $ 35,103
    Short-term investments                                                         6,236      13,154
    Accounts receivable, net of allowances of $941 ($531 in 1996)                 11,059      17,750
    Prepaid expenses and other current assets                                        839       1,003
                                                                                --------    --------
Total current assets                                                              53,215      67,010

Equipment and leasehold improvements, net                                          3,903       6,489
Other assets                                                                         173         250
                                                                                --------    --------
Total assets                                                                    $ 57,291    $ 73,749
                                                                                ========    ========

Liabilities and stockholders' equity 
Current liabilities:
    Accounts payable                                                            $  1,066    $  3,003
    Accrued compensation and related expenses                                      2,881       6,191
    Other accrued liabilities                                                      2,529       3,999
    Deferred revenue                                                               5,941       9,247
    Current portion of capital lease obligations                                   1,084         915
                                                                                --------    --------
Total current liabilities                                                         13,501      23,355

Capital lease obligations, due after one year                                      1,714         849
Deferred revenue                                                                   2,032         871
Commitments

Stockholders' equity:
    Convertible preferred stock, $.01 par value; 5,000,000 shares authorized,
      no shares issued and outstanding                                              --          --
    Common Stock, $.01 par value; 45,000,000 shares authorized; 18,798,100
      shares issued and outstanding (18,283,905 in 1996)                             183         188
    Additional paid-in capital                                                    62,618      64,169
    Accumulated deficit                                                          (22,735)    (15,486)
    Foreign currency translation adjustments                                         (22)       (197)
                                                                                --------    --------
Total stockholders' equity                                                        40,044      48,674
                                                                                --------    --------
Total liabilities and stockholders' equity                                      $ 57,291    $ 73,749
                                                                                ========    ========
<FN>

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

<PAGE>
<TABLE>

                              Forte Software, Inc.

                      Consolidated Statements of Operations
                    (In thousands, except per share amounts)

<CAPTION>
                                                             Years ended March 31,
                                                       --------------------------------
                                                         1995        1996        1997
                                                       --------    --------    --------
<S>                                                    <C>         <C>         <C>     
Revenues:
    License fees                                       $  7,974    $ 21,357    $ 43,595
    Maintenance and services                              2,033       8,688      19,456
                                                       --------    --------    --------
Total revenues                                           10,007      30,045      63,051

Operating expenses:
    Cost of license fees                                    142         456         665
    Cost of maintenance and services                      2,000       5,452      11,796
    Sales and marketing                                   7,869      15,060      28,560
    Product development and engineering                   5,515       8,069      10,611
    General and administrative                            1,874       3,168       5,119
                                                       --------    --------    --------
Total operating expenses                                 17,400      32,205      56,751
                                                       --------    --------    --------
Operating income (loss)                                  (7,393)     (2,160)      6,300

Interest income                                             312         568       2,232
Interest expense and other, net                            (165)       (282)       (244)
                                                       --------    --------    --------
Income (loss) before income taxes                        (7,246)     (1,874)      8,288
Provision for income taxes                                 (104)       (114)     (1,039)
                                                       --------    --------    --------
Net income (loss)                                      $ (7,350)   $ (1,988)   $  7,249
                                                       ========    ========    ========

Pro forma net income (loss) per share                  $  (0.45)   $  (0.11)   $   0.34
                                                       ========    ========    ========

Shares used in computing pro forma net income (loss)
    per share                                            16,248      17,517      21,110
                                                       ========    ========    ========
<FN>

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

<PAGE>
<TABLE>
                              Forte Software, Inc.

                 Consolidated Statements of Stockholders' Equity
                                 (In thousands)

<CAPTION>
                                                                                                   
                                               Convertible                             Additional  
                                             Preferred Stock         Common Stock        Paid-in  
                                            Shares     Amount       Shares    Amount     Capital   
                                           --------    ------       ------    ------     -------   
<S>                                          <C>       <C>            <C>     <C>        <C>       
Balance at March 31, 1994                    10,051    $    100       3,615   $     36   $ 15,133  
    Issuance of common stock                   --          --            69          1         27  
    Issuance of preferred stock Series
       D, net of issuance costs               1,979          20        --         --       12,855  
    Forgiveness of stockholders' notes
       receivable                              --          --          --         --         --    
    Foreign currency translation
       adjustment                              --          --          --         --         --    
    Net loss                                   --          --          --         --         --    
                                           --------    --------    --------   --------   --------  
Balance at March 31, 1995                    12,030         120       3,684         37     28,015  
    Issuance of common stock                   --          --           747          8        334  
    Public offering of common stock, net
       of expenses of $3,985                   --          --         1,823         18     34,269  
    Conversion of preferred stock           (12,030)       (120)     12,030        120       --    
    Foreign currency translation
       adjustment                              --          --          --         --         --    
    Net loss                                   --          --          --         --         --    
                                           --------    --------    --------   --------   --------  
Balance at March 31, 1996                      --          --        18,284        183     62,618  
    Issuance of common stock                   --          --           514          5      1,551  
    Foreign currency translation
       adjustment                              --          --          --         --         --    
    Net income                                 --          --          --         --         --    
                                           --------    --------    --------   --------   --------  
Balance at March 31, 1997                      --      $   --        18,798   $    188   $ 64,169  
                                           ========    ========    ========   ========   ========  
</TABLE>
<TABLE>
<CAPTION>

