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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
 
                                   FORM 10-K
                            ------------------------
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934
   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
                                       OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934
    FOR THE TRANSITION PERIOD FROM  ______________ TO  _______________
 
                        COMMISSION FILE NUMBER: 0-27774
 
                             PRISM SOLUTIONS, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
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                              <S>                                      <C>
                              DELAWARE                                           77-0282704
                              (STATE OR OTHER JURISDICTION OF              (I.R.S. EMPLOYER
                              INCORPORATION OR ORGANIZATION)            IDENTIFICATION NO.)
</TABLE>
 
                               1000 HAMLIN COURT
                              SUNNYVALE, CA 94089
          (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
 
                        TELEPHONE NUMBER (408) 752-1888
              (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, $.001 PAR VALUE 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 voting Common Stock held by non-affiliates of
the Registrant as of January 21, 1998 was approximately $22,643,985. Shares of
Common Stock held by each executive, director and 5% or greater shareholder have
been excluded in that such persons may be deemed affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes. The Company has not issued any shares of non-voting common equity.
 
     As of January 21, 1998, there were approximately 14,777,369 shares of the
Registrant's Common Stock outstanding.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
     Portions of the Definitive Proxy Statement in connection with the
Registrant's 1997 Annual Meeting of Stockholders to be held March 20, 1998 in
Sunnyvale, California are incorporated by reference in Part III.
 
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<PAGE>   2
 
                             PRISM SOLUTIONS, INC.
                                   FORM 10-K
                               TABLE OF CONTENTS
 
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                                                                                               PAGE
                                                                                               NO.
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                                              PART I.
Item 1.      Business........................................................................    1
Item 2.      Properties......................................................................    6
Item 3.      Legal Proceedings...............................................................    6
Item 4.      Submission of Matters to a Vote of Security Holders.............................    7
Item 4A.     Executive Officers of the Registrant............................................    7
                                             PART II.
Item 5.      Market for Registrant's Common Equity and Related Stockholder Matters...........    9
Item 6.      Selected Financial Data.........................................................   10
Item 7.      Management's Discussion and Analysis of Financial Condition and Results of
             Operations......................................................................   10
Item 7A.     Quantitative and Qualitative Disclosures About Market Risk......................   17
Item 8.      Financial Statements and Supplementary Data.....................................   17
Item 9.      Changes in and Disagreements with Accountants on Accounting and Financial
             Disclosures.....................................................................   17
                                             PART III.
Item 10.     Directors and Executive Officers of Registrant..................................   34
Item 11.     Executive Compensation..........................................................   34
Item 12.     Security Ownership of Certain Beneficial Owners and Management..................   34
Item 13.     Certain Relationships and Related Transactions..................................   34
                                             PART IV.
Item 14.     Exhibits, Financial Statement Schedule and Reports on Form 8-K..................   35
Signatures   ................................................................................   39
</TABLE>
 
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                                     PART I
 
ITEM 1. BUSINESS
 
OVERVIEW
 
     Prism Solutions, Inc. ("Prism" or the "Company") designs, develops, markets
and supports data warehouse management software that assists its customers in
implementing data warehousing applications for the enterprise or line of
business; delivered through an information architecture of data warehouses, data
marts, and/or Operational Data Stores ("ODS.") These applications provide new
information to the organization by delivering improved efficiencies for existing
operations or processes and providing new, cross-functional views of the
business to drive innovation and overall business effectiveness. Additionally,
these applications create a comprehensive perspective for discovering and
capitalizing on new market opportunities.
 
     Data warehouses, data marts and ODS (data warehouse) are separate databases
that store historical data which is collected from an enterprise's existing
operational computer systems, then integrated and transformed for use in
business analysis and decision making. Prism offers a comprehensive suite of
products, services and methodology for the rapid, iterative process of building,
managing, maintaining and using warehousing applications which can be deployed
on top of the customer's existing IT infrastructure. The Company's products
enable its customers to develop and maintain their data warehouses more quickly
than through manual programming methods or through the use of individual
programming tools. By using the Company's products, customers can build an
initial data warehouse in as little as three to six months and significantly
reduce ongoing maintenance costs. At the same time, the Company's products
collect and manage "meta data," contextual information describing the data being
stored in the warehouse. The meta data collection and analysis capabilities
provided by the Company's products allow for more reliable analysis and decision
making by providing users with the ability to determine what data is in the
warehouse, where it came from, how it was transformed and how it has changed
over time.
 
