<PAGE>   1
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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    
                          ---------------------------
                                    
                                   FORM 10-K

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

                   For the fiscal year ended December 31, 1998

                                       OR

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

          For the transition period from ____________ to ______________



                         Commission File Number 0-27574

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

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


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

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

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

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

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

The aggregate market value of the registrant's voting stock held by
non-affiliates as of April 8, 1999 was approximately $19,475,561. There were
13,147,408 shares of the registrant's common stock, par value $.001 per share,
outstanding on April 8, 1999.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive Proxy Statement for its 1999 Annual
Meeting of Shareholders, scheduled to be held on June 2, 1999, which Proxy
Statement will be filed no later than 120 days after the close of the
registrant's fiscal year ended December 31, 1998, are incorporated by reference
in Part III of this Annual Report on Form 10-K.

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                              POWERCERV CORPORATION

                             FORM 10-K ANNUAL REPORT

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
   PART I                                                                                               Page No.
                                                                                                        --------
<S>           <C>                                                                                       <C>
   Item 1     Business .........................................................................            2
   Item 2     Properties .......................................................................           13
   Item 3     Legal Proceedings ................................................................           13
   Item 4     Submission of Matters to a Vote of Security Holders ..............................           13

  PART II
   Item 5     Market Value of the Registrant's Common Stock ....................................           14
   Item 6     Selected Consolidated Financial Data .............................................           15
   Item 7     Management's Discussion and Analysis of Financial Condition and Results of
              Operations .......................................................................           17
   Item 7A    Quantitative And Qualitative Disclosures About Market Risk .......................           30
   Item 8     Financial Statements and Supplementary Data ......................................           30
   Item 9     Changes in and Disagreements with Accountants on Accounting and Financial
              Disclosure .......................................................................           31

 PART III
  Item 10     Directors and Executive Officers of the Registrant ...............................           32
  Item 11     Executive Compensation ...........................................................           32
  Item 12     Security Ownership of Certain Beneficial Owners and Management ...................           32
  Item 13     Certain Relationships and Related Transactions ...................................           32

  PART IV
  Item 14     Exhibits, Financial Statement Schedules and Reports on Form 8-K ..................           33

Signatures    ..................................................................................           62
</TABLE>



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                                     PART 1

         This Annual Report on Form 10-K and the documents incorporated herein
by reference contain forward-looking statements that have been made pursuant to
the provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are based on current expectations, estimates and
projections about PowerCerv Corporation's (the "Company", as further defined
below) industry, management's beliefs and certain assumptions made by the
Company's management. Words such as "anticipates," "expects," "intends,"
"plans," "believes," "seeks," "estimates," variations of such words and similar
expressions are intended to identify such forward-looking statements. These
statements are not guarantees of future performance and are subject to certain
risks, uncertainties and assumptions that are difficult to predict; therefore,
actual results may differ materially from those expressed or forecasted in any
such forward-looking statements. Forward-looking statements include, without
limitation, statements regarding the extent and timing of future revenues and
expenses and customer demand for the Company's products and services under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Forward-Looking Statements and Associated Considerations;"
"--Fluctuations in Quarterly Activity and Results of Operations;"
"--Competition;" "--Economic and Market Condition Risks;" "Year 2000 Readiness;"
"--Lengthy Sales Cycle;" "Ability to Manage Change;" "--Liquidity;"
"--Availability of Consulting Personnel," "--Dependence on Product Development;
and Associated Risks," "--Dependence on New Products;" "--Dependence on
PowerBuilder(R) and Other Third Party Products;" "--Dependence on Proprietary
Technology; Risks of Third-Party Claims for Infringement;" "--Expansion of
Indirect Channels; and Potential for Channel Conflict;" "--Voting Control by
Management;" "--Dependence on Key Personnel;" and "--Possible Volatility of
Stock Price." The Company assumes no obligation to update any such
forward-looking statement. It is important to note that the Company's actual
results could differ materially from those in such forward-looking statements.

ITEM 1.  BUSINESS

         PowerCerv's primary mission is to develop, market, license, implement
and support open, modifiable enterprise application software solutions for
mid-size U.S. companies. Today the Company focuses on discrete manufacturing
companies with annual revenues between $25 million and $750 million. PowerCerv's
target market was expanded in late 1998 because management believes the
architecture, functionality and scalability of PowerCerv's application products
allow them to be a strong solution for companies with annual revenue of up to
$750 million. Management believes that PowerCerv is the first enterprise
application vendor to develop, promote and license an integrated Enterprise
Resource Planning (ERP) software solution having a common technical
architecture, common look and feel, and also integrating front office
applications such as sales force automation and customer support. The Company
refers to its full suite of integrated ERP/back-office and front-office
enterprise application software products as ERP Plus. The Company's ERP
application products consist of Manufacturing Plus, Distribution Plus,
Financials Plus, SFA Plus, and Support Plus. PowerCerv's ERP application
products facilitate the management of resources and information to allow
manufacturers to reduce order fulfillment times, improve operating efficiencies
and measure critical company performance against defined objectives. The
Company's front-office application products increase the effectiveness of sales
organizations and customer support centers in two ways. PowerCerv SFA Plus
provides opportunity management for maximum sales efficiency. PowerCerv Support
Plus provides problem tracking and resolution management. Because the Company
leverages available software development tool technology from Microsoft
Corporation and Sybase Inc., the Company's research and development efforts are
directed primarily toward new features in its application products.

         The Company historically has provided a wide range of professional
technical and business consulting services, including application analysis,
design, development, modification and integration programming, training and
deployment for its application products. Separately, the Company provides a
general business technical consulting services and general education/training
services on third party products. These services include client/server
application development, database administration services, internet/intranet
application development and e-commerce consulting solutions all of which are
unrelated to the Company's application products (collectively, the "General
Consulting/General Education Business").

         On March 31, 1999, the Company sold the net assets of the General
Consulting/General Education Business to R.O.I. Consulting, Inc. (the "ROI
Transaction"). Following this transaction, the Company will further increase its
focus on selling its ERP application software solutions to its target market. In
connection with the ROI Transaction, a co-founder and the vice chairman of the
Company resigned as an officer of the Company to become



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the president and chief operating officer of R.O.I. Consulting, Inc. ("ROI").
The ROI Transaction was valued at approximately $10 million in a combination of
cash, stock and notes. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

         The Company was incorporated in Florida in January 1995 as a holding
company for its operating subsidiary, which was incorporated in Florida in April
1992. Unless otherwise specified, references herein to "PowerCerv" and "the
Company" mean PowerCerv Corporation and its subsidiary.

         The Company's principal offices are located at 400 North Ashley Drive,
Suite 2700, Tampa, Florida 33602, and its telephone number is (813) 226-2600.
PowerCerv's website is located at www.powercerv.com. Information contained in
the website is not a part of this Annual Report on Form 10-K.

INDUSTRY BACKGROUND

         The computer revolution has evolved from the air-conditioned,
seven-figure plus mainframe computer running back-office operations such as
payroll and human resource systems, to distributed, network-based systems with
an affordable computer on every knowledge-worker's desk. All this has occurred
in less than forty years. Contrasted to other industries such as transportation,
medicine, telecommunications or automotive, no other industry has grown as
rapidly. In addition, no other industry has impacted everyone from the chief
executive officer to the accounting clerk to the schoolteacher as much as the
"information industry." This revolution is now recognized as the "information
revolution," not the computer revolution.

         The rapid acceptance of 2-tier, 3-tier and "n-tier" applications gave
birth to the next generation of application software packages. For many years,
application software vendors sold products that were developed with programming
languages such as Cobol, and they were implemented on mainframe and
mini-computers generally characterized as proprietary. Each software vendor was
forced to "port" their applications to support the most popular hardware
platforms such as IBM Corporation, Digital Equipment Corporation and others. The
client/server revolution changed that for application software vendors. The
industry went from single vendor, proprietary architecture and closed systems to
open architecture, multi-vendor, truly open systems. This was a fundamental
shift in the industry and created opportunities for entrepreneurs in the
application sector.

         The first wave of client/server application software products
introduced to the market was conventional back-office software for accounting,
human resources, manufacturing and order processing. Vendors such as McCormack &
Dodge, Management Sciences of America, IBM, SSA, Oracle and SAP enjoyed rapid
market acceptance with their back-office software packages. During the 1980's
and the 1990's many vendors rose and fell in this competitive landscape. ASK,
SSA, MSA, and McCormack & Dodge, each a one-time industry leader, all fell
victim to this competitive market. By 1996, SAP, Peoplesoft, Oracle, and
newcomer Baan had emerged on the scene as potential leaders for enterprise
applications. The vast majority of the leading global 2000 companies were all
looking for ways to control their businesses and gain competitive advantage by
implementing enterprise applications in their businesses. This enterprise space
quickly became dominated by SAP, Oracle and Peoplesoft. During this time a trend
started to emerge of smaller companies wanting to realize the same business
benefits as larger companies in implementing enterprise application software.
This emerging market, rapidly coined the "mid-market," emerged as a growth
opportunity or an entrance opportunity for enterprising companies having the
ability to deliver application software that had the price performance metrics
necessary to be successful in the mid-market. This middle market is where the
Company focuses its solutions. In 1998, the market for ERP application software
was estimated by AMR Research to be $14.8 billion in license revenues alone.

THE POWERCERV APPROACH

         The Company's heritage is rooted in designing and developing
application solutions for its customers. Early in its history, PowerCerv became
involved in developing applications for customers for both the back-office
(manufacturing, order management and accounting) and the front-office (sales
force automation or customer support) operations of the enterprise. Through
contracted project engagements, PowerCerv developed a sales force automation
application for one customer, a customer support application for another
customer, and a manufacturing and order management application for another
customer. PowerCerv leveraged its expertise in the design and development of
n-tier application systems driven by real-world requirements. During 1995, the
Company was a relative newcomer to the enterprise application software market
and sold its software products as independent



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software modules primarily on a "best of breed" basis to companies of all sizes
across all industries. By early 1996, many of the Company's competitors had
application products that were either back-office or front-office, but not both.
Management of the Company believed that the enterprise application software
market would evolve to demand an integrated ERP or back-office, and SFA and
Customer Support or front-office software solutions from a single vendor. In
order for most vendors to achieve this strategy, they would be forced to acquire
or merge with other vendors whose products complemented theirs and then attempt
to integrate those products under a common architecture.

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

         The Company refers to its full suite of integrated ERP and front-office
enterprise application software products as its ERP Plus product line. The
Company's ERP Plus application products consist of Manufacturing Plus,
Distribution Plus, Financials Plus, SFA Plus and Support Plus. Many of the
Company's customers license the Company's ERP application products as an
integrated suite. Additionally, each PowerCerv application product can be
licensed as a standalone solution.

         In addition to promoting and licensing its ERP application products,
the Company provides a full complement of professional consulting services that
allow the Company's license customers to maximize the benefits of its ERP
application products. These consulting services include, requirements analysis,
application analysis, detailed pre-implementation consulting, project
management, data migration planning, application customization and modification,
integration programming, system implementation and deployment. In addition to
the consulting services described above, the Company offers education and
training services on its ERP application products that provide its license
customers with formalized programs to ensure that its application products are
implemented and utilized in an efficient and cost-effective manner. The Company
also provides timely, high quality technical support and maintenance on its ERP
application products.

         Separate from its professional application consulting services
referenced above, the Company historically has provided a wide range of
technical business consulting services. These services were previously
described as the Company's General Consulting/General Education Business. With
this service offering, the Company typically analyzed the customer's existing
technology infrastructure and assessed the customer's business needs and
resource constraints to determine the customer's requirements. This
independent project consulting related to client/server architecture
consulting, application design and development consulting, internet
consulting, PowerBuilder(R) consulting, database consulting or some
combination of the above. In addition to these offerings the Company also
provided technology skills transfer through its public-training offerings for
both PowerBuilder(R) and Sybase. The net assets of the General
Consulting/General Education Business were sold to ROI on March 31, 1999. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

POWERCERV'S STRATEGY

         The Company's objective is to become a recognized leader in the
mid-size discrete manufacturing market with integrated ERP and front-office
enterprise application software solutions. The Company believes that the
mid-size or middle market is represented by companies with annual revenues
between $25 million and $750 million. In general, revenue is not a very reliable
metric for targeting an application software solution; however, as it has become
industry standard to do so, this middle market as defined above best describes
our target market. The Company's strategy to achieve this objective in this
market includes the following key components:



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-        Increase license revenue and market share. The Company's primary
         objective is to increase its license revenues and market share in the
         middle market. The Company believes that its ERP and front-office suite
         of application products effectively meet the needs of mid-size
         manufacturing companies based on technology platforms, functionality,
         agility and integration capabilities. The Company also believes that
         the market for enterprise application vendors is growing significantly
         based on, among other factors, the continuing acceptance of ERP
         application software technology as a tool to gain competitive
         advantage, the migration from mini and mainframe computers and even at
         this late date, year 2000 concerns. Management believes that Year 2000
         concerns may, however, negatively impact the Company's revenue growth
         in the future. See "Management's Discussion and Analysis of Financial
         Condition and Results of Operations. - Year 2000 Readiness." The
         Company is focused on trying to successfully increase its license
         revenues while closely managing its operating costs. If these
         objectives are achieved, this will result in improved earnings
         performance. To achieve the Company's strategy to increase license
         revenue and market share, the Company will have to continue to
         enhance its products, recruit and train additional qualified
         application consulting professionals and recruit and train sales and
         marketing professionals. There can be no assurance that the Company
         will be able to achieve this strategy and successfully compete
         against current and future competitors. See also "Business -
         Competition" and "Management's Discussion and Analysis of Financial
         Condition and Results of Operations. - Fluctuations in Quarterly
         Activities and Results of Operations."

-        Focused Market Strategy. The Company is focused on delivering open,
         modifiable ERP and front-office enterprise application software
         solutions to mid-size U.S. discrete manufacturing companies with annual
         revenues between $25 million and $750 million. The Company has focused
         its resources, including product development, marketing and sales
         efforts, on the needs and requirements of companies in this market. A
         significant portion of the Company's ongoing product development
         efforts will focus on building new features and functionality that
         address the particular needs and requirements of mid-size discrete
         manufacturing companies. The Company intends to leverage its expertise
         in this area and continues to expect this expertise will provide the
         Company with a competitive advantage. Also in connection with this
         focused market strategy, in March 1999 the Company sold the net assets
         of its General Services/General Education Business to ROI.

-        Streamlined Implementation Methodology. The Company continues to put
         significant resources into its professional services organization with
         a focus on continuing to streamline the implementation process of its
         ERP application products. The Company has had success implementing its
         products in a three to six month time period, on average. Management
         believes that as the Company continues to refine its implementation
         processes, this will give the Company a competitive advantage. These
         implementation processes, however, involve complex application software
         products and require the involvement of significant resources of the
         customer and can result in significant risks. Delays in implementation
         by the Company may result in customer dissatisfaction or damage to the
         Company's reputation. There can be no assurance that the Company will
         be able to achieve its streamlined implementation methodology and
         successfully implement its ERP application products within this
         strategy. If unsuccessful, this could result in material adverse
         effects to the Company's business, operating results and financial
         condition.

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

-        Capitalize on Year 2000 readiness. Many companies are facing the
         prospect of severe business problems if they do not update or modify
         their existing enterprise software systems to appropriately recognize
         the calendar year 2000. Even at this late stage the Company believes
         customers are still looking at new systems to become year 2000
         compliant. Management believes this will continue at least through the
         first



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         half of 1999 and then begin to decrease. During this time, the Company
         is well positioned to capitalize on any demand for application software
         caused by the Year 2000 problem. There can be no assurance that the
         Company will be able to achieve this strategy or that any significant
         market opportunity will occur or that the Company will be able to
         successfully compete against current and future competitors with regard
         to Year 2000 readiness. See "Management's Discussion and Analysis of
         Financial Condition and Results of Operations - Impact of the Year
         2000 Issue."

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

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

-        Achieve high level of customer satisfaction. The Company is committed
         to consistently achieving high levels of customer satisfaction with all
         of its products and services. The Company focuses on delivering high
         quality products that address specific business requirements, are easy
         to implement, and enable increased productivity for the customer. In
         addition the Company has a technical support center staffed with
         subject matter experts to assist customers on an on-going basis after
         the sale. There can be no assurances the Company will achieve this
         objective depending on current market conditions that may exist.

-        Additional products, technologies and solutions. The Company is
         regularly engaged in product marketing and business development
         activities designed to enhance the Company's current product offerings.
         From time to time, this may include the Company exploring strategic
         alliances or other forms of business relationships with third party
         technology firms having complementary products, technologies or
         marketing and sales strategies.

PRODUCTS AND SERVICES

         The Company's application products and services are designed to enable
the Company's customers to design, deploy and maintain ERP application systems.