                                                         Notes      Foreign
                                                       Receivable   Currency
                                           Accumulated    from     Translation
                                             Deficit   Stockholders Adjustment   Total
                                             -------   ------------ ----------   ------
<S>                                          <C>         <C>         <C>         <C>     
Balance at March 31, 1994                    $(13,397)   $    (51)   $   --      $  1,821
    Issuance of common stock                     --          --          --            28
    Issuance of preferred stock Series
       D, net of issuance costs                  --          --          --        12,875
    Forgiveness of stockholders' notes
       receivable                                --            51        --            51
    Foreign currency translation
       adjustment                                --          --            24          24
    Net loss                                   (7,350)       --          --        (7,350)
                                             --------    --------    --------    --------
Balance at March 31, 1995                     (20,747)       --            24       7,449
    Issuance of common stock                     --          --          --           342
    Public offering of common stock, net
       of expenses of $3,985                     --          --          --        34,287
    Conversion of preferred stock                --          --          --          --
    Foreign currency translation
       adjustment                                --          --           (46)        (46)
    Net loss                                   (1,988)       --          --        (1,988)
                                             --------    --------    --------    --------
Balance at March 31, 1996                     (22,735)       --           (22)     40,044
    Issuance of common stock                     --          --          --         1,556
    Foreign currency translation
       adjustment                                --          --          (175)       (175)
    Net income                                  7,249        --          --         7,249
                                             --------    --------    --------    --------
Balance at March 31, 1997                    $(15,486)   $   --      $   (197)   $ 48,674
                                             ========    ========    ========    ========

<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
<TABLE>
                              Forte Software, Inc.

                      Consolidated Statements of Cash Flows
                                 (In thousands)

<CAPTION>
                                                              Years ended March 31,
                                                         --------------------------------
                                                           1995        1996       1997
                                                         --------    --------    --------
<S>                                                      <C>         <C>         <C>     
Operating activities
Net income (loss)                                        $ (7,350)   $ (1,988)   $  7,249
Adjustments to reconcile net income (loss) to net cash
   used in operating activities:
       Depreciation and amortization                          457       1,365       2,476
       Forgiveness of interest and principal on notes
          receivable from stockholders                         51        --          --
       Changes in operating assets and liabilities:
          Accounts receivable                              (2,937)     (8,099)     (6,777)
          Prepaid expenses and other assets                  (368)       (498)       (241)
          Accounts payable                                    276         701       1,851
          Accrued compensation and related expenses         1,446       1,208       3,310
          Deferred revenue                                  3,055       2,051       2,145
          Other accrued liabilities                           266       1,897       1,470
                                                         --------    --------    --------
Net cash provided by (used in) operating activities        (5,104)     (3,363)     11,483

Investing activities
Purchases of equipment and leasehold improvements            (430)     (1,220)     (4,972)
Purchase of short-term investments                         (3,920)     (6,236)    (16,539)
Maturities of short-term investments                        5,998       2,915       9,618
                                                         --------    --------    --------
Net cash (used in) provided by investing activities         1,648      (4,541)    (11,893)

Financing activities
Proceeds from issuance of preferred stock                  12,875        --          --
Payment on notes payable                                     (171)       (729)       --
Reduction of capital lease obligations                       (360)       (775)     (1,124)
Proceeds from issuance of common stock                         28      34,629       1,556
                                                         --------    --------    --------
Net cash provided by financing activities                  12,372      33,125         432
                                                         --------    --------    --------
Increase in cash and cash equivalents                       8,916      25,221          22
Cash and cash equivalents at beginning of period              944       9,860      35,081
                                                         --------    --------    --------
Cash and cash equivalents at end of period               $  9,860    $ 35,081    $ 35,103
                                                         ========    ========    ========

Supplemental disclosures:
    Interest paid                                        $    177    $    287    $    244
                                                         ========    ========    ========
    Income taxes paid                                    $    100    $    118    $    372
                                                         ========    ========    ========
Supplemental disclosures of noncash investing 
    and financing activities:
      Capital lease obligations incurred                 $    871    $  2,201    $     90
                                                         ========    ========    ========
<FN>

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

                              Forte Software, Inc.