     Prism's suite of Scaleable Data Warehousing Solutions packages provides a
point-and-click user interface for data warehousing projects, complementing
products offered by database, data access and systems integration providers. The
suite offers support for the construction and maintenance of data warehouses; an
iterative warehousing methodology, scaleable software solutions for rapid
economic implementation, and a flexible information architecture built on an
integrated meta data foundation. The Company supports and provides a wide range
of consulting and implementation services to assist its customers in the
successful implementation of their warehousing initiatives.
 
     Prism was initially incorporated in California in 1991 and was
reincorporated in Delaware in January 1996. The Company maintains its executive
offices at 1000 Hamlin Court, Sunnyvale, California, 94089. Its telephone number
is (408) 752-1888.
 
PRODUCTS AND SERVICES
 
     Prism offers data warehouse management software products and related
services. Its Scaleable Data Warehousing Solutions packages are designed to meet
customer needs for data marts, department warehouses, enterprise-wide warehouses
and conversion environments. Substantially all of the Company's license revenues
to date have been attributable to licenses for Prism Warehouse Manager and Prism
Directory Manager, the predecessors to Prism Warehouse Executive(TM) and Prism
Warehouse Directory(TM), respectively. Customers can select from the following
packages to match their requirements:
 
     The Prism Scaleable Data Mart package supports the construction of
scaleable data marts for workgroups or departments. It is typically used to
build a mart consisting of a single subject area of data within a single target
database, commonly sourcing UNIX operational systems and creating a data mart on
a UNIX or NT platform. Prism's mart package also simplifies sourcing of more
complex legacy systems data.
 
     The Prism Scaleable Warehouse package supports midrange warehousing
projects often requiring integration of data from multiple, heterogeneous source
databases to provide consistent information across
 
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departmental organizations. Typically this includes sourcing multiple legacy
files and targeting one or more relational database environments.
 
     The Prism Scaleable Enterprise package supports building and maintaining
large-scale data warehouses or operational data stores serving a wide variety of
users across the enterprise. It enables integration of several subject areas
from cross-enterprise data sources, as well as managed deployment of warehouses
on multiple heterogeneous databases, scaling from SQL to MPP configurations.
 
     The Prism Scaleable Conversion package provides data conversion
capabilities for migrating data across one application domain. It integrates
data from multiple legacy sources into a single target database.
 
     Each of these packages is based on Prism Warehouse Executive and Prism
Warehouse Directory, except for the Prism Scaleable Conversion package, which
only contains Prism Warehouse Executive.
 
     Prism Warehouse Executive has a drag-and-drop graphical user interface that
allows users to graphically model the flow of data from multiple data sources
into a target data warehouse, including all required data mappings and
transformations. The design documents and reports created with Prism Warehouse
Executive give the user an overview of a project's structure and workflow, and
help them gain visibility to the warehouse or mart construction process. Prism
Warehouse Executive extracts and integrates data from mainframe and UNIX-based
source databases. Built-in transformations allow users to perform the data
conversions, structural changes and summarizations needed to create a
consistent, historical perspective of information. Support for user-defined
business rules and user exit routines provides customers with the flexibility
needed to tailor the warehouse population processes to suit their particular
environments and data transformation requirements. Prism Warehouse Executive
includes a range of options to provide comprehensive support for the ongoing
process of managing and maintaining the data warehouse. Prism Changed Data
Capture allows customers to capture changes to the information in their
operational systems as well as transform and load these changes into the data
warehouse. Prism Schedule Manager provides support for planning, scheduling and
managing the deployment of processes to source, transform and load data into the
data warehouse. Prism FastLoad and FastUpdate allows the replication and
movement of data between databases for load balancing and the propagation of
data marts.
 
     Prism Warehouse Executive's design and construction capabilities are joined
by a common layer of meta data. During the implementation process, technical
meta data describing the warehouse source files and output tables is
automatically captured, along with the data mappings and transformations
required for development. Common meta data enables users to move from planning
and design to actual warehouse implementation. Once the warehouse specifications
are complete, the meta data serves as the basis for generating programs to
integrate, transform and map source data to the target warehouse database.
 