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


<TABLE>
<CAPTION>
                                                        PRODUCT
PRODUCT                                               DESCRIPTION
-------                                               -----------
<S>                             <C>
POWERCERV APPLICATION
PRODUCTS

Manufacturing Plus              Multiple modules that address manufacturing
                                resource planning, scheduling, shop floor
                                control, configuration management and
                                performance management
</TABLE>



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<TABLE>
<CAPTION>
                                                        PRODUCT
PRODUCT                                               DESCRIPTION
-------                                               -----------
<S>                        <C>
Distribution Plus          Multiple modules that address order processing,
                           returned goods processing, quotation processing,
                           customer profiling, marketing and sales, pricing,
                           shipping, freight, invoicing and inventory/warehouse
                           management

Financials Plus            Multiple modules that address accounting, financial
                           and business management needs including general
                           ledger, accounts payable, accounts receivable,
                           purchasing, project accounting, order processing and
                           inventory.

PowerCerv Business         PowerCerv Business Intelligence provides the tools
Intelligence               necessary to turn all the data in your ERP
                           application into information. Comprehensive report
                           writing as well as OLAP reporting and integrated
                           internet reporting and distribution utilizing both
                           push and pull technology.

SFA Plus                   Sales force automation and contact management

Support Plus Support       Customer support, including problem management and
                           tracking
</TABLE>

POWERCERV SOFTWARE DEVELOPMENT TOOLS

         During the first half of 1998, the Company marketed and sold its own
software development tools. These development tools, which extended the
functionality of PowerBuilder(R) and were designed to assist PowerBuilder
developers in more quickly building applications, included PowerTOOL
(object-oriented class library for PowerBuilder-based applications), PADLock
(data and application access control for PowerBuilder-based applications),
AppSync (software and file distribution and synchronization), and PFCtool (class
library for PowerBuilder using Sybase's PFC product). These products, which were
licensed pursuant to standard shrinkwrap licenses, had suggested list prices
ranging between $695 - $1,200 per developer and $2,300 per server. On July 2,
1998, the Company announced that it was discontinuing sales of its development
tools. This decision was based upon the execution of the Company's focused
strategy on its ERP Plus application products and increased competition in the
software development tools market. In connection with the ROI Transaction, the
Company provided ROI with OEM rights to market and sell its software development
tools.

TECHNOLOGY RESALES

         During 1998, the Company resold industry-leading client/server
development tools that complemented the Company's own development tools. In
connection with the Company's decision to discontinue sales of its development
tools in July 1998, the Company has also significantly reduced its efforts on
marketing and selling licenses for technology resales. Due to the Company's
increased focus on the marketing and sale of its own ERP Plus application
products and increased market competition for technology resale products, in
1999 the Company will discontinue its marketing and sales efforts for technology
resale products.

SERVICES

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

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

         Prior to March 31, 1999, the Company had a General Consulting/General
Education Business. On this date, the Company sold the net assets of this
business to ROI. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." In connection with the ROI Transaction,
the Company agreed not



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to engage in general consulting and/or education services unrelated to its
application products and those of its partners for a period of two years.

         The Company's services are provided to end-user customers pursuant to
written service agreements and "statements of work." These agreements detail the
scope of the consulting services to be provided and the applicable hourly
billing rates, indicate payment and warranty terms, require separately executed
change orders for any statement of work modifications, identify project
management personnel responsible, and require weekly and/or monthly status
meetings between PowerCerv and its customers. PowerCerv consulting services are
generally billed on a time and materials (including travel and living expenses)
basis.

         Education Services. Education services consist of end-user education on
the Company's ERP Plus application products. End-user education involves
providing comprehensive education and training classes for end-users on the
implementation and use of the PowerCerv application products in an efficient and
cost-effective manner. Customized education and training programs are also
available to meet the end-user customers' specific requirements. The Company
provides its customers classroom training in five classrooms in four cities
across the United States as well as in a number of regional sales offices. In
addition, training courses are frequently provided at customer sites, using
customer facilities and equipment, with the Company providing the instructor and
class materials. Some classes are offered on a per-student basis and other
classes are offered on a negotiated fixed-fee basis.

         Maintenance Services. PowerCerv is committed to providing timely, high
quality support and maintenance on its ERP application products. The Company
intends to continue to provide support and maintenance on two of its
development tools through June 30, 1999. See "Business - Products and Services
- PowerCerv Software Development Tools." Maintenance services are generally
provided pursuant to maintenance agreements between the Company and its
end-user customers. These agreements entitle customers to hotline telephone
support during extended business hours, notification of product enhancements
and upgrades, the enhancements and upgrades, functional releases and
maintenance releases, technical bulletins, replacement of damaged products and
access to the Company's World Wide Web site (http://www.powercerv.com) and
electronic bulletin board. The Company currently charges a percentage of its
product license fee for renewable one-year maintenance agreements. Maintenance
fees are generally billed annually in advance.

CUSTOMERS

         Since its inception, the Company has more than 3,000 customers
worldwide for its products and services. The Company's customers include Allied
Signal Corporation, CTI PET Systems, Inc., Chatsworth Products, Inc., Compaq
Computer Corporation, Dolch Computer, F.X. Coughlin Company, JBB (Asia-Pacific)
Pty Ltd., Lorin Industries Inc., Monaco Coach Corporation, Reliance Electric,
Ltd., Rockwell/Dodge Automation Inc., Rohm and Haas Company, Silicon Valley
Bank, SNS Bank Groep N.V., Sony Pictures Entertainment, Inc., Southern Indiana
Gas & Electric, Textron Financial Corporation, Unit Parts Company and Wellington
Leisure Products, Inc. The Company continues to focus its marketing and sales
efforts primarily on mid-size U.S. discrete manufacturing companies with annual
revenues between $25 and $750 million.

MARKETING, SALES AND DISTRIBUTION

         The Company markets and sells its full suite of open, modifiable
ERP/back-office and front-office enterprise application software solutions to
mid-size U.S. discrete manufacturing companies with annual revenues between $25
million and $750 million. The Company's application products are primarily sold
through a direct sales force, and to a lesser extent, through a select network
of VARs, distributors and partners who generally serve in their respective
capacities on a nonexclusive basis. As of December 31, 1998, the Company's
sales and marketing organizations had 49 full-time employees.

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



                                       8
<PAGE>   10


to $1 billion) and government entities and relied on the coordinated efforts of
its U.S. direct sales force, international sales force, corporate marketing and
corporate telesales groups, together with its Business Development Group and
Client/Server Migration Group.

         The Company utilizes a direct sales force to sell its enterprise
application software solutions. The sales force is geographically dispersed
across six regions in the United States, with offices in major metropolitan
areas. The charter of the Company's direct sales force is to identify
manufacturers in the target market and engage those accounts in a sales campaign
once a target company has acknowledged its interest in the Company's enterprise
software solutions. The Company's sales force uses a structured sales
methodology to maximize the efficiency of its sales resources and maximize its
competitiveness.

         In the United States, the Company also utilizes select indirect
channels. These indirect channels consist of Strategic Implementation Partners,
VARs, (Value Added Resellers) and affiliate channel partners. Strategic
Implementation Partners are consulting organizations that generally do not sell
software, but may assist organizations with selection criteria and possibly
provide implementation assistance. VARs are authorized channel partners who
generally sell the Company's application products to manufacturing companies
(generally with annual revenues below $25 million) or into other market segments
on which the Company does not directly focus. Affiliate channel partners
generally identify qualified sales opportunities for the Company's direct sales
organization to address and close, but generally do not directly participate in
the sales process. Internationally, the Company utilizes distributors and
channel partners to sell and support its products. VARs, distributors and
channel partners typically have expertise in particular vertical markets and
geographic ties to their target markets. Additionally, the Company's VARs,
channel partners and international distributors receive training and support in
the Company's enterprise application software solutions.

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

         The Company actively and regularly conducts marketing activities
designed to increase its market awareness. These marketing activities include
advertising direct marketing, telemarketing, seminar marketing, tradeshow
marketing, and public relations activities to generate leads and gain valuable
market exposure. Additionally, the Company updates industry analysts regularly
with announcements including new customers and updated product features. The
Company maintains a World Wide Web site that serves as a marketing communication
vehicle. The Company also publishes all of its product and service information
on its World Wide Web site, including a full color version of its product
literature, recent press releases, selected reprinted press coverage, the
Company's training schedule and other relevant information pertaining to its
full suite of products and services.

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

PRODUCT DEVELOPMENT

         During 1998, the Company made substantial investments in internal
research and development as well as technology advancements. The Company's
product development efforts are focused primarily on continued enhancement of
its ERP Plus application products to meet the needs and requirements of mid-size
discrete manufacturing companies. The Company believes its future performance
will depend in large part on its ability to maintain and enhance its current
product line to meet the needs of this target market, its development of new
application products, as well as exploiting emerging technologies. As of
December 31, 1998, the Company had 51 full-time employees in its product
development group. The Company opened a new 15,000 square foot facility in
Anderson, South Carolina on March 23, 1998. Research and development expenses
consist primarily of salaries for employees in the product development group and
a portion of the related overhead. Research and development expenses are charged
to operations as incurred. Research and development expenditures were
approximately $3.8 million in 1998 and $5.8 million in 1997.



                                       9
<PAGE>   11


         In November 1998, the Company released version 8.0 of its ERP Plus
application products on schedule and as planned. The new release added
additional functionality and features to the Company's applications products.
Version 8.0 also further improved the integration among the Company's ERP and
front-office application products and delivered totally rewritten user manuals
and on-line documentation. Technology upgrades to the latest versions of
operating systems, development tools, and database platforms were also included
in Version 8.0 of the Company's ERP Plus application products.

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

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

STRATEGIC ALLIANCES

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

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

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




                                       10
<PAGE>   12


         Best Software, Inc. - The Company has entered into an agreement with
Best Software, where the Company has agreed to re-sell the Best! Imperativ Fixed
Assets product as a solution for customers that need fixed assets as part of
their financial solution. The Company has integrated the product into the
Company's Financials Plus solution for customers.

         Brio Technology, Inc. - The Company has entered into an agreement
whereby the Company will private label the BRIO product suite as the basis for
its PowerCerv Intelligence Series. The Company has added functionality to these
products to integrate them into the Company's ERP Plus product suite.

         Taylor Manufacturing Systems, Inc. - The Company has entered into a
strategic marketing relationship with Taylor Manufacturing Systems where the
Company has integrated the Taylor TESS product into the Company's ERP Plus
product suite.

         In addition to the above mentioned relationships the Company will from
time to time enter into relationships with third parties that it deems
strategic, important and useful to furthering the efforts of the Company.

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

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

COMPETITION

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

         The Company competes in the enterprise application software and
services market on the following merits: a focus on the mid-size discrete
manufacturing market; product functionality; integrated ERP application
solution; and integrated front-office sales force automation and customer
support solutions. In addition the Company competes on its application software
modification and customization capabilities, single-source implementation
solution, quicker time to benefit, open and industry standard technology
platforms, professional services and total cost of ownership. The Company
currently competes primarily with (i) other vendors of software focused on the
specific needs of mid-size discrete manufacturing companies, which include
Symix, QAD, Platinum Software, Baan N.V., J.D. Edwards, Oracle and (ii) VARs and
system integrators of the larger enterprise software companies, including SAP
AG, Baan N.V., Peoplesoft, Inc., Oracle Corporation. When competing with the
indirect channels of these larger ERP vendors, it is generally when those
vendors are targeting mid-size discrete manufacturing companies. In addition,
customers who have a large installed base of legacy systems may resist
committing the time



                                       11
<PAGE>   13


and resources necessary to convert to an open system, client/server-based
software suite of products. Further, as the enterprise application software and
services market continues to develop, companies with significantly greater
resources than the Company may attempt to increase their presence in the target
market where the Company is focused by acquiring or forming strategic alliances
with competitors of the Company. Increased competition is likely to result in
price reductions and related reductions in gross margins and market share, any
one of which could materially adversely affect the Company's business, results
of operations and financial condition. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Competition."

INTELLECTUAL PROPERTY AND OTHER PROPRIETARY TECHNOLOGY

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

         The Company licenses its application products to customers under
non-transferable, non-exclusive negotiated license agreements. The standard form
license agreement allows customers to use the Company's products solely for
internal purposes and specifies the maximum number of servers and concurrent
users that may use the products. The Company may license product source code to
enable its customers to customize the software to meet particular requirements.
The disclosure of source code increases the likelihood of misappropriation or
other misuse of the Company's proprietary trade secrets. The Company's standard
license contains confidentiality provisions protecting the products. In the
event of termination of the license, the end-user customer remains responsible
for any unpaid license fees and the confidentiality obligations. However, there
can be no assurance that such customers will take adequate precautions to
protect the Company's proprietary trade secrets and confidential information.
There can be no assurance that the Company's means of protecting its proprietary
rights and confidential information will be adequate.

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

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

EMPLOYEES

         As of December 31, 1998, the Company had 281 full-time employees. On
March 31, 1999, and in connection with the ROI Transaction, approximately 80
employees of the Company were effectively transferred to ROI. Approximately 75
of these employees were from the Company's training and consulting services
group. As of April 1, 1999, the Company had 196 full-time employees. These
employees include 50 in sales, marketing and related activities, 52 in research
and development, 68 in customer support, training and consulting services, and
26 in information technology, finance, administration and human resources. The
Company's employees are not represented by any collective bargaining



                                       12
<PAGE>   14


organization and the Company has never experienced a work stoppage. The Company
believes that its relations with employees are good. The loss of certain key
employees or the Company's inability to attract and retain other qualified
employees could have a material adverse effect on the Company's business and
operations.

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

ITEM 2.  PROPERTIES

         The Company's corporate headquarters are located in Tampa, Florida in a
24,000 square foot facility, including office space and customer training
facilities, occupied under a lease expiring in September 2000. The Company
leases additional office space in Orlando, Florida, and in California, Georgia,
Illinois, Michigan, Minnesota, North Carolina, Pennsylvania, South Carolina,
Texas and Virginia. In connection with the ROI Transaction, the Company is in
the process of assigning its leases in Orlando, Florida, Troy, Michigan,
Chantilly, Virginia and Houston, Texas to ROI. The Company will also subdivide
its offices in Tampa, Florida and Minneapolis, Minnesota with ROI. The Company
believes that its existing offices and facilities are adequate to support its
current needs, and that suitable additional facilities will be available, when
needed, on commercially reasonable terms.

ITEM 3.  LEGAL PROCEEDINGS

         A complaint was filed on July 24, 1997 in the United States District
Court for the Middle District of Florida, captioned J. Conrad Lifsey vs. Harold
R. Ross, Gerald R. Wicker, Marc J. Fratello, Roy E. Crippen, III, Donald B.
Hebb, Jr., Thomas S. Roberts, PowerCerv Corporation, Alex Brown & Sons, Inc.,
Robertson, Stephens & Company, ABS Capital Partners, L.P., Summit Investors II,
L.P., and Summit Ventures III, L.P. The complaint purports to be a class action
on behalf of those persons who purchased shares of the Company's common stock
from March 1, 1996 (the date of the Company's initial public offering of its
common stock ("IPO")) through July 24, 1996. The complaint alleges, among other
things, that the defendants violated the Securities Act of 1933 and the
Securities Exchange Act of 1934 in connection with the Company's IPO and in its
subsequent securities filings, press releases and other public statements. The
plaintiff seeks damages of an unspecified amount, rescission of certain
securities sales and certain other remedies. On March 19, 1998, the defendants
filed their motions to dismiss this complaint. An effect of this motion filing
is to postpone any discovery on this case until after the motions are ruled on
by the Court. No ruling has yet been handed down. On April 5, 1998, the Court
ordered the parties to attend a mediation conference by July 30, 1998. The
parties did not resolve this lawsuit in the mediation conference. The defendants
continue to deny any wrongdoing and are contesting the suit vigorously.

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

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

         No matters were submitted to a vote of security holders during the
fourth quarter of the year ended December 31, 1998.



                                       13
<PAGE>   15


PART II


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

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

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

<CAPTION>
          1997                                               High            Low
          ----                                               ----            ---
         <S>                                                <C>             <C>
         1st Quarter                                        $6.875          $3.250
         2nd Quarter                                         4.250           2.750
         3rd Quarter                                         3.875           2.125
         4th Quarter                                         3.750           1.750

<CAPTION>
          1998                                               High            Low
          ----                                               ----            ---
         <S>                                                <C>             <C>
         1st Quarter                                        $4.000          $1.625
         2nd Quarter                                         6.313           2.750
         3rd Quarter                                         5.250           2.500
         4th Quarter                                         3.750           1.375
</TABLE>

         As of December 31, 1998, the Company had approximately 114 shareholders
of record, and the Company believes there are more than 71 beneficial
shareholders. The Company declared no dividends in respect of its Common Stock
in 1997 and 1998. The Company intends to retain any earnings for use in the
business for the foreseeable future.