                   Notes to Consolidated Financial Statements


1. Summary of Significant Accounting Policies

The Company

Forte Software, Inc. designs,  develops,  markets and supports a set of products
for developing,  deploying and managing  production  applications in distributed
environments,  including  client/server  and the Internet.  Forte's products and
services  are  marketed  and sold  worldwide  through  a  combination  of direct
operations, subsidiaries, geographical distributors, and value added resellers.

Basis of Presentation

The accompanying  financial  statements  include the accounts of the Company and
its wholly owned foreign  subsidiaries.  The Company  translates the accounts of
its foreign  subsidiaries  using the local  foreign  currency as the  functional
currency.  The assets and liabilities of the foreign subsidiaries are translated
into U.S.  dollars using exchange rates at the balance sheet date,  revenues and
expenses are translated using the weighted average exchange rate for the period,
and gains and losses from this  translation  process are  credited or charged to
stockholders'  equity.  Foreign currency  transaction  gains and losses have not
been material. All significant  intercompany accounts and transactions have been
eliminated.

Use of Estimates

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect  the  reported  amounts  of  assets  and  liabilities  at the date of the
financial  statements and the reported  amounts of revenues and expenses  during
the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents and Short-Term Investments

Cash equivalents are highly liquid investments with insignificant  interest rate
risk and  maturities  of three  months or less at the date of  purchase  and are
stated at amounts which  approximate fair value,  based on quoted market prices.
Cash equivalents consist principally of investments in taxable, short-term money
market instruments and commercial paper.

Short-term investments consist principally of short-term U.S. Treasury bills and
corporate securities and are stated at amounts which approximate fair value.

<PAGE>
                              Forte Software, Inc.

             Notes to Consolidated Financial Statements (continued)


1. Summary of Significant Accounting Policies (continued)

Cash and Cash Equivalents and Short-Term Investments (continued)

The Company  accounts for its cash  equivalents  and  short-term  investments in
accordance with Statement of Financial Accounting Standards No. 115, "Accounting
for Certain  Investments in Debt and Equity Securities."  Management  determines
the  appropriate  classification  of debt securities at the time of purchase and
reevaluates  such  designation  as of each balance sheet date. At March 31, 1996
and  1997,  the  Company  has   classified   all  of  its  debt   securities  as
available-for-sale, the components of which are as follows (in thousands):

                                                  Year ended March 31,
                                                 1996              1997
                                               --------------------------

Commercial paper                               $ 20,861          $ 25,432
Corporate securities                             14,244            13,154
U.S. Government securities                        1,325                 -
                                               --------          --------
Total                                          $ 36,430          $ 38,586
                                               ========          ========

Unrealized  gains and losses at March 31, 1996 and 1997 and  realized  gains and
losses for the years then ended were not material.  The cost of securities  sold
is based on the specific identification method.

At March 31, 1996 and 1997,  $30,194,000 and $25,432,000 of debt securities were
included in cash  equivalents,  and $6,236,000 and $13,154,000  were included in
short-term investments, respectively.

Concentrations of Credit Risk and Credit Evaluations

Financial instruments which potentially subject the Company to concentrations of
credit  risk  consist  principally  of  temporary  cash  investments   including
short-term  obligations  of the  U.S.  Government  and its  agencies,  corporate
securities,  money market funds and  commercial  paper.  The Company  places its
temporary cash investments primarily with two financial institutions.

The Company  licenses  its products  primarily  to  companies in North  America,
Europe and Japan.  The Company  performs  ongoing  credit  evaluations  of these
customers and generally does not require collateral. Reserves are maintained for
potential credit losses.

<PAGE>
                              Forte Software, Inc.

             Notes to Consolidated Financial Statements (continued)


1. Summary of Significant Accounting Policies (continued)

Major Customer

No customer  accounted  for more than 10% of total  revenues for the years ended
March 31, 1996 and 1995.  One customer  accounted for 12% of total  revenues for
the year ended March 31, 1997.