     The technical meta data collected by Prism Warehouse Executive is stored in
the Prism Warehouse Directory, which provides an open platform to integrate and
manage both business and technical information about warehouse changes across
the enterprise. Developers use this meta data to manage rapid, incremental
construction, while users rely on the meta data to help them navigate and access
business information. Prism Warehouse Directory's meta data can be read by a
variety of decision support tools and industry-standard Web browsers, giving
users access to warehouse information using their preferred tools.
 
     Complementing Prism Warehouse Executive and Directory, the Company offers
Prism Quality Manager (PQM). This product allows customers to analyze the
accuracy of data in their operational systems, manage the accuracy of the data
transformation process, and monitor the ongoing quality of data in the
warehouse. Prism Quality Manager allows customers to shorten the warehouse
development cycle and improve overall information accuracy and end user
confidence in warehoused information. PQM can also be used to improve quality in
application conversions or data quality/reengineering initiatives for existing
operational systems.
 
     Implementation and Consulting Services. Prism provides both implementation
services and longer term consulting services to assist in the sale and
installation of its products. Implementation services are marketed by the
Company as a standard component of the product license and delivery process,
thereby enhancing the likelihood of early-stage customer acceptance and
satisfaction. The implementation process, which lasts approximately two weeks
and is delivered by a systems engineering team familiar to the customer,
includes an
 
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on-site planning session, product training, a detailed design session and
implementation of a prototype or limited scope data warehouse. In 1997, Prism
also established vertical consulting practices for the utilities and insurance
industries.
 
     Prism's Iterations(TM) methodology is a key underlying component of Prism's
Scaleable Data Warehousing Solutions. Iterations establishes an effective
development process that defines the ongoing parallel steps and cycles needed to
build data warehouses within reasonable timeframes. Iterations details the
activities specific to the data warehouse development process, guiding users
from the startup phase to analysis and design; to construction, testing and
implementation; then returning to evaluation and management of the subsequent
version.
 
     In conjunction with the Iterations methodology, Prism has introduced a
suite of SureStart(TM) consulting programs to help customers achieve early,
visible results with their data warehousing projects. The SureStart Readiness
Assessment evaluates a company's technical and organizational preparedness to
proceed with a data warehouse initiative. The SureStart Mentored Pilot extends
the SureStart Readiness Assessment to guide an organization through its initial
data warehouse. Prism's SureStart Mart offers focuses on data marts that meet
departmental requirements.
 
     Prism is also engaged in educating the market about the benefits,
technology and payback of data warehousing through seminars, educational
curriculums and technical publications. Prism offers executive briefings and
seminars worldwide to help companies understand data warehousing strategies.
Additionally, Prism publishes a series of Tech Topics and Executive Briefings
that provide in-depth information on data warehouse strategy and implementation.
 
PRODUCT DEVELOPMENT
 
     The Company believes that its future success will depend, in part, on its
ability to maintain and improve its current technologies, enhance its existing
products and develop new products that meet an expanding range of customer
requirements. The Company intends to expand its existing product offerings and
to introduce new data warehousing software products. To date, the Company has
relied primarily on internal development of its products, but expects that,
based on timing and cost considerations, it will also license or acquire
technology or products from third parties or consultants. For example, the
Company licenses its web access software from a third party. The Company intends
to continue to support industry standard operating environments, client-server
architectures and databases.
 
     The Company is currently rewriting its software code base and plans to
incrementally incorporate the new code into its products over the next two
years. The first product element to incorporate the new code base was the
point-and-click user interface, which was introduced as part of Prism Warehouse
Executive in the fourth quarter of 1996. The Company believes that the new code
base will allow it to more easily maintain its software and quickly add
functionality to its products. In addition, the new code base provides an
enhanced level of usability for growing the customer base.
 
     As of December 31, 1997, the Company's product development staff consisted
of 87 full-time equivalent employees. The Company's total expenses for product
development for 1995, 1996 and 1997 were $3,451,000, $5,705,000, and $9,086,000
respectively. The Company anticipates that it will continue to commit
substantial resources to product development in the future. To date, the Company
has not capitalized any software development costs as such costs required to be
capitalized have been immaterial.
 