                                       14
<PAGE>   16


ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

         The following historical selected consolidated financial data of the
Company is qualified by reference to and should be read in conjunction with the
Consolidated Financial Statements and Notes thereto and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere in this Form 10-K. The balance sheet data set forth below as
of December 31, 1998 and the statement of operations data for the year ended
December 31, 1998 are derived from the Consolidated Financial Statements of the
Company audited by Ernst & Young LLP, independent certified public accountants,
appearing elsewhere in this report on Form 10-K. The balance sheet data set
forth below as of December 31, 1997 and the statement of operations data for the
years in the 2-year period ended December 31, 1997 are derived from the
Consolidated Financial Statements of the Company audited by KPMG LLP,
independent certified public accountants, appearing elsewhere in this report on
Form 10-K. The statement of operations data set forth below with respect to the
years ended December 31, 1995 and 1994, and the balance sheet data as of
December 31, 1996, 1995 and 1994 are derived from audited financial statements
not included in this Form 10-K.

<TABLE>
<CAPTION>
                                                                                        YEARS ENDED
                                                                                        DECEMBER 31,
                                                             ---------------------------------------------------------------
                                                               1998           1997         1996          1995          1994
                                                             -------        -------       ------       -------        ------
                                                                      (In thousands, except per share data)
<S>                                                          <C>            <C>           <C>          <C>            <C>
STATEMENT OF OPERATIONS DATA:

Revenue:
   License fees                                              $ 8,342          6,434       11,324         8,258         2,280
   Technology resales                                            858          2,385        2,860         3,368         2,399
   Service fees                                               20,771         24,268       23,172        16,573         8,453
                                                             -------        -------       ------       -------        ------

      Total revenue                                           29,971         33,087       37,356        28,199        13,132
                                                             -------        -------       ------       -------        ------

Costs and expenses:
   Cost of licenses                                              670          2,975        1,319           439           445
   Cost of technology resales                                    593          1,871        2,337         2,651         1,802
   Cost of services                                           16,514         19,635       15,973        10,341         4,614
   General and administrative                                  3,886          7,687        5,256         4,761         2,441
   Sales and marketing                                         6,597         11,075       10,730         4,829         1,826
   Research and development                                    3,820          5,788        6,688         3,082           481
   Work force reduction and other                                 --          1,010           --            --            --
   In-process research and development                            --             --          100         6,913            --
                                                             -------        -------       ------       -------        ------

      Total costs and expenses                                32,080         50,041       42,403        33,016        11,609
                                                             -------        -------       ------       -------        ------

Operating income (loss)                                       (2,109)       (16,954)      (5,047)       (4,817)        1,523

Other income (expense)                                           301            578          674          (158)           (7)
                                                             -------        -------       ------       -------        ------

Income (loss) before income taxes                             (1,808)       (16,376)      (4,373)       (4,975)        1,516
Income tax expense (benefit)                                      --          1,711       (1,658)           --            --
                                                             -------        -------       ------       -------        ------

Net income (loss)                                            $(1,808)       (18,087)      (2,715)       (4,975)        1,516
                                                             =======        =======       ======       =======        ======

Basic and diluted net loss per share                         $ (0.13)         (1.31)       (0.21)
                                                             =======        =======       ======

Shares used in computing basic and diluted net loss per
share                                                         13,817         13,839       12,950
                                                             =======        =======       ======


Pro forma (1):
   Income (loss) before income taxes as reported                                                       $(4,975)        1,516
   Income tax expense (benefit)                                                                           (550)          605
                                                                                                       -------        ------

   Net income (loss)                                                                                   $(4,425)          911
                                                                                                       =======        ======

   Basic and diluted net income (loss) per share                                                       $ (0.52)         0.11
                                                                                                       =======        ======

   Shares used in computing basic and diluted net                                                        8,451         8,400
income (loss) per share                                                                                =======        ======
</TABLE>



                                       15
<PAGE>   17


<TABLE>
<CAPTION>
                                                                       DECEMBER 31,
                                              --------------------------------------------------------------
                                                1998          1997          1996          1995         1994
                                              -------       -------       -------       -------       ------
                                                                    (Table in thousands)
<S>                                          <C>            <C>           <C>           <C>           <C>
BALANCE SHEET DATA:

Cash and cash equivalents                    $  6,594         6,360        14,637             1          87
Working capital                                 7,387         7,885        21,619        (1,308)      1,368
Total assets                                   15,730        18,687        36,351        15,292       4,630
Long-term debt, less current portion               --            --            --         8,932          --
Convertible preferred stock                        --            --            --         5,500          --
Redeemable preferred stock                         --            --            --         5,500          --
Retained earnings (accumulated deficit)       (39,729)      (37,921)      (19,834)      (17,119)      2,015
Shareholders' equity (deficit)                 11,275        12,957        30,992       (15,990)      2,024
</TABLE>

(1)  Prior to May 15, 1995, the Company had elected to be treated as a small
     business corporation (S Corporation) for income tax purposes. The pro forma
     income taxes have been calculated using the statutory tax rates in effect
     during the applicable periods, as if the Company was taxable as a C
     Corporation. The pro forma income taxes also assume the adoption of
     Statement of Financial Accounting Standards No. 109, Accounting for Income
     Taxes, for all periods presented above.



                                       16
<PAGE>   18


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

OVERVIEW

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

         License fees represent revenue from the licensing of the Company's ERP
application products and, to a lesser extent, its development tools. License
fees also include royalties earned on the Company's ERP application products and
related intellectual properties. Technology resales represent revenue from the
Company's resale of various third-party software products. Service fees
represent revenue from consulting services, education services and support and
maintenance services.

         Beginning January 1, 1998, the Company has recognized revenue in
accordance with the American Institute of Certified Public Accountants'
("AICPA") Statement of Position 97-2, Software Revenue Recognition ("SOP 97-2"),
as amended by Statement of Position 98-4 ("SOP 98-4"), Deferral of the Effective
Date of a Provision of SOP 97-2. Revenue is recognized from licenses of the
Company's software products when the contract has been executed, the product(s)
has been shipped, collectibility is probable and the software license fees are
fixed or determinable. In the event that the contract provides for multiple
elements (e.g., software products, postcontract customer support, consulting
services), the total fee is allocated to these elements based on
"vendor-specific objective evidence" of fair value. If any portion of the
license fees is subject to forfeiture, refund or other contractual
contingencies, the Company will postpone revenue recognition until these
contingencies have been removed. Historically, product returns and allowances
have been immaterial. For those periods in which the Company marketed its
development tools and third party technology resales, license revenue was
recognized following the procedures above except that these products are
generally licensed via shrinkwrap license agreements. The Company generally
accounts for consulting and education services separate from software license
fees for those multi-element arrangements where services are a separate element
and are not essential to the customer's functionality requirements and there is
"vendor-specific objective evidence" of fair value for these services.
Consulting and education revenue is recognized as the services are performed.
Revenue from support and maintenance activities is recognized ratably over the
term of the maintenance period and the unrecognized portion is recorded as
deferred revenue. Prior to January 1, 1998, the Company recognized revenue in
accordance with the American Institute of Certified Public Accountants'
Statement of Position 91-1, Software Revenue Recognition.

         The AICPA published further guidance on applying the provisions of SOP
97-2 and SOP 98-4 in SOP 98-9 ("SOP 98-9"), "Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions." Additionally, the
AICPA issued technical questions and answers on financial accounting and
reporting issues related to SOP 97-2 in January 1999. The Company will apply the
provisions of SOP 98-9 on a prospective basis for new software transactions
entered into beginning in the first quarter of 1999. Management believes that
the adoption of this guidance will not have a material impact on its financial
condition or results of operations and will not have a significant impact on its
current licensing or revenue recognition practices. However, comprehensive
interpretations and commonly accepted business practices for these statements
have not yet been established. There can be no assurance that additional
guidance and commonly accepted business practices pertaining to the new
standards will not result in unexpected modifications to the Company's current
revenue recognition practices which could materially adversely impact the
Company's license fee revenue, results of operations and net income.

         The Company's primary focus in 1998 was to execute its 1998 financial
operating plan, which included a increased emphasis on growing license revenue
and market share, as well as cost reduction measures. During December 1997, the
Company recorded a charge of $1,010,000 for work force reductions and other
charges with the intent to significantly reduce operating expenses and the usage
of cash. The charge included severance and related costs associated with 50
employees, a charge for impairment of property and equipment, costs related to
office downsizing or closings, and other costs.



                                       17
<PAGE>   19


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

         Effective January 1, 1996, the Company expanded its sales and
consulting force and acquired rights to a client/server development tool by the
completion of the acquisition of substantially all of the net assets of Visual
Systems Development Group of Michigan, Inc. This transaction resulted in a
non-recurring charge to 1996 first quarter income for in-process research and
development of $0.1 million. The Company is not currently considering additional
significant acquisitions of complementary businesses, products or technologies,
although it may do so in the future.

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

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
Revenue:                                               FOR THE YEARS ENDED DECEMBER 31,
                                     ---------------------------------------------------------------------
                                                              ($ IN THOUSANDS)
                                         1998         CHANGE         1997        CHANGE         1996
--------------------------------     ---------------------------------------------------------------------
<S>                                  <C>              <C>          <C>           <C>           <C>
License fees                           $ 8,342          30%        $ 6,434       (43%)         $11,324
Percentage of total revenue                 28%                         20%                         30%
--------------------------------     ---------------------------------------------------------------------
Technology resales                     $   858         (64%)       $ 2,385       (17%)         $ 2,860
Percentage of total revenue                  3%                          7%                          8%
--------------------------------     ---------------------------------------------------------------------
Service fees                           $20,771         (14%)       $24,268         5%          $23,172
Percentage of total revenue                 69%                         73%                         62%
--------------------------------     ---------------------------------------------------------------------
</TABLE>

         License Fees. The Company's license fees are derived primarily from
licensing the Company's application products, and to a lesser extent, from
licensing its development tools. In addition, any royalty fees earned are
included in license fees. The Company establishes its licensing fees using a
tiered pricing approach based on the number of concurrent servers and users.
Source code licenses are available at an additional cost.

         License fees decreased 43% from 1996 to 1997 due to lower product
application and development tools sales. Lower sales in part were a result of
the early 1997 restructuring of the Company's direct sales force and sales
management and the Company's continuing efforts to increase the number and
caliber of its direct sales force.

         License fees increased 30% from 1997 to 1998 primarily due to an
increase in the number of license transactions for the Company's ERP application
software products. Management believes this increase is attributable to the
Company's successful execution of its focused marketing and sales strategy
during 1998. This increase in license fees revenue was offset by lower revenue
from licensing of the Company's development tools, which were discontinued in
early July 1998 due to the Company's focus on application sales. During late
December 1997 and through January 1998, the Company initiated a new plan to
increase license revenues from its application products. Under this plan, the
Company has focused its marketing and sales efforts on licensing its ERP Plus
solutions, comprised of back-office and front-office application products, to
mid-size U.S. discrete manufacturing companies in a defined target market. The
decision to implement this strategy is the result of the Company's assessment of
the market for enterprise application software solutions, its existing suite of
products, and its operational and development strengths. Under this strategy,
the Company approved and implemented a financial operating plan consistent with
its marketing and sales focus and hired a president/COO with relevant industry
experience to direct the execution of this plan. During 1998, the Company also
recruited a senior vice president of marketing and senior vice president of
direct sales, transitioned a marketing




                                       18
<PAGE>   20


executive into channel sales, centralized its marketing organization in the
Company's Tampa headquarters, and increased the number of U.S. regional sales
offices and regional sales vice presidents from three to six. Management
believes the Company's implementation of this plan will help in accomplishing
its strategic objective to increase license revenues from its application
products; however, there can be no assurance that the Company will achieve this
objective or that the Company's license revenues will increase in accordance
with management's expectations.

         Prior to 1998, the Company had been reducing its focus on its
development tools due to increased competition in the software development tools
market and the Company's decision to focus on its ERP Plus enterprise
application software solutions. License fees revenue from development tools
continued to decrease both in absolute dollars and as a percentage of total
license fees. These and other factors led the Company to announce on July 2,
1998, that it was discontinuing sales of its development tools. The Company
intends to continue to provide support/maintenance on two of its development
tools through June 30, 1999.

         Technology resales. Technology resales are derived from licensing
complementary client/server and Internet development tools developed by other
independent software vendors. The market for technology resales and related
services is very competitive and is more price-sensitive than are the Company's
application product license fees and related services markets. In connection
with the Company's decision to discontinue sales of its development tools,
during 1998 the Company also has significantly reduced its emphasis on
technology resales. This action is consistent with the Company's 1998 strategy
focused on its ERP application products. As a result of these factors,
technology resales revenue decreased 17% from 1996 to 1997 and 64% from 1997 to
1998. Due to the Company's increased focus on the marketing and sale of its own
ERP application products and increased market competition for technology resale
products, in 1999 the Company will discontinue its marketing and sales efforts
for technology resale products.

         Service fees. The Company's service fees consist of revenue from
consulting, education, and support and maintenance services. Consulting services
are primarily provided on a time and materials basis, education services are
generally priced on a per-student basis and annual support and maintenance
service fees are based on a percentage of the related license fees. During 1997,
service fees grew 5% over 1996 due primarily to an increase in consulting hourly
rates, an increase in education revenue, and the additional maintenance revenue
provided by the Company's product licensing activities. During 1998, service
fees declined 14% over 1997 due primarily to a decrease in the number of
billable consultants as a result of closing certain unprofitable service areas,
the Company's December 1997 work force reduction, and higher than expected
consultant turnover. Also, in conjunction with the work force reduction,
employees who were transitioned from non-billable to billable positions within
the Company were not billable to customers until the latter part of the March
31, 1998 quarter, following additional education and training. An additional
factor impacting revenue from service fees was non-billable time spent by
consultants in the Company's ERP Plus internal application training program,
which was undertaken during the second and third quarters of 1998. The Company
believes that as revenue from licensing its application products increases, the
demand for application consulting services (and related revenue) will
correspondingly increase, as will service fees for maintenance and support.
However; there can be no assurance that license revenue will continue to
increase or that if it does increase, revenue from service fees will
correspondingly increase.

         Effective March 31, 1999, the Company sold its General
Consulting/General Education Business to a third party. Consideration totaled
approximately $10 million and consisted of a combination of cash, PowerCerv
Common Stock and notes. This portion of PowerCerv's services business provided
approximately $12 million in revenue and approximately $2 million in gross
margin during the year ended December 31, 1998. In connection with this
transaction, a co-founder and the vice chairman of the Company resigned as an
officer of the Company to become the president and chief operating officer of
the acquiring company.

COSTS AND EXPENSES

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



                                       19
<PAGE>   21


<TABLE>
<CAPTION>
Cost of revenue:                                         FOR THE YEARS ENDED DECEMBER 31,
                                       ----------------------------------------------------------------------
                                                                 ($ IN THOUSANDS)
                                           1998         CHANGE         1997         CHANGE         1996
----------------------------------     ----------------------------------------------------------------------
<S>                                     <C>             <C>          <C>            <C>           <C>
Cost of licenses                         $   670        (77%)        $ 2,975         126%         $ 1,319
Gross profit percentage                       92%                         54%                          88%
----------------------------------     ----------------------------------------------------------------------
Cost of technology resales               $   593        (68%)        $ 1,871         (20%)        $ 2,337
Gross profit percentage                       31%                         22%                          18%
----------------------------------     ----------------------------------------------------------------------
Cost of services                         $16,514        (16%)        $19,635          23%         $15,973
Gross profit percentage                       20%                         19%                          31%
----------------------------------     ----------------------------------------------------------------------
</TABLE>

         Cost of Licenses. The cost of licenses consists primarily of production
costs, royalties associated with modules of the Company's application products,
and the amortization of intangible assets. The cost of licenses increased from
1996 to 1997 due to the amortization of intangible assets acquired in various
acquisitions. Additionally, in 1997 the cost of licenses increased compared to
1996 as a result of a charge of approximately $1,300,000 to reduce the
intangible assets acquired in various acquisitions to their net realizable
value. The cost of licenses decreased from 1997 to 1998 due to lower
amortization of intangible assets and lower royalties. The Company will incur an
annual amortization expense of approximately $400,000 during 1999 and $200,000
for the three years thereafter.

         Cost of Technology Resales. The cost of technology resales consists
primarily of costs associated with resales of complementary client/server and
Internet development tools developed by independent software vendors. The cost
of technology resales decreased in 1997 and 1998 compared to the prior year
because of the decrease in technology resales revenue described previously in
this section.