Revenue Recognition

The  Company  licenses  software  under  noncancelable  license  agreements  and
provides  services,  including  maintenance,  training and  consulting.  License
revenues are recognized when a noncancelable  license agreement has been signed,
the  product  has  been  shipped,  the  fees  are  fixed  and  determinable  and
collectibility  is probable.  Fees for services are charged  separately from the
license of the Company's software products. Maintenance revenues consist of fees
for ongoing support and product updates and are recognized ratably over the term
of the  contract,  which is  typically  12 months.  Revenues  from  training are
recognized upon completion of the related  training class.  Consulting  revenues
are  recognized  as the services are  performed.  To date,  all of the Company's
revenues have been derived from licenses of the Company's primary product, Forte
and related  products as well as related  maintenance,  training and  consulting
revenues.

Allowances  for credit risks and for estimated  future  returns are provided for
upon shipment.  Returns to date have not been material. Actual credit losses and
returns may differ from the Company's  estimates and such  differences  could be
material to the financial statements.

Deferred revenue includes deferred maintenance  revenue,  prepaid consulting and
training fees and prepaid license fees from third party resellers.

International Operations

The Company  operates in one industry  segment (the development and marketing of
computer  software and related  services)  and markets its products and services
internationally  through foreign  subsidiaries in Europe and Australia,  Digital
Equipment Corporation on a worldwide basis, and other distributors and resellers
located in the United States,  Canada, Asia, Europe, South America, South Africa
and Israel. Export sales through distributors, resellers and the domestic direct
sales  organization  totaled  $890,000,  $5,312,000 and $9,911,000 for the years
ended March 31, 1995, 1996 and 1997,  respectively.  Sales through the Company's
foreign subsidiaries totaled $796,000,  $2,427,000 and $12,967,000 for the years
ended March 31, 1995, 1996 and 1997, respectively.

<PAGE>
                              Forte Software, Inc.

             Notes to Consolidated Financial Statements (continued)


1. Summary of Significant Accounting Policies (continued)

Software Development Costs

Software  development costs have been 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."  Under  the  standard,
capitalization  of software  development  costs begins upon the establishment of
technological feasibility,  subject to net realizable value considerations.  The
Company begins  capitalization upon completion of a working model. To date, such
capitalizable costs have not been material. Accordingly, the Company has charged
all such costs to research and development expense. Future capitalized costs, if
any, will be amortized on a  straight-line  basis over the estimated life of the
products or the ratio of current revenue to the total of current and anticipated
future revenue, whichever expense is greater.

Equipment and Leasehold Improvements

Equipment  and  leasehold  improvements  are stated at cost and are  depreciated
using the  straight-line  method over the estimated  useful lives of the related
assets.  Leasehold improvements and equipment under capital leases are amortized
using  the  straight-line  method  over  the  lesser  of the  lease  term or the
estimated useful lives.

Income Taxes

The Company  accounts for income taxes in accordance with Statement of Financial
Accounting  Standards No. 109, "Accounting for Income Taxes", which requires the
use of the liability  method in accounting for income taxes.  Under this method,
deferred tax assets and  liabilities  are measured  using  enacted tax rates and
laws that will be in effect when the differences are expected to reverse.

Accounting for Stock-Based Compensation

The Company  accounts for employee stock options in accordance  with  Accounting
Principles  Board  Opinion No. 25,  "Accounting  for Stock Issued to  Employees"
("APB 25") and has  adopted  the  "disclosure  only"  alternative  described  in
Statement  of  Accounting   Standards  No.  123,   "Accounting  for  Stock-Based
Compensation" ("SFAS 123").

<PAGE>
                              Forte Software, Inc.

             Notes to Consolidated Financial Statements (continued)


1. Summary of Significant Accounting Policies (continued)

Net Income (Loss) Per Share

Except  as noted  below,  net  income  (loss)  per share is  computed  using the
weighted  average  number of shares of common stock and common stock  equivalent
shares,   when   dilutive,   from   convertible   preferred   stock  (using  the
as-if-converted   method)  and  from  stock  options  and  warrants  (using  the
treasury-stock method). Pursuant to the Securities and Exchange Commission Staff
Accounting Bulletins,  common and common equivalent shares issued by the Company
at prices below the initial  public  offering  price during the 12-month  period
prior to the  offering  have been  included in the  calculation  as if they were
outstanding  for all  periods  presented  through  December  31, 1995 (using the
treasury-stock method).

Per share  information  calculated  on this basis is as follows  (in  thousands,
except per share amounts):

                                                          Year ended March 31,
                                                        1995     1996     1997
                                                       ------------------------

Net income (loss) per share                            $(1.38)  $(0.33)  $ 0.34
                                                       ======   ======   ======
Shares used in computing net income (loss) per share    5,329    6,089   21,110
                                                       ======   ======   ======

Pro forma net income (loss) per share has been  computed as described  above and
also gives  effect,  even if  antidilutive,  to common  equivalent  shares  from
convertible preferred stock that automatically converted upon the closing of the
Company's initial public offering (using the as-if-converted method). All of the
convertible  preferred stock outstanding as of the closing date, March 11, 1996,
was  automatically  converted  into an aggregate of 12,029,883  shares of common
stock.