     The market for data warehouse software products is characterized by rapidly
changing technology and improvements in computer hardware, computer software and
databases. The Company's success will depend upon its ability to deliver its new
code base, maintain competitive technologies, enhance its current products and
develop new products in a timely and cost-effective manner that meet changing
market conditions, including evolving customer needs, new competitive product
offerings, emerging industry standards and changing technology. There can be no
assurance that the Company will be able to develop and market, on a timely
basis, if at all, product enhancements or new products that respond to changing
market conditions or that they will be accepted by customers. The Company has
previously experienced delays in the development
 
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and introduction of new products and product enhancements. The length of these
delays has varied depending upon the size and scope of the project and the
nature of the problems encountered. Any failure by the Company to anticipate or
to respond adequately to changing market conditions, or any significant delays
in product development or introduction, could cause customers to delay or decide
against purchases of the Company's products and would have a material adverse
effect on the Company's business, operating results and financial condition.
 
SALES, MARKETING AND CUSTOMER SUPPORT
 
     The Company markets its software and services primarily through a direct
sales organization and, to a lesser extent, through third-party distributors and
other indirect sales channels. The Company employs skilled engineers and
technically proficient salespersons capable of serving the needs of its
customers' information and business management staffs. In addition to its direct
sales efforts, the Company utilizes advertising, direct mail and public
relations programs, participates in numerous industry trade shows and
individually or jointly organizes seminars and conferences to promote the
adoption of its products and methodologies. The Company currently has domestic
offices in the metropolitan areas of Atlanta, Boston, Chicago, Dallas, Los
Angeles, New York and Washington, D.C. In addition, the Company has offices in
Reading, United Kingdom; Paris, France; Munich, Germany; Madrid, Spain; Toronto,
Canada; Mexico City, Mexico; Holland, Netherlands and through its recently
completed acquisition of Object Software, Melbourne, Australia. Field offices
are staffed with both sales and technical pre-sales representatives. In 1997,
the Company opened field offices in the Netherlands, Australia, New Zealand,
Hong Kong and Singapore.
 
     The Company has also developed indirect distribution and marketing channels
with vendors whose products fit strategically with those of the Company. The
Company believes that, in order to provide the most comprehensive and
competitive data warehouse management solutions for heterogeneous, open systems
computing environments, it will be necessary to develop, maintain and enhance
close associations with application, database, data access, hardware and
operating system vendors. The Company currently has marketing relationships with
over 20 software and hardware vendors and several systems integrators. However,
there can be no assurance that the Company will be able to maintain such
existing relationships or enter into new relationships. The Company's failure to
do so could adversely affect the portability of the Company's products to and
compatibility with existing and new platforms and databases and the timing of
new and enhanced products into the marketplace. In addition, failure to do so
could affect the Company's ability to leverage third party distribution channels
and increase its market presence.
 
     The Company engages distributors to serve certain international markets in
which the Company typically does not have a direct sales presence. The Company's
current distributors sublicense the Company's products in Belgium, Denmark,
Israel, Italy, Luxembourg, the Netherlands, Portugal, South Africa, Spain and
Sweden. In 1997, the Company added additional distributors in Brazil and Mexico.
These distributors license the Company's products at a discount for relicensing
and may provide training and consulting services to end users, in certain cases.
The Company intends to expand its operations in Europe, North America, Latin
America and Asia, which will require significant management attention and
financial resources. The Company has committed and continues to commit
significant resources to developing international sales and support channels and
opening international sales offices. In 1997, the Company expanded its presence
in the Asia/Pacific region with the acquisition of its distributor, Object
Software. There can be no assurance that the Company's efforts to develop
international sales and support channels will be successful. The failure of such
efforts could have a material adverse effect on the Company's business,
operating results and financial condition.
 
     The Company believes that its ability to provide a high level of customer
service and technical support is crucial to its marketing efforts and to the
establishment of long-term customer relationships. The Company offers an annual
maintenance program to its licensees through the Company's internal support
organization that includes product updates and post-sales technical assistance
via telephone hotline, web and fax. Substantially all of the Company's customers
at the time of initial software licensing contract with the Company for annual
maintenance. Annual maintenance fees are typically 15% of the license fees for
the relevant products. The Company also offers installation, consulting,
education and training services on a fee
 
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basis to assist customers in implementing their data warehouse solutions.
Education and training is offered at the Company's in-house facilities and at
customers' sites. The Company's distributors also offer first-level customer
support to their end users, while relying on the Company for any additional
support as needed.
 