         Cost of Services. The cost of services consists primarily of
compensation and travel costs associated with providing consulting, product
support and maintenance, technical services and education. The cost of services
increased 23% from 1996 to 1997 primarily due to increased number of personnel,
compensation and related expenses. The cost of services decreased 16% from 1997
to 1998 due to a decrease in the number of consultants as a result of closing
certain unprofitable service areas and the Company's December 1997 work force
reduction.

          The decrease in gross profit percentage from 31% during 1996 to 19%
during 1997 resulted from providing certain services at reduced rates or on a
"no-charge" basis in connection with addressing customer issues, and higher
costs associated with recruiting and training a more experienced, and thus more
expensive, consulting staff. Other factors that contributed to higher costs of
services included higher than expected consultant turnover, lower utilization of
application consultants due to lower application license sales, and delays
associated with the redeployment of consultants from large projects that were
completed. The increase in gross profit percentage from 19% during 1997 to 20%
in 1998 was a result of several factors including higher utilization of
application consultants and higher average consultant billable rates.

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

<TABLE>
<CAPTION>
Operating expenses                                        FOR THE YEARS ENDED DECEMBER 31,
                                           ----------------------------------------------------------------
                                                                  ($ IN THOUSANDS)
                                              1998        CHANGE        1997        CHANGE        1996
---------------------------------------    ----------------------------------------------------------------
<S>                                        <C>            <C>         <C>           <C>         <C>
General and administrative                   $3,886        (49%)      $ 7,687        46%        $ 5,256
Percentage of total revenue                      13%                       23%                       14%
---------------------------------------    ----------------------------------------------------------------
Sales and marketing                          $6,597        (40%)      $11,075         3%        $10,730
Percentage of total revenue                      22%                       33%                       29%
---------------------------------------    ----------------------------------------------------------------
Research and development                     $3,820        (34%)      $ 5,788       (13%)       $ 6,688
Percentage of license fees revenue               13%                       90%                       59%
---------------------------------------    ----------------------------------------------------------------
</TABLE>

                  As noted previously, effective March 31, 1999, the Company
sold its general consulting business (consulting services other than its
application-related services) to a third party. This portion of PowerCerv's
services business accounted for approximately $10 million of the total $17
million in costs of services during 1998.

         General and administrative ("G&A"). G&A expenses include general
compensation, communications, accounting, human resources, legal and related
facilities expenses. The increase in G&A expenses in 1997 from 1996 of 46% was a
result of an increase in bad debt expense of approximately $1,700,000 and
increased legal



                                       20
<PAGE>   22


expenses primarily associated with litigation matters. The decrease in G&A
expenses from 1997 to 1998 is primarily due to the Company's implementation of
the financial operating plan consistent with its marketing and sales focus which
included a work force reduction.

         Sales and Marketing. Sales and marketing expenses primarily consist of
compensation paid to sales and marketing personnel, costs of marketing programs,
and related communication costs. Sales and marketing expenses increased as a
percentage of total revenue from 29% in 1996 to 33% in 1997 as a result of the
Company continuing to invest in its direct and indirect sales force, increased
marketing expenses for the Company's products and services and increased costs
associated with sales force turnover. Sales and marketing expenses decreased as
a percentage of total revenue to 22% during 1998 as a result of the Company's
implementation of its financial operating plan and the Company's restructuring
of its marketing and sales organizations. During 1998, the Company recruited a
senior vice president of marketing and senior vice president of direct sales,
transitioned a marketing executive into channel sales, centralized its marketing
organization in the Company's Tampa headquarters, and increased the number of
U.S. regional sales offices and regional sales vice presidents from three to
six. In the third quarter of 1998, the Company also changed its sales
organization commission plans, which likely will result in higher sales
commission payments. During 1999, the Company is investing additional resources
in strengthening the Company's marketing and sales organizations and their
respective programs and initiatives.

         As noted previously, effective March 31, 1999, the Company sold its
General Consulting/General Education Business to a third party. This portion of 
the Company's services business accounted for approximately $0.6 million of the
total $7 million incurred for sales and marketing expenses during 1998.

         Research and development ("R&D"). R&D costs consist primarily of
compensation and related facilities, software and equipment costs associated
with developing, maintaining and enhancing the Company's products. Since
inception, the Company has not capitalized any internal R&D costs as the costs
incurred during the period between the point in time that technological
feasibility is established and that a product is released to the market have
been insignificant. R&D costs decreased 13% from 1996 to 1997 primarily due to
the temporary assignment of consulting personnel to R&D positions during 1996 to
facilitate new version releases of its application products and the
consolidation of R&D facilities from four separate application R&D centers into
one facility. R&D costs decreased 34% from 1997 to 1998 due to the Company's
implementation of the 1998 financial operating plan and related workforce
reduction. R&D costs as a percentage of license fees increased to 90% during
1997 from 59% during 1996 as a result of lower license fee revenues during 1997
as compared to 1996. R&D costs as a percentage of license fees decreased to 13%
during 1998 as a result of higher 1998 license revenues and the implementation
of the 1998 financial operating plan and related work force reduction.

    WORK FORCE REDUCTION AND OTHER CHARGES

         During December 1997, the Company recorded a charge related to a work
force reduction and other related expenses totaling $1,010,000. This amount
included severance and related costs of $411,000, a charge related to impairment
of property and equipment of $192,000, costs of $113,000 related to office
downsizing or closings, and other costs totaling $294,000.

    IN-PROCESS RESEARCH AND DEVELOPMENT

         A $0.1 million expense was recorded in the first quarter of 1996
related to the acquisition of in-process research and development. This amount
was recorded as an operating cost and a reduction of operating income.

    INCOME TAX EXPENSE (BENEFIT)

         The effective tax rate for 1996 was 38%. During 1997, the Company
increased its deferred income tax asset valuation allowance by $7.9 million to
offset deferred tax benefits previously recorded and reduce the deferred tax
asset balance to zero. During 1998, the Company increased the valuation
allowance by an additional $0.7 million. The decision to fully reserve the
deferred income tax asset was based on the uncertainty as to the ultimate
realization of the asset due to the Company's continued losses from operations.
Any realization of the Company's net deferred tax asset will reduce the
Company's effective tax rate in future periods.



                                       21

<PAGE>   23


    LIQUIDITY AND CAPITAL RESOURCES

         From the inception of the Company until the IPO, the Company financed
its operations primarily through cash flow from operations, private sales of
equity securities, shareholder loans and borrowings under a commercial line of
credit.

         During March 1996, the Company's IPO resulted in net proceeds of
approximately $43.3 million. The Company used these IPO proceeds to repay the
$7.1 million promissory note issued in connection with the acquisition of
certain software from a third party; redeem all outstanding shares of the
Company's Redeemable Preferred Stock of approximately $5.5 million; repay
promissory notes from the Company to the three founding shareholders of the
Company of approximately $3.4 million; repay the outstanding bank line of credit
balances; and repay the $1.0 million working capital notes from the three
founding shareholders of the Company. The remaining proceeds from the IPO were
invested in short-term investments and are being used to provide working capital
and capital resources as needed.

         At December 31, 1998, 1997 and 1996, the Company had available cash and
cash equivalents of $6.6 million, $6.4 million and $14.6 million respectively,
and working capital of $7.4 million, $7.9 million and $21.6 million,
respectively.

         During 1998, the Company had an unsecured $5 million revolving line of
credit with a commercial bank for working capital and other purposes ("1998
Line of Credit"). The 1998 Line of Credit expired February 15, 1999 and has
been replaced with a new $10 million facility described below. The interest
rate on the 1998 Line of Credit was equal to the 90-day floating LIBOR rate
plus 150 or 200 basis points, based on the Company's tangible net worth. The
1998 Line of Credit required the Company to maintain certain financial ratios.
At December 31, 1998, no balance was outstanding on the 1998 Line of Credit.

         On March 29, 1999, the Company entered into an agreement with its bank
for a $10 million credit facility ("1999 Line of Credit"). The 1999 Line of
Credit facility consists of a commitment for a revolving line of credit
totaling $5 million, with an additional $5 million of uncommitted funding. The
first $2 million of the 1999 Line of Credit is unsecured, with substantially
the same terms and conditions as the 1998 Line of Credit. Draws from $2
million to $5 million will be conditioned upon the Company's compliance with
an additional financial ratio, or alternatively, may be secured by the
Company's accounts receivable and inventory. Draws in excess of $5 million
will be subject to terms agreed to at the time of the draw.

         Net cash provided by (used in) operating activities for the years ended
December 31, 1998, 1997 and 1996 was $0.3 million, $(7.6) million and $(4.8)
million, respectively. The significant improvement from 1997 to 1998 was largely
the result of the Company's implementation of its 1998 financial operating plan
and associated work force reduction. Use of cash in 1997 and 1996 was primarily
the result of the Company's net losses during those years.

         Net cash used in investing activities for the years ended December 31,
1998, 1997 and 1996 totaled $0.2 million, $0.7 million and $3.4 million,
respectively. Such uses generally were for purchases of furniture, fixtures, and
communication and computer equipment. In 1996, the Company invested $1.5
million in an unrelated business and used $0.1 million to acquire an unrelated
business. In 1998, the net cash used was reduced by $0.5 million cash received
as a result of the Company exercising a put option related to its $1.5 million
investment described above.

         Net cash provided by financing activities for the years ended December
31, 1998, 1997 and 1996 totaled $0.1 million, $0.1 million and $22.8 million,
respectively. These amounts generally relate to the issuance of common stock,
net of offering costs. In 1996, proceeds from the Company's IPO were offset by
repayment of debt and redemption of preferred stock.

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

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



                                       22

<PAGE>   24


license and service fees, as well as the collection of its outstanding accounts
receivable, to maintain its current liquidity levels.

         The Company believes that, based upon its projected revenues and
operating expense levels and funds received and to be received by the Company in
connection with the ROI Transaction, that funds generated from operations,
existing cash and cash equivalents and its short-term accounts receivable,
together with the availability of the line of credit, will be sufficient to
finance the Company's operations for at least the next twelve months. See
"Forward Looking Statements and Associated Considerations - Liquidity."

                  As noted previously, effective March 31, 1999, the Company
sold the net assets of its General Consulting/General Education Business to a
third party. Consideration totaled approximately $10 million and consisted of a
combination of cash, PowerCerv Common Stock and secured promissory notes. Under
the terms of the agreement, the Company will receive approximately $7.8 million
in cash in 1999. The remaining consideration is evidenced by a promissory note
which will mature in 2004.

IMPACT OF THE YEAR 2000 ISSUE

         The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Affected
computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. Potential implications include system failures or miscalculations that
could impair a company's ability to conduct normal business operations and
process transactions. This Year 2000 issue affects the Company in two general
areas: (i) its software products sold to customers, and (ii) its internal
information systems.

         Based on its assessments, management believes that the current versions
of the Company's ERP application products generally are Year 2000 ready.
However, these products are developed and produced using third-party development
tools that, themselves, may be subject to Year 2000 issues. The Company has
tested its products in an attempt to identify any such issues, but there is no
assurance that all such issues have been identified and corrected. The Company
has a published Year 2000 Readiness Disclosure statement that provides guidance
to its customers and prospects on the status of the Year 2000 issue with respect
to its products. From time to time, customers require this statement to be
included as a warranty in their license agreements, which the Company will do.
This could result in additional exposure for the Company to Year 2000-related
litigation. Furthermore, it has been widely reported that a significant amount
of litigation surrounding business interruptions will arise out of Year 2000
issues. It is uncertain whether, or to what extent, the Company may be affected
by such litigation. See "Forward Looking Statements and Associated
Considerations - Year 2000 Readiness."

         The Company's efforts to resolve the Year 2000 issue with respect to
its internal information systems involve the following four phases: assessment,
remediation or replacement, testing and contingency planning. The Company has
completed the assessment process for its information technology exposures and
expects to complete the assessment process for non-information technology
exposures by March 31, 1999. The Company presently believes that its internal
software systems, which include its application products and other internally
developed software and its relational data base management system, are Year 2000
ready.

         The Company has determined that it will be required to modify or
replace certain hardware and upgrade certain operating system software so that
those systems will properly utilize dates beyond December 31, 1999. The Company
presently believes that with modifications or replacements of certain hardware
and upgrades to operating systems software, the Year 2000 issue can be
mitigated. However, if such modifications, replacements, and upgrades are not
made, or are not completed timely, the Year 2000 issue could have a material
impact on the operations of the Company. The Company expects remediation and
replacement of affected hardware and operating systems software to be completed
by June 30, 1999, and to have completed substantially all the phases of its
efforts by September 30, 1999.

         The Company has queried its significant suppliers and subcontractors
that do not share information systems with the Company (external agents). To
date, the Company is not aware of any external agent with a Year 2000 issue that
would materially impact the Company's results of operations, liquidity or
capital resources. However, the Company has no means of ensuring that external
agents will be Year 2000 ready. The inability of external agents to complete
their Year 2000 resolution process in a timely fashion could materially impact
the Company. The effect of non-compliance by external agents is not
determinable.



                                       23
<PAGE>   25


         The Company is utilizing internal resources to address Year 2000
issues. The total cost of its Year 2000 effort is estimated to be approximately
$0.4 million and is being funded through operating cash flows. To date, the
Company has incurred approximately $0.2 million related to all phases of its
Year 2000 efforts. The remaining project costs primarily relate to modifications
to hardware and operating system software and will be expensed as incurred.

         Management of the Company believes it has an effective program in place
to resolve the Year 2000 issue in a timely manner. As noted above, the Company
has not yet completed all of its Year 2000 efforts. In the event that the
Company does not complete its efforts, the Company could experience Year
2000-related disruptions that might affect its ability to serve its customers
and process transactions. In addition, disruptions in the economy generally
resulting from Year 2000 issues could also materially adversely affect the
Company. The Company also could be subject to Year 2000-related litigation. The
amount of potential liability or potential lost revenue cannot be reasonably
estimated at this time.

         The Company currently has no contingency plans in place in the event it
does not complete all phases of the Year 2000 efforts. The Company plans to
evaluate the status of completion in July 1999 and determine whether such plans
are necessary.

         In addition to the concerns discussed above on the Year 2000 issue and
how it affects the Company's products and its internal information systems,
significant uncertainty exists in the ERP software industry concerning the
potential effects associated with Year 2000 readiness. Management believes that
customers and potential customers purchasing patterns may be affected in a
number of ways. Many companies are expending significant resources to upgrade
their systems. These expenditures may result in reduced funds available to
purchase software products such as those the Company offers. Additionally, it is
possible that certain of the Company's customers are purchasing support
contracts only to ensure that they are Year 2000 ready and then will cancel
such contracts. Many potential customers may defer purchasing Year 2000 ready
products as long as possible, accelerate purchasing such products, switch to
other systems or suppliers, or purchase the Company's products only as an
interim solution. See "Forward Looking Statements and Associated
Considerations - Year 2000 Readiness."

FORWARD-LOOKING STATEMENTS AND ASSOCIATED CONSIDERATIONS

         This Annual Report on Form 10-K and the documents incorporated herein
by reference contain forward-looking statements that have been made pursuant to
the provisions of the Private Securities Litigation Reform Act of 1995. Words
such as "anticipates," "expects," "intends," "plans," "believes," "seeks,"
"estimates," variations of such words and similar expressions are intended to
identify such forward-looking statements. These statements are not guarantees of
future performance and are subject to certain risks, uncertainties and
assumptions that are difficult to predict; therefore, actual results may differ
materially from those expressed or forecasted in any such forward-looking
statements. In addition, the Company may from time to time make oral
forward-looking statements. The Company undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events, or otherwise. Such statements appear in a number of
places in this report and include statements regarding the intent, belief or
current expectations of the Company, its directors or its officers with respect
to, among other things: (i) trends affecting the Company's financial condition
or results of operations; (ii) the industry in which the Company operates; (iii)
the Company's business and growth strategies; and (iv) other matters.
Prospective investors are cautioned that any such forward-looking statements are
not guarantees of future performance and involve risks and uncertainties, and
that actual results may differ materially from those indicated in the
forward-looking statements as a result of various factors. Readers are cautioned
not to place undue reliance on these forward-looking statements. Factors to
consider in evaluating any forward-looking statements and the other information
contained herein include the following:

         Fluctuations in Quarterly Activities and Results of Operations. The
Company has experienced significant fluctuations in its revenues and operating
results from quarter to quarter and anticipates that it will continue to
experience such quarterly fluctuations. Factors that may contribute to such
fluctuations include, among others, the demand for and market acceptance of the
Company's products and services, the size and timing of the Company's sales, the
level of product and price competition encountered, the length of the sales
cycle, the timing of the Company's and its competitors' product releases and
enhancements, reduction in demand for existing products and shortening of
product life cycles, customer order deferrals in anticipation of new products or
Year 2000 concerns,



                                       24
<PAGE>   26


changes in the Company's and its competitors' pricing policies, variations in
the length of the product implementation cycle, software defects and other
product quality problems, the mix of products and services sold, changes in the
Company's sales and marketing organizations and the sales and marketing
incentives, the mix of direct versus indirect sales, reassignment of consultants
from providing billable services to research and development positions, changes
in the Company's operating expenses, personnel changes, changes in the renewal
rate of the Company's maintenance agreements, seasonal factors that generally
influence purchasing decisions of application software products, conditions or
events in our target market, budgeting cycle of the Company's customers, and
general economic conditions. Any one or more of these or other factors could
have a material adverse effect on the Company's business, financial condition
and results of operations. The potential occurrence of any one or more of these
factors makes the prediction of revenue and results of operations on a quarterly
basis difficult.