<PAGE>
                              Forte Software, Inc.

             Notes to Consolidated Financial Statements (continued)


1. Summary of Significant Accounting Policies (continued)

Newly Issued Accounting Standards

In February 1997, the Financial  Accounting Standards Board issued Statement No.
128,  "Earnings  per  Share,"  which is  effective  for both  interim and annual
financial statements for periods ended after December 15, 1997. The Company will
be required to change the method  currently  used to compute  earnings per share
and to restate all prior periods.  Under the new  requirements  for  calculating
primary  earnings  per  share,  the  dilutive  effect of stock  options  will be
excluded.  The impact is expected  to result in an increase in primary  earnings
per share for the year ended  March 31,  1997 and a decrease  for the year ended
March 31, 1996. The impact of Statement 128 on the  calculation of fully diluted
earnings per share for these periods is not expected to be material.


2. Equipment and Leasehold Improvements
<TABLE>

Equipment and leasehold improvements consist of the following (in thousands):
<CAPTION>
                                                                 March 31,             Useful
                                                            1996        1997           Lives
                                                           ---------------------       -----
<S>                                                        <C>          <C>       <C>  
Equipment under capital leases                             $ 4,150      $ 4,182   36 - 42 months
Equipment                                                    1,415        5,664   36 - 42 months
Leasehold improvements                                         495        1,276        36 months
                                                           -------      -------
                                                             6,060       11,122
Less accumulated depreciation and amortization              (2,157)      (4,633)
                                                           -------      -------
Equipment and leasehold improvements, net                  $ 3,903      $ 6,489
                                                           =======      ========
</TABLE>

Accumulated  amortization  related to assets under  capital  leases at March 31,
1996 and 1997 totaled $1,528,000 and $2,649,000, respectively.

<PAGE>
                              Forte Software, Inc.

             Notes to Consolidated Financial Statements (continued)

3. Stockholders' Equity

Initial Public Offering

On March 11, 1996, the Company completed an initial public offering of 1,822,500
shares of common stock at $21.00 per share. The Company received net proceeds of
$34,287,000.  In connection  with the initial public  offering,  all outstanding
shares of Series A, B, C and D preferred stock converted into 12,029,883  shares
of common stock.  Approximately $750,000 of the initial public offering expenses
are included in other accrued  liabilities  at March 31, 1996 (none at March 31,
1997).

Common Stock

Certain  common  shares are subject to  repurchase  rights by the Company in the
event  of  termination  of  employment  at  the  price  originally  paid  by the
shareholder.

At March 31, 1997, shares of common stock were reserved for issuance as follows:

    Stock option plan                            4,160,907
    Warrants                                        67,423
    Employee stock purchase plan                   331,810
                                                 ---------
                                                 4,560,140
                                                 =========

Warrants

In March 1996 and February 1997 11,798 and 9,163 shares, respectively, of common
stock were issued in connection  with the exercise of warrants by a vendor and a
bank.

As of March  31,  1997,  warrants  to  purchase  common  stock  were  issued  in
connection  with an equipment  lease  agreement as follows:  39,173 shares at an
exercise  price of $2.30 per share,  12,500 shares at an exercise price of $4.00
per share,  13,500  shares at an  exercise  price of $6.67 per share,  and 2,250
shares at an exercise price of $6.67 per share.  These warrants are  exercisable
through 2005.


<PAGE>
                              Forte Software, Inc.

             Notes to Consolidated Financial Statements (continued)



3. Stockholders' Equity (continued)

Employee Stock Purchase Plan

The Employee  Stock  Purchase  Plan  ("ESPP") was adopted in January  1996.  The
Company authorized 400,000 shares of common stock under the ESPP of which 68,190
shares were issued during the year ended March 31, 1997.  Eligible employees may
purchase common stock through payroll deductions, which may not exceed 10% of an
employee's compensation. The price of stock purchased under the ESPP will be 85%
of the lower of the fair market  value of the common  stock at the  beginning of
the 24-month  offering  period or on the  applicable  semiannual  purchase date.
Unless  sooner  terminated  by the  Board,  the ESPP  shall  terminate  upon the
earliest of (i) the last  business day in October  2006,  (ii) the date on which
all shares  available for issuance  under the ESPP shall have been sold pursuant
to  purchase  rights  exercised  under  the ESPP or (iii)  the date on which all
purchase rights are exercised in connection with certain corporate transactions.
The weighted-average  fair value of shares issued under the ESPP during 1997 was
$6.11 per share using the Black-Scholes pricing method.