     The Company generally ships its products as orders are received. As a
result, the Company has relatively little backlog at any given time, and does
not consider backlog to be a meaningful indicator of future performance. The
Company's sales cycle can range from three months to over a year, depending on
factors such as transaction size, the length of the customer relationship, the
timing of new product releases, the level of sales management activity and
general economic conditions. Historically, a substantial majority of the
Company's revenues in a given quarter have been recorded in the third month of
that quarter, with a concentration of such revenues in the last two weeks of the
third month. Because of the relatively large dollar size of the Company's
typical software license, any delay in the closing of a transaction can have a
significant impact on the Company's operating results for a particular period.
 
     At December 31, 1997, the Company had more than 330 active customers, some
with multiple installations. No customer accounted for more than 10% of the
Company's total revenues in 1995, 1996 or 1997.
 
COMPETITION
 
     The data warehouse market is intensely competitive and subject to rapid
change. Competitors vary in size and scope of the products and services they
offer. The Company encounters competition from a number of sources, including
internal information systems departments of customers and potential customers.
The most active competitors to the Company's Prism Scaleable Enterprise and
Prism Scaleable Warehouse packages are Evolutionary Technologies International,
Apertus Carleton Corporation, and PLATINUM Technology. The most active
competitor to the Company's Prism Scaleable Data Mart package is Informatica and
several other small, private companies. Notwithstanding the foregoing, all
competitors compete in each market segment. The Company expects to experience
additional competition from other established and emerging software companies,
including some of the Company's current marketing partners. Increased
competition has resulted in the lengthening of sales cycles and price
reductions, and could result in reduced transaction sizes, fewer customer
orders, reduced gross margins and loss of market share, any of which could have
a material adverse effect on the Company's business, operating results and
financial condition.
 
     The Company believes that the principal competitive factors affecting the
data warehouse market include technical performance and product attributes such
as functionality, portability, reliability, ease of use, adaptability and
scaleability, product reputation, quality, customer service and support, price,
ability to integrate with products produced by other vendors, the effectiveness
of sales and marketing efforts and company reputation. There can be no assurance
that the Company will be successful in competing in the future with respect to
these or other factors.
 
     Some of the Company's current, and many of the Company's potential,
competitors have significantly greater financial, technical, marketing and other
resources than the Company. As a result, they may be able to respond more
quickly to new or emerging technologies and changes in customer requirements or
to devote greater resources to the development, promotion, sale and support of
their products than the Company. In addition, current and potential competitors
have established or may establish cooperative relationships among themselves or
with third parties to increase the ability of their products to address the
needs of the Company's prospective customers. Accordingly, it is possible that
new competitors or alliances among competitors may emerge and rapidly gain
significant market share. There can be no assurance that the Company will be
able to compete successfully against current and future competitors or that
competitive pressures faced by the Company will not have a material adverse
effect on its business, operating results and financial condition.
 
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
 
     The Company relies primarily on a combination of copyright and trademark
laws, trade secrets, confidentiality procedures and contractual provisions to
protect its proprietary technology. For example, the Company licenses its
software pursuant to signed license agreements, which impose certain
restrictions on the
 
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licensees' ability to utilize the software. In addition, the Company seeks to
avoid disclosure of its trade secrets, including requiring those persons with
access to the Company's proprietary information to execute confidentiality
agreements with the Company and restricting access to the Company's source code.
The Company seeks to protect its software, documentation and other written
materials under trade secret and copyright laws, which afford only limited
protection. The Company presently has no patents or patent applications pending.
 
     Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. Policing
unauthorized use of the Company's products is difficult, and, while the Company
is unable to determine the extent to which piracy of its software products
exists, software piracy can be expected to be a persistent problem. In addition,
the laws of many countries do not protect the Company's proprietary rights to as
great an extent as do the laws of the United States. There can be no assurance
that the Company's means of protecting its proprietary rights will be adequate
or that the Company's competitors will not independently develop similar
technology.
 
     To date, the Company has not been notified that the Company's products
infringe the proprietary rights of third parties, but there can be no assurance
that third parties will not claim infringement by the Company with respect to
current or future products. The Company expects that data warehouse software
product developers will increasingly be subject to infringement claims as the
number of products and competitors in the Company's industry segment grows and
the functionality of products in different industry segments overlaps. Any such
claims, with or without merit, could be time-consuming, result in costly
litigation, cause product shipment delays or require the Company to enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company or at all,
which could have a material adverse effect upon the Company's business,
operating results and financial condition.
 