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

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

         Economic and Market Condition Risks. Various segments of the software
industry have experienced significant economic downturns characterized by
decreased product demand, price erosion, work slowdown and layoffs. In addition,
there is increasing uncertainty in the ERP market attributed to many factors
including global economic conditions, issues surrounding the Year 2000 and
strong competitive forces. Our future license fee revenue and results of
operations may experience substantial fluctuations from period to period as a
consequence of these factors and such conditions may affect the timing of orders
from major customers and other factors affecting capital spending. Although we
have a diverse client base, we have targeted a number of vertical markets. As a




                                       25
<PAGE>   27


result, any economic downturns in general or in our targeted vertical markets
would have a material adverse effect on our business, operating results or
financial condition.

         Year 2000 Readiness. The Year 2000 issue is the result of computer
programs being written using two digits rather than four to define the
applicable year. Affected computer programs or hardware that have
date-sensitive software or embedded chips may recognize a date using "00" as
the year 1900 rather than the year 2000. Potential implications include system
failures or miscalculations that could impair a company's ability to conduct
normal business operations and process transactions. This Year 2000 issue
affects the Company in two general areas: (i) its software products sold to
customers and (ii) its internal information systems.

         Based on its assessments, management believes that the current versions
of the Company's ERP application products generally are Year 2000 ready.
However, these products are developed and produced using third-party development
tools that, themselves, may be subject to Year 2000 issues. The Company has
tested its products in an attempt to identify any such issues, but there is no
assurance that all such issues have been identified and corrected. The Company
has a published Year 2000 Readiness Disclosure statement that provides guidance
to its customers and prospects on the status of the Year 2000 issue with respect
to its products. From time to time, customers require this statement to be
included as a warranty in their license agreements, which the Company will do.
This could result in additional exposure for the Company to Year 2000-related
litigation. Furthermore, it has been widely reported that a significant amount
of litigation surrounding business interruptions will arise out of Year 2000
issues. It is uncertain whether, or to what extent, the Company may be affected
by such litigation.

         The Company also needs to ensure Year 2000 readiness of its internal
third-party computer systems. Management does not expect the total cost of Year
2000 readiness issues to be material to the Company's business, operating
results or financial condition. There can be no assurance that customers and
suppliers will identify and remediate all significant Year 2000 problems on a
timely basis. Remediation efforts may involve significant time and expense and
unremediated problems could materially adversely effect the Company's business,
operating results and financial condition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Impact of the Year
2000 Issue."

         Management believes that customers and potential customers purchasing
patterns may be affected in a number of ways. Many companies are expending
significant resources to upgrade their systems. These expenditures may result in
reduced funds available to purchase software products such as those the Company
offers. Additionally, it is possible that certain of the Company's customers are
purchasing support contracts only to ensure that they are Year 2000 ready and
then will cancel such contracts. Many potential customers may defer purchasing
Year 2000 ready products as long as possible, accelerate purchasing such
products, switch to other systems or suppliers, or purchase the Company's
products only as an interim solution. If any of the above were to happen, our
business, operating results or financial condition could be materially adversely
affected.

         Lengthy Sales Cycle. Customers in our target market make a significant
capital investment in purchasing our ERP application solution. Potential
customers spend significant time and resources on determining which software to
purchase. This requires us to spend substantial time, effort and money educating
and convincing prospective customers to purchase our software over our
competitors. Selling our ERP application solution requires an extensive sales
effort because the decision to license software generally involves evaluation by
a significant number of customer personnel in various functional and geographic
areas. The Company also has no control over which company a customer favors or
if the customer chooses to delay or forego a purchase. Due to all of these
factors, the sales cycle generally ranges from a minimum of three (3) months up
to twelve (12) months. Since the sales cycle is unpredictable, the Company
cannot precisely forecast the timing or amount of specific license sales.
Furthermore, license sales may vary from quarter to quarter. Any delays
associated with closing large license transactions could have a material adverse
effect on the Company's business, operating results and financial condition.

         Ability to Manage Change. The Company was incorporated in April 1992
and commercially shipped its initial products in late 1993. Since inception and
through 1996, the Company experienced rapid growth in its revenue, the number of
its employees and the scope of its operations. The number of Company employees,
for example, has fluctuated from 11 on December 31, 1992, to 420 as of December
31, 1996, to 372 as of December 31, 1997 and to 281 as of December 31, 1998. The
Company's rapid growth has resulted in, and is expected to continue to create,
new and increased responsibilities for management personnel, as well as
additional demands on



                                       26
<PAGE>   28


the Company's operating and financial systems, including addressing and reducing
employee turnover. The Company's business and future growth will depend on the
efforts of key management personnel and the Company's ability to attract and
retain qualified management personnel. The Company's business plan will also
require it to recruit additional qualified technical personnel, to enhance its
managerial systems for its operations, and to successfully integrate new
employees and systems into its existing operations. If the Company is unable to
manage change effectively, the Company's business, financial condition and
results of operations could be materially adversely affected.

         The Company began operations primarily as a value-added reseller of
client/server software development tools developed by third parties and as a
provider of related consulting services. For each quarter since that time,
including the quarter ended December 31, 1998, revenue from services has
accounted for at least a majority of the Company's revenue. Although the
Company's initial development tool, PowerTOOL, became commercially available in
the fourth quarter of 1993, the Company's other development tool offerings were
commercially introduced in the second half of 1995 or the first quarter of 1996.
The Company's first application product, PowerCerv Manufacturing, was
commercially introduced in the third quarter of 1994, but the Company's
remaining application product offerings were commercially introduced or acquired
in the second and third quarters of 1995.

         The Company's strategy is to seek to increase its revenue from the sale
of the Company's ERP Plus application software products as a percentage of total
revenue. However, selling, distributing and supporting computer software may
demand different sales, technological and management skills than providing
software consulting services. To be successful, the Company and its management
will be required to adapt to the changing nature of the Company's business. Any
failure to do so would have a material adverse effect on the Company's business,
financial condition and results of operations.

         In 1997, the Company incurred an $18.1 million net loss on license
revenues of $6.4 million. In late 1997 and early 1998, the Company underwent a
reduction in work force of approximately 50 person resulting in a work force
reduction and other charges of $1,010,000, hired a new President/COO with
extensive application software company management experience, and implemented a
strategy to focus its operations on the sale of its ERP Plus application
products to mid-size U.S. discrete manufacturing companies. Also during 1998,
the Company recorded profits in its third and fourth quarters, and reduced its
loss to $1.8 million for the year. In 1999, the Company will take further
measures to focus its business on the development, marketing, sale,
implementation and training of its ERP Plus application products. On March 31,
1999, the Company sold the net assets of its General Consulting/General
Education Business to a third party to further increase the Company's focus on
selling its ERP application software solutions to its target market. The Company
believes that its management team, this focused strategy and these
accomplishments will positively impact the business and financial condition of
the Company; however, there can be no assurance that the Company will achieve
those objectives in connection with this focused operating strategy.

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

         Liquidity. On December 31, 1998, the Company's cash and cash
equivalents were $6.6 million. The Company's cash and cash equivalents balance
as of March 31, 1999 was approximately $7 million. In addition to cash flows
from operations, on or about June 30, 1999, management expects to receive
approximately $4.8 million in connection with the ROI Transaction. This amount
is evidenced by secured promissory notes from ROI which become due on June 30,
1999. In addition, there are penalties associated with late payment on these
notes. There can be no assurance that these notes will be paid by ROI in
accordance with their terms. In the event the notes are not paid per their
terms, the Company's existing cash reserves prove insufficient to fund its
operating needs, and the Company is not able to borrow against its 1999 Line
of Credit in accordance with its terms, management may be required to seek
alternative capital funding sources. Further, there can be no assurances that
such funds would be available to the Company, or if available would be on terms
satisfactory to the Company.



                                       27
<PAGE>   29


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

         Dependence on Product Development and Associated Risks. The enterprise
resource planning application software market is characterized by rapid
technological advances, changes in customer requirements and frequent new
product introductions and enhancements. The Company's future success will depend
upon its ability to enhance its current products, and to develop and introduce
new products on a timely basis that keep pace with technological developments,
respond to evolving customer requirements and achieve market acceptance. Any
failure by the Company to anticipate or respond adequately to technological
developments and customer requirements, or any significant delays in product
development or introduction, could result in a loss of competitiveness or
revenue. In the past, the Company has experienced unexpected delays in the
introduction of certain of its products, which has had an adverse impact on the
Company's revenue. Also, new products, when first released by the Company, may
contain undetected difficulties or defects that, despite testing by the Company,
are discovered only after they have been installed and used by customers. There
can be no assurance that such difficulties will not be discovered in the future,
causing significant customer relations issues, delays in product introduction
and shipments, or requiring design modifications that could adversely affect the
Company's competitive position, business, financial condition and results of
operations. In addition, there can be no assurance that new products or product
enhancements developed by the Company will achieve market acceptance, in which
case the Company's business, financial condition and results of operations could
be adversely affected. See "Business - Product Development."

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

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


                                       28
<PAGE>   30


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

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

         There has been substantial litigation in the software industry
involving intellectual property rights. Although the Company does not believe
that it is infringing the intellectual property rights of others, there can be
no assurance that such claims will not be asserted and, if asserted, would not
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, if the Company acquires or licenses a
portion of the software included in its products from third parties, its
exposure to infringement actions may increase because the Company must rely upon
such third parties for information as to the origin and ownership of such
acquired or licensed software. Although the Company has obtained and intends to
continue to obtain representations as to the origins and ownership of such
acquired or licensed software and obtain indemnification to cover any breach of
any such representations, there can be no assurance that such representations
will be accurate or that such indemnification will provide adequate compensation
for any breach of such representations. In the future, litigation may be
necessary to enforce and protect trade secrets, copyrights and other
intellectual property rights of the Company. The Company may also be subject to
litigation to defend against claimed infringement of the rights of others or to
determine the scope and validity of the intellectual property rights of others.
Any such litigation could be costly and divert management's attention, either of
which could have a material adverse effect on the Company's business, financial
condition and results of operations. Adverse determinations in such litigation
could result in the loss of the Company's proprietary rights, subject the
Company to significant liabilities, require the Company to seek licenses from
third parties or prevent the Company from selling its products, any one of which
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business - Intellectual Property and
Other Proprietary Technology."

         Expansion of Indirect Channels; Potential for Channel Conflict. The
Company markets its development tools, application products and services
directly through both a direct sales force and telesales, and indirectly through
marketing channels such as VARs, OEMs, channel partners and distributors.
Although VARs, OEMs, channel partners and distributors accounted for an
insignificant percentage of the Company's total revenue in 1995 and a growing
percentage in 1996, 1997 and 1998, the Company is increasing resources dedicated
to developing and expanding indirect marketing channels. There can be no
assurance that the Company will be able to attract and retain a sufficient
number of qualified VARs, OEMs, teaming partners and distributors to market
successfully the Company's tools and applications. The failure to retain its
VARs, OEMs, channel partners and distributors could have a material adverse
effect on the Company's business, financial condition and results of operations.

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

         Selling through indirect channels may limit the Company's contacts with
its customers. As a result, the Company's ability to accurately forecast sales,
evaluate customer satisfaction and recognize emerging customer



                                       29
<PAGE>   31


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

         Voting Control by Management. The executive officers and directors of
the Company and two former founders and directors of the Company beneficially
own approximately 48% of the outstanding Common Stock as of April 8, 1999. As a
result, while there is no agreement or understanding among these persons with
respect to the voting of their Common Stock, if they vote together, they may
effectively be able to control the outcome of matters requiring a shareholder
vote, including the election of directors, adopting or amending provisions of
the Company's Articles of Incorporation and Bylaws, and approving mergers or
other similar transactions, such as sales of substantially all the Company's
assets. To the extent there is control, such control by the officers and
directors may have the effect of discouraging certain types of transactions
involving an actual or potential change of control of the Company, including
transactions in which the holders of Common Stock might otherwise receive a
premium for their shares over then-current market prices. In addition, the
possibility of such persons exercising such control may limit the price that
certain investors may be willing to pay in the future for shares of the
Company's Common Stock. Moreover, the Company is not prohibited from engaging in
transactions with its management and principal shareholders, or with entities in
which such persons have an interest. The Company's Articles of Incorporation do
not provide for cumulative voting in the election of directors.

         Dependence on Key Personnel. The Company's success depends to a
significant extent upon a number of key management and technical personnel,
including its Chairman and Chief Executive Officer, Marc J. Fratello, and its
President and Chief Operating Officer, Michael J. Simmons, the loss of either of
whom could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company believes that its future
success will also depend in large part upon its ability to attract and retain
highly skilled technical, management, sales and marketing personnel. Competition
for such personnel in the computer software industry is intense, and there can
be no assurance that the Company will be successful in attracting and retaining
such personnel. Departures and additions of key personnel may be disruptive to
the Company's business and could have a material adverse effect on the Company's
business, financial condition and results of operations.

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

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         The Company had no holdings of derivative financial or commodity
instruments at December 31, 1998. The Company has no significant exposure to
interest rate or foreign currency exchange rate risks. An increase in interest
rates of 100 basis points would not significantly impact the Company's net
income. Generally, all of the Company's business is transacted in U.S. dollars.
Accordingly, foreign exchange rate fluctuations should not have a significant
impact on the Company.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The Company's Consolidated Financial Statements and Notes thereto and
the reports of Ernst & Young LLP and KPMG LLP, the Company's independent
accountants, are set forth on the pages indicated in Item 14.



                                       30
<PAGE>   32


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

         There were no disagreements with respect to the Company's independent
accountants during 1998. As discussed and more fully described in the Company's
Form 8-K dated July 7, 1998, the Company appointed Ernst & Young as its
independent accountants and terminated its relationship with KPMG during 1998.



                                       31
<PAGE>   33



                                    PART III

         Certain information required by Part III is omitted from this Report on
Form 10-K since the Company will file a definitive Proxy Statement for its
Annual Meeting of Shareholders to be held on June 2, 1999, pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended (the "Proxy
Statement"), not later than 120 days after the end of the year covered by this
Report, and certain information included in the Proxy Statement is incorporated
herein by reference.

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

ITEM 11.  EXECUTIVE COMPENSATION

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

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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



                                       32
<PAGE>   34


                                     PART IV


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


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

<TABLE>
<CAPTION>


                                                                                                PAGE
                                                                                                ----
         <S>      <C>                                                                           <C>
         1.       Financial Statements, with Independent Auditors' Report
                  Independent Auditors' Report - KPMG LLP                                        35
                  Report of Independent Certified Public Accountants -
                         Ernst & Young LLP                                                       36
                  Consolidated Balance Sheets as of December 31, 1998 and 1997                   37
                  Consolidated Statements of Operations for each of the years in the
                      three-year period ended December 31, 1998                                  38
                  Consolidated Statements of Shareholders' Equity for each of
                      the years in the three-year period ended December 31, 1998                 39
                  Consolidated Statements of Cash Flows for each of the years in the
                      three-year period ended December 31, 1998                                  40
                  Notes to Consolidated Financial Statements                                     41

         2.       Financial Statement Schedules

                  Schedule II - Schedule of Valuation and Qualifying Accounts for each
                      of the years in the three-year period ended December 31, 1998              61

         3.       Exhibits
</TABLE>



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

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

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

10.2     --       NationsBank Commitment Letter dated October 9, 1997, and
                  related promissory note dated October 22, 1997, extending the
                  maturity of the Company's $5,000,000 revolving line of credit
                  (incorporated herein by reference from Exhibit Number 10.3 to
                  the Company's Annual Report on Form 10-K for the year ended
                  December 31, 1997).


10.3     --       Amendment to Loan Agreement, dated January 26, 1998,
                  among NationsBank, N.A. and the Company, related to the
                  Company's $5,000,000 revolving line of credit (incorporated
                  herein by reference from Exhibit Number 10.4 to the Company's
                  Annual Report on Form 10-K for the year ended December 31,
                  1997).

10.4     --       Loan Agreement and related promissory note, dated March
                  29, 1999, among NationsBank, N.A. and the Company, related to
                  the Company's $10,000,000 credit facility (filed herewith).