Stock Option Plan

Under the terms of the 1991 Stock  Option Plan (the "1991  Plan")  eligible  key
employees,  directors, and consultants can receive options to purchase shares of
the  Company's  common  stock at a price  not less than 100% and 85% of the fair
value on the date of the grant for  incentive  stock  options  and  nonqualified
stock  options,  respectively.  The  options  granted  under  the 1991  Plan are
exercisable  over a  maximum  term of ten  years  from  the  date of  grant  and
generally vest over a five-year  period.  Shares sold under the Plan are subject
to various restrictions as to resale and right of repurchase by the Company.

In January  1996,  the  Company  adopted  the 1996 Stock  Option Plan (the "1996
Plan") as the  successor  to the 1991 Plan.  Under the 1996 Plan,  eligible  key
employees,  directors, and consultants can receive options to purchase shares of
the Company's common stock at a price not less than 85% of the fair market value
on the grant date. The Company authorized 4,860,000 shares of common stock to be
issued under the 1996 Plan (including  shares  previously  authorized  under the
1991 Plan), of which 1,298,635  (including  options  incorporated  from the 1991
Plan) are available for grant at March 31, 1997.


<PAGE>
                              Forte Software, Inc.

             Notes to Consolidated Financial Statements (continued)


3. Stockholders' Equity (continued)

Stock Option Plan (continued)

A summary of the activity under the 1996 Plan is set forth below:

                                                                    Weighted
                                                                    Average
                                                                    Exercise
                                                  Shares             Price
                                                  --------          ---------

Outstanding at March 31, 1994                     1,284,035         $    0.15
    Granted                                       1,681,875              0.59
    Exercised                                       (46,494)             0.13
    Cancelled                                       (61,599)             0.21
                                                 ----------         ---------
Outstanding at March 31, 1995                     2,857,817              0.41
                                                 ----------         ---------
    Granted                                       1,181,075              6.22
    Exercised                                      (735,353)             0.45
    Cancelled                                      (230,481)             0.96
                                                 ----------         ---------
Outstanding at March 31, 1996                     3,073,058              2.73
    Granted                                         486,200             31.06
    Exercised                                      (439,278)             0.81
    Cancelled                                      (257,708)             7.69
                                                 ----------         ---------
Outstanding at March 31, 1997                     2,862,272         $    7.35
                                                 ==========         =========
Vested options at March 31, 1997                    778,822         $    3.12
                                                 ==========         =========

At March 31, 1997, 160,290 shares of common stock issued through the exercise of
options were subject to repurchase by the Company.


<PAGE>
                              Forte Software, Inc.

             Notes to Consolidated Financial Statements (continued)


3. Stockholders' Equity (continued)

Stock Option Plan (continued)

The  weighted-average  fair value of options  granted  during  1996 and 1997 was
$3.63 and $18.17 per share, respectively.
<TABLE>

The following table summarizes  information concerning currently outstanding and
exercisable options:
<CAPTION>
                                                         Outstanding                         Exercisable
                                                   ----------------------              ----------------------
                                                 Weighted
                                                  Average           Weighted                            Weighted
                                                 Remaining           Average           Number            Average
                                Number          Contractual         Exercise         Exercisable        Exercise
   Exercise price             Outstanding          Life               Price          and Vested           Price
    -------------             -----------       ----------          ---------        ----------         ---------

<S>                             <C>                 <C>             <C>                  <C>            <C>    
$  0.07 - $  3.67               1,906,754           7.55            $  1.13              651,094        $  0.91
$  5.00 - $11.00                  482,820           7.70               9.12               94,518           9.16
$21.00 - $54.75                   472,698           9.33              30.81               33,210          29.24
                                 --------                                                -------
                                2,862,272                                                778,822
                                =========                                                =======
</TABLE>

Stock-Based Compensation

As  permitted  under SFAS 123, the Company has elected to continue to follow APB
25 in accounting for stock-based awards to employees.  Under APB 25, the Company
has not recognized any compensation  expense with respect to such awards,  since
the  exercise  price of the stock  options  awarded are equal to the fair market
value of the underlying security on the grant date.


<PAGE>
                              Forte Software, Inc.