EMPLOYEES
 
     As of December 31, 1997, the Company employed 312 full-time equivalent
persons, including 103 in sales, presales technical support, marketing and
related activities, 109 in product development and support, 68 in consulting
services, and 32 in management, administration and finance. The Company's
success is highly dependent on its ability to attract and retain qualified
employees. Competition for employees is intense in the software industry, and an
inability to attract and retain qualified development and sales personnel, in
particular, could postpone product release schedules and adversely affect the
Company's ability to generate revenue.
 
     None of the Company's employees is represented by a labor union or is the
subject of a collective bargaining agreement with respect to his or her
employment by the Company. The Company has never experienced a work stoppage and
believes that its employee relations are good.
 
ITEM 2. PROPERTIES
 
     The Company's principal administrative, sales, marketing, support and
product development facility is located in approximately 38,000 square feet of
space in Sunnyvale, California. The lease on this office space expires in April
1998, but has a two-year renewal option. The Company also leases approximately
4,000 square feet of space in the United Kingdom under a lease agreement that
expires in July 1999. The Company currently leases small field offices in 7
United States cities, as well as in France, Germany, Spain, Canada, Australia,
New Zealand, Hong Kong Singapore and Mexico. The Company believes that suitable
additional or alternative space will be available in the future on commercially
reasonable terms as needed.
 
ITEM 3. LEGAL PROCEEDINGS
 
     On March 5, 1997, a class action complaint was filed by the law firm of
Milberg Weiss Bershad Hynes & Lerach LLP in Superior Court of the State of
California, County of Santa Clara, against the Company and several of its
current and former officers and directors and the underwriters of its initial
public offering. The complaint was filed on behalf of those persons who
purchased or otherwise acquired the common stock of the Company from March 14
through October 14, 1996, and alleges that the defendants artificially inflated
the
 
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demand for the common stock prior to and after the initial public offering. The
complaint seeks damages in an unspecified amount. On August 6, 1997 the Superior
Court entered an order sustaining demurrers to the California Corporation Code
claims with leave to amend and the Federal Securities Act of 1933 claims without
leave to amend. On December 12, 1997, the plaintiff filed an amended complaint
which included both the California Corporation Code claims and the Federal
Securities Act of 1933 claims. The Company has filed a demurrer to the amended
complaint. On December 24, 1997, Milbury Weiss Bershad Hynes & Lerach LLP filed
a class action complaint in the United States District Court for the Northern
District of California. This action, which names the Company and several current
and former officers and directors as defendants, is based on the same
allegations as the earlier filed State Court action. The Company believes that
the complaints have no merit and will vigorously defend itself.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     During the fourth quarter of 1997, no matter was submitted to a vote of
security holders through the solicitation of proxies or otherwise.
 
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
 
The executive officers of the Company, and their respective ages as of February
4, 1998, are as follows:
 
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                       NAME                  AGE                    POSITION
        -----------------------------------  ----    --------------------------------------
        <S>                                  <C>     <C>
        James W. Ashbrook..................    55    Chairman of the Board of Directors
        Warren M. Weiss....................    41    President and Chief Executive Officer
        Earl C. Charles....................    46    Chief Financial Officer and Secretary
        Christopher Hyrne..................    43    Vice President, Marketing,
        Nick Caffara.......................    40    Vice President, Consulting Services
        Tom Swanson........................    42    Vice President, North America Sales
        Philip M. Sakakihara...............    53    Vice President, Development
        Mark Rankovic......................    32    Vice President, Asia Pacific Sales
        Donald N. Taylor...................    43    Vice President, International Sales
</TABLE>
 
     Mr. Ashbrook has been a director since September 1991 and Chairman of the
Board of Directors since March 1995. He also served as President and Chief
Executive Officer of the Company from June 1991 to February 1997. From 1985 to
May 1991, Mr. Ashbrook was employed by AST Research ("AST"), most recently as
Senior Vice President, Marketing and, from 1983 to 1984, Mr. Ashbrook served as
Vice President of Sales and Marketing for CXI, Inc., a marketer of high
performance hardware and software products. He has also held executive and
management positions at Momentum Computers, National Advanced Systems and
International Business Machines Corporation. Mr. Ashbrook holds Bachelor of
Science and Master of Science degrees in Mechanical Engineering from the
University of Illinois.
 