</TABLE>


                                       33
<PAGE>   35


<TABLE>
<S>      <C>      <C>

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

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

10.7     --       Executive Employment Agreement, dated February 19, 1998,
                  between the Company and Michael J. Simmons (incorporated
                  herein by reference from Exhibit Number 10.2 to the Company's
                  Quarterly Report on Form 10-Q for the calendar quarter ended
                  June 30, 1998).

10.8     --       Amended and Restated Executive Employment Agreement, dated
                  April 7, 1998, between the Company and Stephen M. Wagman
                  (incorporated herein by reference from Exhibit Number 10.4 to
                  the Company's Quarterly Report on Form 10-Q for the calendar
                  quarter ended June 30, 1998).

10.9     --       Executive Employment Agreement, dated April 10, 1997, between
                  the Company and Ronald D. Nall (incorporated herein by
                  reference from Exhibit Number 10.5 to the Company's Quarterly
                  Report on Form 10-Q for the calendar quarter ended June 30,
                  1998).

10.10    --       Asset Purchase Agreement, dated March 30, 1999, by and
                  between the Company and R.O.I. Consulting, Inc. (incorporated
                  herein by reference from Exhibit Number 2 to the Company's
                  Current Report on Form 8-K filed on April 13, 1999).

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

23.1     ---      Consent of Independent Certified Public Accountants--Ernst & 
                  Young LLP

23.2     ---      Independent Auditors' Consent--KPMG LLP

27.1     ---      Financial Data Schedule.

</TABLE>

      (b) Reports on Form 8-K
    
          None



                                       34
<PAGE>   36


                          INDEPENDENT AUDITORS' REPORT


The Board of Directors
PowerCerv Corporation:


We have audited the accompanying consolidated balance sheet of PowerCerv
Corporation and subsidiary as of December 31, 1997, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
years in the two-year period ended December 31, 1997. In connection with our
audits of these consolidated financial statements, we also have audited the 1997
and 1996 information in the financial statement schedule as listed under Item 14
of this Form 10-K. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on the 1997 and 1996 consolidated
financial statements and attendant information in the financial statement
schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of PowerCerv
Corporation and subsidiary as of December 31, 1997, and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, the information in the 1997 and 1996 financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects,
the information set forth therein.


                                    /s/ KPMG LLP


Tampa, Florida
January 26, 1998


                                       35
<PAGE>   37


               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

The Board of Directors
PowerCerv Corporation

We have audited the accompanying consolidated balance sheet of PowerCerv
Corporation and subsidiary as of December 31, 1998, and the related consolidated
statement of operations, shareholders' equity, and cash flows for the year then
ended. Our audit also included the information relating to the year ended
December 31, 1998, on the financial statement 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 audit.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
PowerCerv Corporation and subsidiary at December 31, 1998, and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule for the year ended December 31, 1998,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

                                    /s/ Ernst & Young LLP

Tampa, Florida
January  22, 1999, except with respect to Note 16,
           as to which the date is March 31, 1999.


                                       36

<PAGE>   38


                              POWERCERV CORPORATION

                           Consolidated Balance Sheets

                           December 31, 1998 and 1997

<TABLE>
<CAPTION>
                                                                              1998                    1997
                                                                          ------------            -----------
<S>                                                                       <C>                     <C>      
                                     ASSETS
Current assets:
     Cash and cash equivalents                                            $  6,594,430              6,360,249
     Accounts receivable, net of allowance of $1,480,000
        in 1998 and $2,000,000 in 1997                                       5,007,263              6,925,349
     Inventories                                                               137,492                155,026
     Other current assets                                                      102,732                173,478
                                                                          ------------            -----------
                  Total current assets                                      11,841,917             13,614,102

Property and equipment, net                                                  2,238,936              2,527,060
Intangible assets, net                                                         555,657                974,631
Investment in third-party                                                    1,000,000              1,500,000
Deposits and other                                                              93,809                 70,812
                                                                          ------------            -----------

                  Total assets                                            $ 15,730,319             18,686,605
                                                                           ===========            ===========



                      LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
     Accounts payable                                                     $    637,209              1,362,711
     Accrued expenses                                                        1,954,069              2,874,690
     Deferred revenue                                                        1,863,882              1,492,072
                                                                          ------------            -----------

                  Total current liabilities                                  4,455,160              5,729,473


Shareholders' equity:
     Common stock, $.001 par value, 45,000,000 shares authorized;
         13,837,000 shares and 13,797,000 shares issued and
         outstanding at December 31, 1998 and 1997, respectively                13,837                 13,797
     Additional paid-in capital                                             50,990,134             50,864,262
     Accumulated deficit                                                   (39,728,812)           (37,920,927)
                                                                          ------------            -----------

                  Total shareholders' equity                                11,275,159             12,957,132

Commitments, contingencies and related party transactions
                                                                          ------------            -----------
                  Total liabilities and shareholders' equity              $ 15,730,319             18,686,605
                                                                          ============            ===========
</TABLE>


See accompanying notes to consolidated financial statements.



                                       37
<PAGE>   39


                              POWERCERV CORPORATION

                      Consolidated Statements of Operations

                  Years ended December 31, 1998, 1997 and 1996

<TABLE>
<CAPTION>
                                                           1998               1997              1996
                                                       -----------        -----------       -----------
<S>                                                    <C>                  <C>              <C>
Revenue:
     License fees                                      $ 8,342,230          6,433,813        11,323,848
     Technology resales                                    857,887          2,385,028         2,860,481
     Service fees                                       20,770,575         24,267,886        23,171,986
                                                       -----------        -----------       -----------

                  Total revenue                         29,970,692         33,086,727        37,356,315
                                                       -----------        -----------       -----------

Costs and expenses:
     Cost of licenses                                      670,082          2,975,425         1,319,021
     Cost of technology resales                            592,439          1,871,046         2,336,958
     Cost of services                                   16,514,322         19,634,554        15,972,901
     General and administrative                          3,886,360          7,686,842         5,255,869
     Sales and marketing                                 6,597,159         11,075,102        10,730,429
     Research and development                            3,819,587          5,787,529         6,688,520
     Work force reduction and other                             --          1,010,000                --
     In-process research and development                        --                 --           100,000
                                                                          -----------       -----------

                  Total costs and expenses              32,079,949         50,040,498        42,403,698
                                                       -----------        -----------       -----------

                  Operating loss                        (2,109,257)       (16,953,771)       (5,047,383)
                                                       -----------        -----------       -----------

Other income (expense):
     Interest expense                                      (14,851)           (13,966)         (177,687)
     Interest income                                       314,877            615,126           859,459
     Miscellaneous expense                                   1,346            (23,150)           (7,154)
                                                       -----------        -----------       -----------

                  Total other income (expense)             301,372            578,010           674,618
                                                       -----------        -----------       -----------

                  Loss before income taxes              (1,807,885)       (16,375,761)       (4,372,765)

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

                  Net loss and comprehensive loss      $(1,807,885)       (18,087,261)       (2,715,065)
                                                       ===========        ===========       ===========

Basic and diluted net loss per share                   $     (0.13)             (1.31)            (0.21)
                                                       ===========        ===========       ===========


Weighted average shares outstanding                     13,817,000         13,839,000        12,950,000
                                                       ===========        ===========       ===========
</TABLE>


See accompanying notes to consolidated financial statements.



                                       38
<PAGE>   40


                              POWERCERV CORPORATION

                 Consolidated Statements of Shareholders' Equity

                  Years ended December 31, 1998, 1997 and 1996




<TABLE>
<CAPTION>
                                             COMMON STOCK              ADDITIONAL                            TOTAL
                                        -----------------------          PAID-IN        ACCUMULATED      SHAREHOLDERS'
                                        SHARES        PAR VALUE          CAPITAL          DEFICIT       EQUITY (DEFICIT)
                                        ------        ---------          -------          -------       ----------------
<S>                                   <C>             <C>              <C>              <C>             <C>
Balance, January 1, 1996               8,680,000       $ 8,680          1,119,720       (17,118,601)      (15,990,201)

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

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

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

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

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

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

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

Balance, December 31, 1997            13,797,000        13,797         50,864,262       (37,920,927)       12,957,132

Issuance of common stock                  40,000            40            125,872                --           125,912

Net loss                                      --            --                 --        (1,807,885)       (1,807,885)
                                      ----------       -------        -----------        ----------        ----------

Balance, December 31, 1998            13,837,000       $13,837         50,990,134       (39,728,812)       11,275,159
                                      ==========       =======        ===========        ==========        ==========
</TABLE>


See accompanying notes to consolidated financial statements.


                                       39
<PAGE>   41


                              POWERCERV CORPORATION

                      Consolidated Statements of Cash Flows

                  Years ended December 31, 1998, 1997 and 1996

<TABLE>
<CAPTION>
                                                                                        1998              1997              1996
                                                                                    -----------       -----------       -----------
<S>                                                                                 <C>               <C>               <C>
Cash flows from operating activities:
     Net loss                                                                       $(1,807,885)      (18,087,261)       (2,715,065)
     Adjustments to reconcile net loss to net cash
         provided by (used in) operating activities:
              Depreciation and amortization                                           1,451,285         3,420,837         1,594,000
              Accretion of imputed interest                                                  --                --           140,674
              Write-off of in-process research and development                               --                --           100,000
              Deferred income taxes                                                          --         1,657,700          (462,700)
              Deferred revenue                                                          371,809          (286,296)          873,973
              Provision for uncollectible accounts                                     (155,841)        2,011,453           268,000
              Changes in assets and liabilities, net of effect of acquisition:
                  Accounts receivable                                                 2,073,928         1,783,165        (3,268,454)
                  Refundable income taxes                                                    --           103,170           703,723
                  Inventories                                                            17,534           105,663          (213,715)
                  Deposits and other                                                     42,943           (12,873)         (145,884)
                  Accounts payable and accrued expenses                              (1,646,123)        1,714,114          (477,519)
                  Due to affiliate                                                           --                --           (11,343)
                  Noncurrent income taxes payable                                            --                --        (1,195,000)
                                                                                    -----------       -----------       -----------

                      Net cash provided by (used in) operating activities               347,650        (7,590,328)       (4,809,310)
                                                                                    -----------       -----------       -----------

Cash flows from investing activities:
     Purchases of property and equipment, net                                          (739,381)         (738,711)       (1,731,889)
     Investment in third-party                                                               --                --        (1,500,000)
     Exercise of third-party put options                                                500,000                --                --
                                                                                                                        -----------
     Acquisition of assets, net of cash received                                             --                --          (126,386)
                                                                                    -----------       -----------       -----------

                      Net cash used in investing activities                            (239,381)         (738,711)       (3,358,275)
                                                                                    -----------       -----------       -----------

Cash flows from financing activities:
     Net repayments on lines of credit                                                       --                --        (3,617,673)
     Proceeds from notes payable                                                             --                --                --
     Principal payments on notes payable                                                     --                --       (11,540,613)
     Net proceeds from issuance of preferred stock                                           --                --                --
     Redemption of preferred stock                                                           --                --        (5,500,000)
     Net proceeds from issuance of common stock, net of offering costs                  125,912            52,120        43,462,539
                                                                                    -----------       -----------       -----------

                      Net cash provided by financing activities                         125,912            52,120        22,804,253
                                                                                    -----------       -----------       -----------

Net increase (decrease) in cash and cash equivalents                                    234,181        (8,276,919)       14,636,668

Cash and cash equivalents, beginning of year                                          6,360,249        14,637,168               500
                                                                                    -----------       -----------       -----------

Cash and cash equivalents, end of year                                              $ 6,594,430         6,360,249        14,637,168
                                                                                    ===========       ===========       ===========
</TABLE>


See accompanying notes to consolidated financial statements.


                                       40
<PAGE>   42


                              POWERCERV CORPORATION

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997


(1)      ORGANIZATION AND OPERATIONS

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

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

(2)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         (A)      USE OF ESTIMATES

                  The preparation of consolidated financial statements in
                  conformity with generally accepted accounting principles
                  requires management to make estimates and assumptions that
                  affect the reported amounts of assets and liabilities and
                  disclosure of contingent assets and liabilities at the date of
                  the consolidated financial statements and the reported amounts
                  of revenues and expenses during the reporting period. Actual
                  results could differ from those estimates. To the extent
                  management's estimates prove to be incorrect, financial
                  results for future periods may be adversely affected.
                  Significant estimates contained in the accompanying
                  consolidated financial statements include management's
                  estimate of the allowance for uncollectible accounts
                  receivable and the recoverability of long term assets
                  ,including investments, property and equipment and intangible
                  assets.

         (B)      CASH AND CASH EQUIVALENTS

                  The Company considers all highly liquid investments with a
                  maturity of three months or less when purchased to be cash
                  equivalents.

         (C)      INVENTORIES

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

         (D)      PROPERTY AND EQUIPMENT

                  Property and equipment are recorded at cost. Depreciation and
                  amortization are calculated on a straight-line basis over the
                  estimated useful lives of the respective assets. Upon
                  retirement or sale, cost and accumulated depreciation or
                  amortization on such assets are removed from the accounts



                                       41
<PAGE>   43


                  and any gains or losses are reflected in the consolidated
                  statement of operations. Maintenance and repairs are charged
                  to expense as incurred.

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



                                       42
<PAGE>   44


                                    POWERCERV CORPORATION
                                        
                           Notes to Consolidated Financial Statements          

         (E)      REVENUE RECOGNITION

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

                  Beginning January 1, 1998, the Company has recognized revenue
                  in accordance with the American Institute of Certified Public
                  Accountants' ("AICPA") Statement of Position 97-2, Software
                  Revenue Recognition ("SOP 97-2"), as amended by Statement of
                  Position 98-4 ("SOP 98-4"), Deferral of the Effective Date of
                  a Provision of SOP 97-2. Revenue is recognized from licenses
                  of the Company's software products when the contract has been
                  executed, the product(s) has been shipped, collectibility is
                  probable and the software license fees are fixed or
                  determinable. In the event that the contract provides for
                  multiple elements (e.g., software products, postcontract
                  customer support, consulting services), the total fee is
                  allocated to these elements based on "vendor-specific
                  objective evidence" of fair value. If any portion of the
                  license fees is subject to forfeiture, refund or other
                  contractual contingencies, the Company will postpone revenue
                  recognition until these contingencies have been removed.
                  Historically, product returns and allowances have been
                  immaterial. For those periods in which the Company marketed
                  its development tools and third party technology resales,
                  license revenue was recognized following the procedures above
                  except that these products are generally licensed via
                  shrinkwrap license agreements. 

                  The Company generally accounts for consulting and education
                  services separate from software license fees for those
                  multi-element arrangements where services are a separate
                  element and are not essential to the customer's functionality
                  requirements and there is "vendor-specific objective
                  evidence" of fair value for these services. Consulting and
                  education revenue is recognized as the services are
                  performed. Revenue from support and maintenance activities is
                  recognized ratably over the term of the maintenance period
                  and the unrecognized portion is recorded as deferred revenue.
                  Prior to January 1, 1998, the Company recognized revenue in
                  accordance with the American Institute of Certified Public
                  Accountants' Statement of Position 91-1, Software Revenue
                  Recognition.

         (F)      SOFTWARE DEVELOPMENT COSTS

                  Software development costs are accounted for in accordance
                  with Statement of Financial Accounting Standards No. 86,
                  Accounting for the Costs of Computer Software to be Sold,
                  Leased, or Otherwise Marketed. Costs associated with the
                  planning and design phase of software development, including
                  coding and testing activities necessary to establish
                  technological feasibility, are classified as research and
                  development and expensed as incurred. Once technological
                  feasibility has been determined, additional costs incurred in
                  development, including coding, testing, and product quality
                  assurance, are capitalized when material. During the years
                  ended December 31, 1998, 1997 and 1996, the Company did not
                  capitalize any internal software development costs.



                                       43
<PAGE>   45


                              POWERCERV CORPORATION

                   Notes to Consolidated Financial Statements

                  During 1996 and 1995 the Company acquired certain software
                  technology. The acquired software technology is being
                  amortized, on a product-by-product basis, at the greater of
                  the straight-line basis utilizing the estimated economic life,
                  generally three to five years, or the ratio of the current
                  product revenue to total expected revenue over the life of the
                  product.

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

                  Acquired software technology and its amortization are
                  summarized as follows:

<TABLE>
<CAPTION>
                                                         AMORTIZATION             ACCUMULATED
                  YEAR                  COST               EXPENSE                AMORTIZATION
                  ----                  ----             ------------             ------------
                  <S>               <C>                  <C>                      <C>
                  1998              $2,907,000              301,000                2,746,000
                  1997               2,907,000            1,555,000                2,445,000
                  1996               2,907,000              759,000                  890,000
</TABLE>

                  Included in the $1,555,000 amortization expense for 1997 is
                  $808,000 of additional amortization expense recorded in the
                  fourth quarter of 1997 to reduce the carrying value of the
                  acquired software technology to its net realizable value.