             Notes to Consolidated Financial Statements (continued)


3. Stockholders' Equity  (continued)

Stock-Based Compensation (continued)

Disclosure of information  regarding net income (loss) and net income (loss) per
share is required by SFAS 123 for the Company's  awards  granted after March 31,
1995 as if the Company had  accounted  for its  stock-based  awards to employees
under  the fair  value  method  of SFAS  123.  The fair  value of the  Company's
stock-based  awards to employees was estimated as of the date of the grant using
a Black-Scholes  option pricing model.  Limitations on the  effectiveness of the
Black-Scholes  option  valuation  model  are  that it was  developed  for use in
estimating the fair value of traded  options which have no vesting  restrictions
and are  fully  transferable  and  that the  model  requires  the use of  highly
subjective  assumptions  including expected stock price volatility.  Because the
Company's  stock-based  awards to employees have  characteristics  significantly
different  from those of traded  options and because  changes in the  subjective
input assumptions can materially affect the fair value estimate, in management's
opinion,  the  existing  models do not  necessarily  provide a  reliable  single
measure of the fair value of its  stock-based  awards to employees.  The Company
has plans which award  employees  stock  including:  stock options and the ESPP.
Both of these  plans are  discussed  in the note  above.  The fair  value of the
Company's  stock-based  awards to employees was estimated assuming the following
weighted-average assumptions:


                                           Stock Options                ESPP
                                 ---------------------------------   ----------
                                       1996             1997            1997
                                 ---------------------------------   ----------

Expected life (in years)               5.00              5.00           0.50
Expected volatility                    0.62              0.62           0.75
Risk free interest rate          5.26%-6.84%       6.12%-6.74%          6.44%
Expected dividend yield                0.00%             0.00%          0.00%


<PAGE>

                              Forte Software, Inc.

             Notes to Consolidated Financial Statements (continued)


3. Stockholders' Equity  (continued)

Stock-Based Compensation (continued)

For  disclosure  purposes,  the adjusted  estimated  fair value of the Company's
stock-based awards to employees is amortized over the vesting period for options
and the  six-month  purchase  period  for stock  purchases  under the ESPP.  The
Company's  adjusted  information  follows  (in  thousands,  except for per share
information):

                                                           Year ended March 31
                                                           1996          1997
                                                         -----------------------

Net income (loss), as reported                           $   (1,988)  $    7,249
                                                         ==========   ==========
Net income (loss), as adjusted                           $   (2,233)  $    5,258
                                                         ==========   ==========
Pro forma net income (loss) per share, as reported       $    (0.11)  $     0.34
                                                         ==========   ==========
Pro forma net income (loss) per share, as adjusted       $    (0.13)  $     0.25
                                                         ==========   ==========

Because SFAS 123 is applicable  only to the Company's stock based awards granted
subsequent  to March 31,  1995,  its effect  will not be fully  reflected  until
approximately fiscal year 2000.

<PAGE>
                              Forte Software, Inc.

             Notes to Consolidated Financial Statements (continued)


4. Income Taxes

The current income tax provisions are as follows:

                                                 Year ended March 31,
                                         1995             1996            1997
                                        ----------------------------------------

Federal                                 $ --             $ --             $  190
State                                     --               --                115
Foreign                                    104              114              734
                                        ------           ------           ------
                                        $  104           $  114           $1,039
                                        ======           ======           ======

The provision for income taxes differed from the amount computed by applying the
statutory federal income tax rate as follows:

                                                    Year ended March 31,
                                                  1995       1996        1997
                                                --------------------------------

Tax (credit) at federal statutory rate          $(2,464)    $  (637)    $ 2,818
State taxes, net of federal benefit                --          --           115
Foreign taxes                                       104         114         734
Utilization of net operating losses                --          --        (2,896)
Net operating losses not benefited                2,464         581        --
Other items                                        --            56         268
                                                -------     -------     -------
Income tax provision                            $   104     $   114     $ 1,039
                                                =======     =======     =======

<PAGE>
                              Forte Software, Inc.

             Notes to Consolidated Financial Statements (continued)


4. Income Taxes (continued)

Deferred  income  taxes  reflect  the net tax effects of  temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:

                                                                March 31,
                                                            1996         1997
                                                          ----------------------
Deferred tax assets:
    Net operating loss carryforwards                      $  5,995     $  4,785
    Deferred revenue                                         1,647        1,346
    Research and development credit carryforwards            1,062        1,719
    Reserves and other accruals                                547        1,719
    Depreciation                                               363        1,277
    Foreign tax credit carryforwards                           210          757
    Other                                                       83           86
                                                          --------     --------
    Total deferred tax assets                                9,907       11,689
Valuation allowance                                         (9,437)     (10,862)
                                                          --------     --------
                                                               470          827
Deferred tax liabilities                                      (470)        (827)
                                                          --------     --------
Net deferred tax assets                                   $   --       $   --
                                                          ========     ========

The valuation allowance increased by $1,425,000 and $617,000 in the years ending
March 31, 1997 and 1996, respectively. Of the total deferred tax asset valuation
allowance at March 31,  1997,  $3,610,000  relates to the tax benefit  resulting
from the  exercise of  employee  stock  options  during the year ended March 31,
1997.  The tax  benefit,  when  realized,  will be  recorded  as an  increase in
stockholders' equity rather than as a reduction in the income tax provision.