     Mr. Weiss has been President, Chief Executive Officer and a Director of the
Company since February 1997. From June 1996 to February 1997, he served as
President and Chief Operating Officer of SQRIBE Technologies, a provider of
server-based reporting solutions. From April 1995 to May 1996, Mr. Weiss served
as President and Chief Executive Officer of Strategic Mapping, Inc., a software
and geo-demographic information company. From 1993 to 1994, Mr. Weiss was
employed by NeXT Computer, Inc., a computer systems company, most recently as
Vice President, Worldwide Sales and Service. He has also held senior management
positions at Continuum and Management Science America. Mr. Weiss holds a
Bachelor of Science in Criminology from Western Illinois University.
 
     Mr. Charles has served as Chief Financial Officer and Secretary of the
Company since April 1997. From June 1996 to April 1997, he was Chief Financial
Officer of R2 Technology, Inc., a medical imaging software company. From
September 1993 to June 1996, he was Senior Vice President of Operations and
Chief Financial Officer of Strategic Mapping, Inc., a software and
geo-demographic information company. Prior to that, from 1983 to 1993, he was a
partner at Deloitte & Touche LLP, a public accounting firm. Mr. Charles received
his B.B.A. degree from the University of Notre Dame.
 
                                        7
<PAGE>   10
 
     Mr. Hyrne has served as Vice President of Marketing for Prism Solutions
since September 1997. From August 1994 to December 1996, he was Director of
Market Development for Taligent, responsible for defining new market
opportunities, early adopter and partner relationships. From June 1977 to July
1994, he was at IBM, holding positions in marketing, large enterprise sales and
new market development. Mr. Hyrne received his B.S. degree in Economics from
Santa Clara University.
 
     Mr. Caffara has served as Vice President of Consulting Services since April
1997. From March 1995 to April 1997, he was involved in the consulting services
group for North America. From 1987 to 1995, Mr. Caffara was a Vice President at
A.C. Nielson Marketing Research. Prior to that, he was a Systems Engineering
Manager at ITT Information Systems from 1985 to 1987. From 1983 to 1985, Mr.
Caffara was a Business Systems Consultant with Coopers and Lybrand, LLP. Mr.
Caffara received his B.S. in Applied Economics and Physical Sciences from
Rutgers University in 1983.
 
     Mr. Swanson has been with the Company since April, 1994. He has been Vice
President of North American Sales since August, 1997. Prior to that, Mr. Swanson
was Area Vice President for Sales, responsible for the Eastern and Central U.S.
and Canada. From 1985 to 1993, he held a variety of sales and sales management
positions with Comshare, Inc. of Ann Arbor, Michigan. From April 1980 to 1984,
he was a management consultant with Deloitte & Touche LLP. Mr. Swanson received
his B.S.B.A from John Carroll University in Cleveland, Ohio.
 
     Mr. Sakakihara joined the Company in December 1995 as Vice President,
Development. From July 1994 to December 1995, he served as Vice President,
Engineering at ViewStar Corporation, a computer software company. Mr. Sakakihara
was employed by Hewlett-Packard Company from 1972 to July 1994, most recently as
General Manager, Distributed Computing Products Operation. Mr. Sakakihara holds
a Bachelor of Arts degree in Applied Mathematics from San Jose State University
and a Master of Science degree in Applied Mathematics from Santa Clara
University.
 
     Mr. Rankovic has served as Vice President of Asia Pacific Sales since July
1997. From January 1991 to July 1997, Mr. Rankovic was the President and founder
of Object Software Pty Ltd., which the Company acquired in July. From 1986
through 1990, Mr. Rankovic was the Director of Professional Services for
Information Builders, Inc. (and its prior distributor in Australia). Mr.
Rankovic received his Bachelor of Science in Applied Mathematics and Computer
Science with Honours from the University of Adelaide, Australia in 1985.
 
     Mr. Taylor joined the Company in August 1995 as Vice President,
International Sales. From January 1994 to August 1995, he was employed by Oracle
U.K. Ltd., where he served as Director of Marketing. Prior to joining Oracle
U.K. Ltd., Mr. Taylor was employed by Sun Microsystems, where he served as
Director of Marketing, Northern Europe from January 1992 to December 1993 and as
Director of Marketing, U.K. from November 1991 to January 1992. From 1989 to
August 1991, Mr. Taylor was Vice President, European General Manager at Netwise
International Ltd. He holds a Bachelor of Arts degree in History from Williams
College.
 