         (G)      GOODWILL AND OTHER INTANGIBLE ASSETS

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

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

<TABLE>
<CAPTION>
                                                          AMORTIZATION             ACCUMULATED
                   YEAR                 COST                EXPENSE                AMORTIZATION
                   ----                 ----              ------------             ------------
                  <S>               <C>                   <C>                      <C>
                  1998              $1,458,000              123,000                1,064,000
                  1997               1,453,000              736,000                  941,000
                  1996               1,431,000              196,000                  205,000
</TABLE>

                  Included in the $736,000 amortization expense for 1997 is
                  $530,000 of additional amortization expense recorded in the
                  fourth quarter of 1997 to reduce the carrying value of
                  goodwill to its net realizable value.

         (H)      INVESTMENT IN THIRD-PARTY

                  During December 1996, the Company acquired a 5% fully-diluted
                  equity interest in a closely-held entity, through a $1,500,000
                  investment in the entity's Series B convertible preferred
                  stock. The cost of the investment was based upon a valuation
                  of the entity done for the Company by an


                                       44
<PAGE>   46


                              POWERCERV CORPORATION

                   Notes to Consolidated Financial Statements


                  independent firm. During the year ended December 31, 1997, the
                  Company's investment interest was diluted to approximately 4%
                  as a result of additional equity transactions by the investee
                  company. During December 1998, the Company entered into an
                  agreement that expanded its rights to exercise its preferred
                  stock put options and exercised its preferred stock put option
                  on 98,232 shares for $500,000. The remaining preferred stock
                  put options can be exercised on the remaining 196,679 shares
                  of investee stock at various dates through June 2000. The
                  investee company develops, markets and licenses accounting
                  software. Based upon management's evaluations of the investee
                  company's projection of undiscounted future cash flows, the
                  Company is of the opinion that its investment is recorded at
                  the lower of cost or market value as of December 31, 1998. In
                  a separate transaction with this entity, the Company entered
                  into a partnering agreement in June 1996. Under this
                  agreement, the Company granted this entity original equipment
                  manufacturer (OEM) development and distribution rights to one
                  of its application products in exchange for a license fee of
                  $2 million. In addition to the OEM license fee, the Company
                  was entitled to royalties based upon future licensing of the
                  OEM products. The partnering agreement also provided for the
                  entity to have value-added reseller rights for certain of the
                  Company's other products. During December 1997, the Company
                  amended the partnering agreement by expanding the OEM license
                  rights for a license fee of $250,000. During 1998, the Company
                  amended the partnering agreement twice by expanding the OEM
                  license rights for license fees of $825,000. These amendments
                  also provide evaluation license rights to other application
                  products of the Company and reduced the total royalties due
                  under the partnering agreement from $2 million to zero.

         (I)      INCOME TAXES

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

         (J)      CONCENTRATIONS OF CREDIT RISK

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

         (K)      STOCK BASED COMPENSATION

                  Statement of Financial Accounting Standards No. 123,
                  Accounting for Stock-Based Compensation ("Statement 123")
                  stipulates that entities recognize as expense over the vesting
                  period the fair value of all stock-based awards on the date of
                  grant. Alternatively, Statement 123 allows entities to
                  continue to apply the provisions of APB 25 and provide pro
                  forma net income and pro forma



                                       45
<PAGE>   47


                              POWERCERV CORPORATION

                   Notes to Consolidated Financial Statements

                  net earnings per share disclosures for employee stock options
                  as if the fair-value-based method defined in Statement 123 had
                  been applied. The Company has elected to continue to apply the
                  provisions of Accounting Principles Board Opinion No. 25 and
                  provide the pro forma disclosure information required by
                  Statement 123.

         (L)      NET LOSS PER SHARE

                  The Company computes net loss per share based upon Statement
                  of Financial Accounting Standards No. 128, Earnings Per Share.
                  The basic net loss per share is computed by dividing the net
                  loss available to common stockholders by the weighted-average
                  number of common shares outstanding. Potential common shares
                  relating to stock options in each of the years in the
                  three-year period ended December 31, 1998 were anti-dilutive
                  due to the net losses sustained by the Company, thus the
                  diluted net loss per share in these years is the same as the
                  basic net loss per share.

         (M)      RECLASSIFICATIONS

                  Certain prior year amounts have been reclassified to conform
                  with the current year's presentation.

         (N)      SUPPLEMENTAL CASH FLOW INFORMATION

                  The Company considers all highly liquid investments with
                  maturity dates of three months or less at the time of purchase
                  to be cash equivalents. At December 31, 1998 and 1997, cash
                  equivalents totaled approximately $3,991,000 and $4,986,000,
                  respectively.

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

                  Interest paid during the years ended December 31, 1998, 1997
                  and 1996 was approximately $14,800, $14,000 and $240,600,
                  respectively.

                  Income taxes paid during the years ended December 31, 1998,
                  1997 and 1996 were approximately $11,000, $37,000 and $4,000,
                  respectively. Income tax refunds totaled approximately
                  $14,000, $89,000 and $708,000 during the years ended December
                  31, 1998, 1997 and 1996, respectively.




                                       46
<PAGE>   48


                              POWERCERV CORPORATION

                   Notes to Consolidated Financial Statements


(3)      WORK FORCE REDUCTION AND OTHER CHARGE

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

<TABLE>
         <S>                                                                      <C>
         Severance and related costs (50 employees)                               $  411,000
         Office closing costs                                                        113,000
         Impairment of property and equipment primarily related to
             assets used by severed employees                                        192,000
         Other costs, primarily related to previous contractual commitments          294,000
                                                                                  ----------
                                                                                  $1,010,000
                                                                                  ==========
</TABLE>

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

         At December 31, 1998, the Company had approximately $75,000 in
         remaining work force reduction-related liabilities, primarily severance
         payments, that are included in accrued expenses on the consolidated
         balance sheets.

(4)      PROPERTY AND EQUIPMENT

         Property and equipment consists of the following at December 31, 1998
         and 1997:

<TABLE>
<CAPTION>
                                                                                           ESTIMATED
                                                                                         USEFUL LIVES
                                                        1998               1997            (YEARS)
                                                        ----               ----            -------
         <S>                                         <C>                <C>              <C>
         Leasehold improvements                      $  439,202           101,276           3 - 5*
         Furniture and fixtures                         751,678           707,603           5 - 7
         Computer equipment                           3,797,594         3,548,248           3 - 7
         Equipment                                      600,357           493,160           5 - 7
                                                     ----------         ---------

                                                      5,588,831         4,850,287
         Less accumulated depreciation
             and amortization                         3,349,895         2,323,227
                                                     ----------         ---------

                                                     $2,238,936         2,527,060
                                                     ==========         =========
</TABLE>

         * Or the remaining term of the lease, if shorter.

         Depreciation and amortization expense totaled approximately $1,027,000,
         $1,131,000, and $639,000 during the years ended December 31, 1998,
         1997, and 1996, respectively.



                                       47

<PAGE>   49


                              POWERCERV CORPORATION

                   Notes to Consolidated Financial Statements


(5)      LINES OF CREDIT AND NOTES PAYABLE

         The Company had a $5,000,000 unsecured revolving bank line of credit
         that expired on February 15, 1999. The line of credit had an interest
         rate equal to the 90 day floating LIBOR rate plus 150 to 200 basis
         points depending on a ratio of the Company's total liabilities to
         tangible net worth, as defined (7.07% and 7.22% at December 31, 1998
         and 1997, respectively). The line of credit agreement required the
         Company to adhere to certain restrictive financial ratios. The Company
         was in compliance with these financial ratios at December 31, 1998.
         There were no outstanding balances on the line of credit as of December
         31, 1998 and 1997. During January 1998, the Company and its bank
         amended the terms of this line of credit providing for the application
         of a $300,000 sub-limit for the purpose of supporting letters of
         credit. See Note 16 for further discussion.

(6)      ACCRUED EXPENSES

         Accrued expenses consist of the following at December 31, 1998 and
         1997:

<TABLE>
<CAPTION>
                                                      1998           1997
                                                   ----------      ---------
                  <S>                              <C>             <C>
                  Compensation                     $1,054,972      1,369,603
                  Severance and related costs          57,033        411,000
                  Other                               842,064      1,094,087
                                                   ----------      ---------
                                                   $1,954,069      2,874,690
                                                   ==========      =========
</TABLE>

(7)      INCOME TAXES

         Income tax expense (benefit) for the years ended December 31, 1998,
         1997 and 1996 consists of the following:

<TABLE>
<CAPTION>
                                                          1998         1997             1996
                                                          ----      ----------       ----------
                  <S>                                     <C>      <C>              <C>
                  Current:
                     Federal                              $--          45,300       (1,005,000)
                     State                                 --           8,500         (190,000)
                                                          ---      ----------       ----------

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

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

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

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



                                       48
<PAGE>   50


                              POWERCERV CORPORATION

                   Notes to Consolidated Financial Statements


       Income tax expense (benefit) for the years ended December 31, 1998, 1997
       and 1996 differed from the amount computed by applying the U.S. federal
       income tax rate of 34 percent to loss before income taxes as a result of
       the following:

<TABLE>
<CAPTION>
                                                            1998             1997             1996
                                                         ---------        ----------       ----------
                  <S>                                    <C>              <C>              <C>
                  "Expected" income tax benefit          $(615,000)       (5,568,000)      (1,487,000)
                  State, net of federal benefit            (72,000)         (648,000)        (173,000)
                  Change in the valuation allowance
                       for deferred tax assets             687,000         7,936,000               --
                  Other, net                                    --            (8,500)           2,300
                                                         ---------        ----------       ----------
                                                         $      --         1,711,500       (1,657,700)
                                                         =========        ==========       ==========
</TABLE>

         The tax effects of temporary differences that give rise to significant
         components of the deferred tax assets and deferred tax liabilities at
         December 31, 1998 and 1997 are presented below:

<TABLE>
<CAPTION>
                                                                                      1998              1997
                                                                                  -----------        ----------
                  <S>                                                             <C>                <C>
                  Deferred tax assets:
                     Deferred revenue                                             $   135,000           271,000
                     Provision for uncollectible accounts                             116,000                --
                     Accrued expenses and work force reduction                         95,000           171,000
                     Operating losses                                               6,661,000         6,146,000
                        Intangible assets                                           3,231,000         3,192,000
                                                                                  -----------        ----------

                         Total gross deferred tax assets                           10,122,000         9,780,000

                         Less valuation allowance                                  (9,918,000)       (9,231,000)
                                                                                  -----------        ----------

                         Net deferred tax assets                                      204,000           549,000
                                                                                  -----------        ----------

                  Deferred tax liabilities:
                     Section 481 cash to accrual conversion                                --           292,000
                     Depreciation and amortization of property and equipment          196,000           257,000
                     Other                                                              8,000                --
                                                                                  -----------        ----------

                         Gross deferred tax liabilities                               204,000           549,000
                                                                                  -----------        ----------

                     Total net deferred tax assets                                $        --                --
                                                                                  ===========        ==========
</TABLE>



                                       49
<PAGE>   51


                              POWERCERV CORPORATION

                   Notes to Consolidated Financial Statements


         The Company increased its deferred income tax asset valuation allowance
         by $687,000 during the year ended December 31, 1998 to offset deferred
         tax benefits recognized. The decision to continue to fully reserve the
         deferred income tax asset was primarily the result of the Company's
         continued losses from operations. At December 31, 1998, the Company has
         net operating loss carry forwards of approximately $17,527,000 for
         federal income tax purposes that expire at various times from years
         2010 to 2018.

         The Company's federal income tax returns for the years ended December
         31, 1996 and 1995 were subject to a routine examination by the Internal
         Revenue Service that resulted in an assessment of $66,000 of tax and
         approximately $87,000 of interest. The Company is currently in the
         process of appealing this assessment.

(8)      SHAREHOLDERS' EQUITY

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

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

(9)      COMPREHENSIVE INCOME (LOSS)

         Beginning January 1, 1998, the Company adopted Statement of Financial
         Accounting Standards No. 130, Reporting Comprehensive Income. Statement
         130, which defines comprehensive income as the change in equity of an
         enterprise except for those changes resulting from shareholder
         transactions, establishes standards for reporting comprehensive income.
         For the years ended December 31, 1998, 1997 and 1996, the Company did
         not have any comprehensive income (loss) other than the net loss
         reported on the Consolidated Statements of Operations.



                                       50
<PAGE>   52


                              POWERCERV CORPORATION

                   Notes to Consolidated Financial Statements


(10)     COMMITMENTS AND CONTINGENCIES

         (A)      LEASES

                  The Company conducts its operations in leased facilities. The
                  lease terms range from one month to five years. Rental
                  expenses under operating leases approximated $1,080,000,
                  $1,167,000 and $1,020,000, during the years ended December 31,
                  1998, 1997 and 1996, respectively.

                  Future minimum lease payments under noncancelable operating
                  lease agreements during the years following December 31, 1998
                  are as follows:

<TABLE>
<CAPTION>
                  YEAR ENDING
                  DECEMBER 31,                          COMMITMENT
                  ------------                          ----------
                  <S>                                   <C>
                      1999                              $1,131,000
                      2000                                 722,000
                      2001                                 367,000
                      2002                                 180,000
                      2003                                  55,000
                  Thereafter                                    --
                                                        ----------
                                                        $2,455,000
                                                        ==========
</TABLE>

         (B)      LITIGATION

                  A complaint was filed on July 24, 1997 in the United States
                  District Court for the Middle District of Florida, captioned
                  J. Conrad Lifsey vs. Harold R. Ross, Gerald R. Wicker, Marc J.
                  Fratello, Roy E. Crippen, III, Donald B. Hebb, Jr., Thomas S.
                  Roberts, PowerCerv Corporation, Alex Brown & Sons, Inc.,
                  Robertson, Stephens & Company, ABS Capital Partners, L.P.,
                  Summit Investors II, L.P., and Summit Ventures III, L.P. The
                  complaint purports to be a class action on behalf of those
                  persons who purchased shares of the Company's common stock
                  from March 1, 1996 (the date of the Company's initial public
                  offering of its common stock ("IPO")) through July 24, 1996.
                  The complaint alleges, among other things, that the defendants
                  violated the Securities Act of 1933 and the Securities
                  Exchange Act of 1934 in connection with the Company's IPO and
                  in its subsequent securities filings, press releases and other
                  public statements. The plaintiff seeks damages of an
                  unspecified amount, rescission of certain securities sales and
                  certain other remedies. On March 19, 1998, the defendants
                  filed their motions to dismiss this complaint. An effect of
                  this motion filing is to postpone any discovery on this case
                  until after the motions are ruled on by the Court. No ruling
                  has yet been handed down. On April 5, 1998, the Court ordered
                  the parties to attend a mediation conference by July 30, 1998.
                  The parties did not resolve this lawsuit in the mediation
                  conference. The defendants continue to deny any wrongdoing and
                  intend to contest the suit vigorously.

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



                                       51
<PAGE>   53


                              POWERCERV CORPORATION

                   Notes to Consolidated Financial Statements


         (C)      EMPLOYMENT AGREEMENTS

                  The Company is party to employment agreements with several of
                  its officers that provide for annual base salaries, target
                  bonus levels, severance pay under certain conditions, and
                  certain other benefits.

(11)     EMPLOYEE BENEFIT PLANS

         (A)      DEFINED CONTRIBUTION PLAN

                  The Company has a 401(k) plan covering employees who meet
                  established eligibility requirements. Under the plan
                  provisions, the Company may match participant contributions.
                  During 1998, the Company matched 30% of participant
                  contributions to a maximum matching amount of 6% of
                  participant base compensation. During 1997 and 1996, the
                  Company matched 50% of participant contributions to a maximum
                  matching amount of 6% of participant base compensation. Total
                  Company contributions were approximately $145,000, $342,000
                  and $257,000, during the years ended December 31, 1998, 1997
                  and 1996, respectively. During the years ended December 31,
                  1998 and 1997, this match occurred in the form of Company
                  common stock purchased in the open market. During 1998, Plan
                  forfeitures funded the Company matching amounts.

         (B)      STOCK OPTION PLAN

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



                                       52
<PAGE>   54


                              POWERCERV CORPORATION

                   Notes to Consolidated Financial Statements


         Generally, options granted under this stock option plan expire 10 years
         after the date of grant, are exercisable in four equal annual
         installments commencing one year from the date of grant and are granted
         at fair market value on the date of the grant. As of December 31, 1998,
         a total of 3,675,000 shares were reserved for issuance under the plan.

         During 1998, the Company issued 1,815,000 non-qualified stock options
         to certain new members of our senior management. These options were
         granted at fair market value on the date of the grant, are vested based
         upon specific dates through December 2001 and expire 10 years after the
         date of grant.