At March 31, 1997, the Company had net operating loss  carryforwards for federal
income tax purposes of approximately  $13,266,000 which expire in tax years 2007
through 2010, a federal  research and  development  tax credit  carryforward  of
approximately  $1,719,000  which  expires in tax years 2005  through  2011 and a
foreign tax credit  carryforward of approximately  $757,000 which expires in tax
years 1999 through 2001.

<PAGE>
                              Forte Software, Inc.

             Notes to Consolidated Financial Statements (continued)


4. Income Taxes (continued)

Utilization  of net  operating  losses  and  credits  may be  subject  to annual
limitations  due to the ownership  change  limitations  provided by the Internal
Revenue Code of 1986 and similar state  provisions.  Management  does not expect
such   limitations,   if  any,  to  impact  the  ultimate   utilization  of  the
carryforwards.


5. Profit Sharing Plan

The Company has a retirement  plan under Section 401(k) of the Internal  Revenue
Code (the "401(k) Plan") for its eligible employees.  All employees, as defined,
are eligible to participate after completion of one month of employment with the
Company.  Employee  contributions  to the Plan are subject to certain  statutory
limitations.  The  pre-tax  voluntary  contributions  are  limited to 15% of the
aggregate compensation paid to the employee in all the years since participation
in the Plan. The Company's contribution to the 401(k) Plan is discretionary. The
Company has not contributed any amounts to the 401(k) Plan to date.


6. Commitments

The Company has entered into  operating  leases for office  space with  original
terms  ranging  from 12 to 42 months.  The  facility  leases  generally  contain
renewal  options and provisions  adjusting the lease payments based upon changes
in operating costs of the building.

The Company also entered into capital  leases with  original  terms of 42 months
for certain furniture, fixtures and equipment.

Capital lease obligations  represent the present value of future rental payments
under  various  lease  agreements  for  equipment.  The  Company  has options to
purchase  the leased  assets at the end of the lease terms for their fair market
value.

<PAGE>
                              Forte Software, Inc.

             Notes to Consolidated Financial Statements (continued)


6. Commitments (continued)

The future minimum lease payments under all noncancelable  leases having initial
terms longer than one year at March 31, 1997 are as follows (in thousands):

                                                           Capital    Operating
                                                           Leases      Leases
                                                           -------    --------
Years ending March 31:
    1998                                                    $1,057      $2,123
    1999                                                       735       3,261
    2000                                                       114       3,167
    2001                                                      --           909
    2002 and thereafter                                       --            87
                                                            ------      ------
Total minimum lease payments                                 1,906      $9,547
                                                                        ======
Less interest                                                  142
                                                            ------
Present value of minimum lease payments                      1,764
Less current portion                                           915
                                                            ------
Capital lease obligations, due after one year               $  849
                                                            ======

Rent  expense for the years ended March 31,  1995,  1996 and 1997 was  $469,000,
$1,461,000 and $2,305,000, respectively.


7. Subsequent Event

In April 1997, the Company  initiated a voluntary stock option repricing program
under which  options to acquire  638,000  common  shares  which were  originally
issued with exercise prices ranging from $8.83 to $54.75 per share were reissued
with an  exercise  price of  $8.31  per  share,  the  fair  market  value of the
Company's stock at the repricing date. These options will continue to vest under
the original terms of the option grant,  except that no options may be exercised
for a period of one year from the repricing date.
<PAGE>


                                                                     SCHEDULE II

                              FORTE SOFTWARE, INC.

                        VALUATION AND QUALIFYING ACCOUNTS
                    YEARS ENDED MARCH 31, 1995, 1996 and 1997

                   Allowance for Doubtful Accounts Receivable


Year Ended March 31,   Balance at  Additions Charged  Deductions  Balance at End
--------------------   ----------  -----------------  ----------  --------------
                      Beginning of   to Costs and     Write-offs     of Year
                      ------------   ------------     ----------     -------
                         Year         Expenses
                         ----         --------

1995 ...............    $   --         $365,000       $   --         $365,000
1996 ...............     365,000        288,000        122,000        531,000
1997 ...............     531,000        494,000         84,000        941,000