         Activity with respect to all stock options is summarized as follows:

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

              <S>                                                          <C>          <C>
              Balance at December 31, 1995                                   659,633          $3.61

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

              Balance at December 31, 1996                                   920,922          $5.00

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

              Balance at December 31, 1997                                 1,302,402          $3.86

                  Options granted                                          4,888,506          $2.83
                  Options exercised                                          (40,191)         $3.13
                  Options canceled                                          (728,277)         $3.74
                                                                           ---------

              Balance at December 31, 1998                                 5,422,440          $2.95
                                                                           =========
</TABLE>

         Subsequent to December 31, 1998, the Company granted options to
         purchase 1,292,000 shares of common stock and canceled 627,000 options
         that had been outstanding at December 31, 1998.


                                       53
<PAGE>   55


                              POWERCERV CORPORATION

                   Notes to Consolidated Financial Statements


         The range of exercise prices, shares, weighted-average contractual life
         and weighted-average exercise price for the options outstanding at
         December 31, 1998 is presented below:

<TABLE>
<CAPTION>
             Range of                                     Weighted-average         Weighted-average
         exercise prices              Shares              contractual life          exercise price
         ---------------              ------              ----------------         ----------------
         <S>                         <C>                  <C>                      <C>
          $ 1.50 - 2.50              1,932,989                9 years                     $ 1.80
            2.51 - 4.00              2,161,394                9 years                       3.01
            4.01 - 5.81              1,278,697                9 years                       4.30
            7.00 - 10.00                39,060                7 years                       9.42
           12.75 - 16.75                10,300                7 years                      14.84
                                     ---------
           1.50 - 16.75              5,422,440                9 years                       2.95
                                     =========
</TABLE>



                                       54
<PAGE>   56


                              POWERCERV CORPORATION

                   Notes to Consolidated Financial Statements


         The range of exercise prices, shares and weighted-average exercise
         price for the options exercisable at December 31, 1998 are presented
         below:

<TABLE>
<CAPTION>
            Range of                    Shares              Weighted-average
         exercise prices             exercisable             exercise price
         ---------------             -----------            ----------------
         <S>                         <C>                    <C>
         $ 1.50 - 2.50                   970,234                  $ 1.80
           2.51 - 4.00                   683,738                    3.09
           4.01 - 5.81                   106,977                    4.60
           7.00 - 10.00                   32,982                    9.49
          12.75 - 16.75                    5,750                   14.71
                                       ---------
           1.50 - 16.75                1,799,681                    2.64
                                       =========
</TABLE>

         The per share weighted-average fair value of stock options granted
         during 1998, 1997 and 1996 was $2.94, $1.63 and $2.34, respectively on
         the date of grant using the Black Scholes option-pricing model with the
         following weighted-average assumptions: 1998 - expected dividend yield
         of 0%, risk-free interest rate of 4.7%, expected volatility rate of
         157%, and an expected life of 3.5 years; 1997 - expected dividend yield
         of 0%, risk-free interest rate of 5.8%, expected volatility rate of
         103%, and an expected life of 3.5 years; 1996 - expected dividend yield
         of 0%, risk-free interest rate of 6.4%, expected volatility rate of
         135%, and an expected life of 3.5 years.

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

<TABLE>
<CAPTION>
                                                     1998                         1997                       1996
                                        -------------------------    -------------------------    -----------------------
                                                           NET                          NET                         NET
                                           NET           LOSS PER        NET          LOSS PER       NET          LOSS PER
                                           LOSS           SHARE          LOSS          SHARE         LOSS          SHARE
                                           ----           -----          ----          -----         ----          -----
         <S>                            <C>              <C>         <C>              <C>         <C>             <C>
         As reported                    $(1,807,885)      (0.13)     (18,087,261)      (1.31)     (2,715,065)      (0.21)

         Statement 123
          compensation, net of tax       (1,407,000)      (0.10)        (849,000)      (0.06)       (437,000)      (0.03)
                                        -----------       -----      -----------       -----      ----------       -----

         Pro forma disclosure            (3,214,885)      (0.23)     (18,936,261)      (1.37)     (3,152,065)      (0.24)
                                        ===========       =====      ===========       =====      ==========       =====
</TABLE>



                                       55
<PAGE>   57


                              POWERCERV CORPORATION

                   Notes to Consolidated Financial Statements


(12)     SEGMENT REPORTING

         The Company has identified its operating segments as its services and
         license product segments. In 1998, the Company adopted Statement of
         Financial Accounting Standards No. 131, Disclosures about Segments of
         an Enterprise and Related Information. The services segment provides
         consulting, education and maintenance services and the license product
         segment provides application, tools and technology resale products.

         The following tables provide the various segment data:

<TABLE>
<CAPTION>
                                         For the year ended December 31, 1998
                            --------------------------------------------------------------
                                               License
                             Services          Product        Unallocated         Total
                             --------          -------        -----------         -----  
<S>                         <C>               <C>             <C>               <C>
Revenues from
   external customers       $20,770,575       9,200,117               --        29,970,692
Segment profit or loss      $ 3,602,291      (1,825,188)      (3,584,988)       (1,807,885)
</TABLE>

<TABLE>
<CAPTION>
                                         For the year ended December 31, 1997
                            --------------------------------------------------------------
                                               License
                             Services          Product        Unallocated          Total
                             --------          -------        -----------          -----
<S>                         <C>               <C>             <C>               <C>
Revenues from
   external customers       $24,267,886        8,818,841               --        33,086,727
Segment profit or loss      $ 3,450,385      (11,707,314)      (9,830,332)      (18,087,261)
</TABLE>

         There were no transactions between segments. The unallocated amounts
         include general and administrative costs, other expense and income
         items as well as in 1997, $1.0 million of work force reduction and
         other costs and $1.7 million of tax expense. The Company does not use
         assets as a measure of the segment's performance, thus no assets are
         disclosed by segment in the table above.

(13)     RELATED PARTY TRANSACTIONS

         The Company has used the services of an entity owned by the Company's
         Chairman and Chief Executive Officer, Vice-chairman and Chief
         Technology Officer, and the Company's former Chief Executive Officer to
         recruit sales and consulting personnel for the Company. Related expense
         incurred by the Company for these services approximated $169,000 in
         1998. For the two previous years, expense totaled approximately
         $319,000 and $414,000, respectively.

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

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

(14)     PREFERRED STOCK

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



                                       56
<PAGE>   58


                              POWERCERV CORPORATION

                   Notes to Consolidated Financial Statements


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

         The Series A Stock subsequently was redeemed at $100 per share (a total
         of $5,500,000) after the completion of the Company's IPO in 1996. The
         Series B Stock was converted to common stock at a ratio of one-to-one
         at the time of the Company's IPO.

(15)     ACQUISITIONS

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

         This transaction resulted in the acquisition of research and
         development related to projects that had not yet reached technological
         feasibility and had no future alternative use at the date of
         acquisition. Such in-process research and development, in the amount of
         $100,000 has been expensed in the Company's consolidated statement of
         operations for the year ended December 31, 1996. This transaction
         resulted in goodwill and other intangible assets of approximately
         $893,000.



                                       57
<PAGE>   59


                              POWERCERV CORPORATION

                   Notes to Consolidated Financial Statements


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

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

(16)     SUBSEQUENT EVENTS

         On January 4, 1999, the Company granted a warrant to an unrelated
         third party to purchase 125,000 shares of the Company's common stock
         in consideration for professional services. The warrant, which expires
         the earlier of December 31, 2000, or the termination of their
         relationship, has an exercise price equal to the fair market value of
         the Company's common stock on the date of grant. The warrant may not
         be exercised until after June 30, 1999. The Company recorded expense
         related to this grant in the first quarter of 1999.

         On March 24, 1999, the Company purchased an option to acquire up to
         2,000,000 shares of its common stock from a former officer and
         director. The Company has no intention of exercising the option and
         acquiring these shares. Alternatively, and pursuant to the terms of the
         option, the Company may assign and transfer this option, in full or in
         part, to third parties during the 120-day option period. The former
         officer agreed not to engage in any further trading of his common stock
         of the Company during the option period.

         On March 29, 1999, the Company entered into an agreement with its bank
         for a $10 million credit facility. The facility consists of a
         commitment of a revolving line of credit totaling $5 million, with an
         additional $5 million of uncommitted funding. The first $2 million of
         the line is unsecured, with substantially the same terms and conditions
         as its previous $5 million line of credit described in Note 5. Draws
         from $2 million to $5 million will be conditioned upon the Company's
         compliance with an additional financial ratio, or alternatively, may be
         secured by the Company's accounts receivable and inventory. Draws in
         excess of $5 million would be subject to terms agreed to at the time of
         the draw.

         Effective March 31, 1999, the Company sold its general consulting
         business (consulting services other than its application-related
         services) to a third party. Consideration totaled approximately $10
         million and consisted of a combination of cash, PowerCerv common
         stock, and notes. This portion of PowerCerv's services business
         provided approximately $12 million in revenue and approximately $2
         million in gross margin during the year ended December 31, 1998.

         The accompanying unaudited pro forma condensed consolidated balance
         sheet as of December 31, 1998, includes the historical effects of the
         sale as though it had occurred on December 31, 1998. The unaudited pro
         forma condensed consolidated statement of operations for the year
         ended December 31, 1998, includes the historical effects of the sale
         of the general consulting business as if the sale had occurred at the
         beginning of the year. The pro forma information is based on the
         historical financial statements of the Company and the assumptions and
         adjustments described in the accompanying Notes to Unaudited Pro Forma
         Condensed Consolidated Financial Statements. The pro forma information
         does not purport to be indicative of the actual results that would
         have been achieved had the sale actually been completed as of the
         dates indicated.


                                       58
<PAGE>   60



                             POWERCERV CORPORATION

            UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

                               December 31, 1998

<TABLE>
<CAPTION>

                                                        Historical (A)       Pro Forma Adjustments          Pro Forma
                                                        --------------       ---------------------         -----------
<S>                                                     <C>                  <C>                         <C>
 ASSETS
 Current assets:
          Cash and cash equivalents                      $ 6,594,430           $  2,455,000 (B)          $  9,049,430
          Accounts receivable                              5,007,263             (1,791,000)(C)             3,216,263
          Inventories                                        137,492                (50,000)(C)                87,492
          Notes receivable                                        --              4,688,000 (D)             4,688,000
          Other current assets                               102,732                                          102,732
                                                        ------------           -------------              ------------
          Total current assets                            11,841,917              5,302,000                17,143,917

 Property and equipment, net                               2,238,936               (445,000)(C)             1,793,936
 Intangible assets, net                                      555,657               (250,000)(E)               305,657
 Investment in third-party                                 1,000,000                                        1,000,000
 Notes receivable                                                 --                850,000 (D)               850,000
 Deposits and other                                           93,809                                           93,809
                                                        ------------           ------------              ------------
          Total assets                                  $ 15,730,319           $  5,457,000              $ 21,187,319
                                                        ============           ============              ============


 LIABILITIES AND SHAREHOLDERS' EQUITY
 Current liabilities:
          Accounts payable                              $    637,209           $         --              $    637,209
          Accrued expenses                                 1,954,069                                        1,954,069
          Deferred revenue                                 1,863,882                                        1,863,882
                                                        ------------           ------------              ------------
                                                           4,455,160                     --                 4,455,160
 Shareholders' equity:
          Common stock                                        13,837                   (700)(F)                13,137
          Additional paid-in capital                      50,990,134             (1,838,200)(F)            49,151,934
          Accumulated deficit                            (39,728,812)             7,295,900 (G)           (32,432,912)
                                                        ------------           ------------              ------------
                                                          11,275,159              5,457,000                16,732,159
                                                        ------------           ------------              ------------
          Total liabilities and shareholders' equity    $ 15,730,319           $  5,457,000              $ 21,187,319
                                                        ============           ============              ============

</TABLE>



                                      59

<PAGE>   61



                             POWERCERV CORPORATION

       UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

                          Year Ended December 31, 1998

<TABLE>
<CAPTION>

                                                        Historical (A)       Pro Forma Adjustments          Pro Forma
                                                        --------------       ---------------------         -----------
<S>                                                     <C>                  <C>                         <C>
Revenue:
         License fees                                    $ 8,342,230           $         --              $  8,342,230
         Technology resales                                  857,887                                          857,887
         Service fees                                     20,770,575            (12,238,000)(H)             8,532,575
                                                        ------------           ------------              ------------
         Total revenue                                    29,970,692            (12,238,000)               17,732,692

Costs and expenses:
         Cost of licenses                                    670,082                (72,000)(I)               598,082
         Cost of technology resales                          592,439                                          592,439
         Cost of services                                 16,514,322             (9,600,000)(I)             6,914,322
         General and administrative                        3,886,360                                        3,886,360
         Sales and marketing                               6,597,159               (477,000)(I)             6,120,159
         Research and development                          3,819,587                                        3,819,587
                                                        ------------           ------------              ------------
         Total costs and expenses                         32,079,949            (10,149,000)               21,930,949
                                                        ------------           ------------              ------------
         Operating loss                                   (2,109,257)            (2,089,000)               (4,198,257)
                                                        ------------           ------------              ------------
Other income (expense):
         Interest expense                                    (14,851)                                         (14,851)
         Interest income                                     314,877                156,000 (J)               470,877
         Miscellaneous expense                                 1,346                                            1,346
                                                        ------------           ------------              ------------
         Total other income                                  301,372                156,000                   457,372
                                                        ------------           ------------              ------------
         Loss before income taxes                         (1,807,885)            (1,933,000)               (3,740,885)
Income tax expense                                                --                     --                        --
                                                        ------------           ------------              ------------
         Net loss and comprehensive loss                  (1,807,885)          $ (1,933,000)             $ (3,740,885)
                                                        ============           ============              ============
Basic and diluted net loss per share                    $      (0.13)                                    $      (0.29)
                                                        ============           ============              ============
Weighted average shares outstanding                       13,817,000               (700,000)               13,117,000
                                                        ============           ============              ============
</TABLE>

Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements

(A) Historical information is based on the audited financial statements of
    PowerCerv Corporation as of and for the year ended December 31, 1998.

(B) To reflect cash received at the closing of the transaction.

(C) To remove assets sold to the acquiring company, including certain accounts
    receivable, certain inventory, and certain property and equipment.

(D) To reflect notes receivable from buyer.

(E) To reflect write off of goodwill related to assets sold to acquiring
    company.

(F) To reflect retirement of 700,000 shares of PowerCerv common stock received
    as consideration from buyer.

(G) To reflect gain on sale of business.

(H) To eliminate revenues from general consulting business.

(I) To eliminate costs and expenses associated with general consulting
    business.

(J) To reflect interest income on cash and notes receivable received as
    consideration.



                                      60

<PAGE>   62


                                                                     SCHEDULE II


                  SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS


<TABLE>
<CAPTION>
                                                                           
                                                                  ADDITIONS                                 
                                              BALANCE AT         CHARGED TO                      BALANCE AT
                                             BEGINNING OF         COSTS AND                        END OF
                                                 YEAR              EXPENSES      WRITE-OFFS         YEAR
                                             ------------        ----------      ----------      ---------- 
                                                                     (In Thousands)
<S>                                          <C>                 <C>             <C>             <C>
Allowance For Uncollectible Accounts
  Year ended December 31, 1998                    $2,000          $ (156)          $(364)          $1,480
  Year ended December 31, 1997                    $  550          $2,011           $(561)          $2,000
  Year ended December 31, 1996                    $  425          $  268           $(143)          $  550
</TABLE>


                                       61
<PAGE>   63


                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized, in the City of Tampa,
State of Florida, on April 14, 1999.

                                    POWERCERV CORPORATION


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

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

<TABLE>
<CAPTION>
         SIGNATURE                                            TITLE                              DATE
         ---------                                            -----                              ----
<S>                                               <C>                                       <C>
/s/ MARC J. FRATELLO                                       Chairman,                        April 14, 1999
---------------------------------------            Chief Executive Officer and
MARC J. FRATELLO                                           Director
                                                  (Principal Executive Officer)


/s/ STEPHEN M. WAGMAN                                Chief Financial Officer                April 14, 1999
---------------------------------------           (Principal Financial Officer)
STEPHEN M. WAGMAN



/s/ MICHAEL J. SIMMONS                                  President, Chief                    April 14, 1999
---------------------------------------               Operating Officer and
MICHAEL J. SIMMONS                                         Director



/s/ ROY E. CRIPPEN, III                                    Director                         April 14, 1999
---------------------------------------            
ROY E. CRIPPEN, III                                



/s/ O. G. GREENE                                           Director                         April 14, 1999
---------------------------------------
O.G. GREENE



/s/ STUART C. JOHNSON                                      Director                         April 14, 1999
---------------------------------------
STUART C. JOHNSON
</TABLE>



                                       62