                                        8
<PAGE>   11
 
                                    PART II
 
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
 
PRICE RANGE OF COMMON STOCK
 
     The Company's common stock is traded on the Nasdaq National Market under
the symbol PRZM. The following table sets forth the range of high and low sales
prices for each of the quarterly periods included in the fiscal years ended
December 31, 1996 and 1997. For the 1996 period, the range of high and low sales
prices are subsequent to the Company's initial public offering of March 15,
1996:
 
<TABLE>
<CAPTION>
                                 FISCAL                                       HIGH       LOW
-------------------------------------------------------------------------    ------     ------
<S>                                                                          <C>        <C>
1996
First Quarter (since March 15, 1996).....................................    $27.50     $22.75
Second Quarter...........................................................    $36.75     $22.25
Third Quarter............................................................    $24.00     $ 8.25
Fourth Quarter...........................................................    $ 9.25     $ 4.25
</TABLE>
 
<TABLE>
<CAPTION>
                                 FISCAL                                       HIGH       LOW
-------------------------------------------------------------------------    ------     ------
<S>                                                                          <C>        <C>
1997
First Quarter............................................................    $10.38     $ 4.88
Second Quarter...........................................................    $ 7.88     $ 4.38
Third Quarter............................................................    $ 7.50     $ 4.38
Fourth Quarter...........................................................    $ 7.06     $ 3.50
</TABLE>
 
On January 21, 1998, there were approximately 123 record holders and over 15
beneficial holders of Prism Solutions, Inc. common stock.
 
DIVIDEND POLICY
 
     The Company has never declared or paid any cash dividends on its capital
stock. The Company currently anticipates that it will retain any future earnings
for use in its business and does not anticipate paying any cash dividends in the
foreseeable future.
 
CHANGES IN SECURITIES AND USE OF PROCEEDS
 
  Use of Proceeds from Initial Public Offering
 
     On March 14, 1996, the Company's registration statement on Form SB-2 (File
No. 333-1180-LA) related to the initial public offering of the Company's Common
Stock (the "Registration Statement") was declared effective by the Securities
and Exchange Commission. The net offering proceeds to the Company after expenses
was $35,718,369 (the "Offering Proceeds").
 
                                        9
<PAGE>   12
 
     From the effective date of the Registration Statement to December 31, 1997,
the Offering Proceeds have been used for the purposes listed below:
 
<TABLE>
<CAPTION>
                            DIRECT OR INDIRECT PAYMENTS TO
                            DIRECTORS, OFFICERS, GENERAL PARTNERS OF THE
                            COMPANY OR THEIR ASSOCIATES; TO PERSONS
                            OWNING TEN (10) PERCENT OR MORE OF ANY CLASS
                            OF EQUITY SECURITIES OF THE COMPANY; AND TO
                            AFFILIATES OF THE COMPANY                       DIRECT OR INDIRECT PAYMENTS TO OTHERS
                            ---------------------------------------------   --------------------------------------
    <S>                     <C>                                             <C>
    Construction of plant,
      building and
      facility............                       --                                      $     59,572
    Purchase of property
      and equipment.......                       --                                         4,283,482
    Repayment of
      indebtedness........                       --                                           611,450
    Acquired Businesses...                       --                                         2,466,000
    Working capital.......                       --                                        12,035,865
    Purchase of short-term
      liquid securities...                       --                                        16,262,000
                                                                                           ----------
                                                                                         $ 35,718,369
</TABLE>
 
ITEM 6. SELECTED FINANCIAL DATA
 
     The following selected financial data is qualified by reference to and
should be read in conjunction with the consolidated financial statements and
related notes thereto and the section captioned "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and other financial
information included elsewhere in this Annual Report on Form 10-K.
 
<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31,
                                   ------------------------------------------------------------------
                                      1993          1994          1995         1996          1997
                                   -----------   -----------   ----------   -----------   -----------
                                            (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S>                                <C>           <C>           <C>          <C>           <C>
CONSOLIDATED STATEMENT OF
  OPERATIONS DATA:
Total revenues...................  $     1,739   $     8,227   $   17,760   $    30,424   $    43,433
Gross margin.....................        1,093         6,460       14,341        23,285        28,723
Loss from operations.............       (4,096)       (2,497)      (2,767)       (3,151)      (17,533)
Net loss.........................  $    (4,063)  $    (2,538)  $   (2,738)  $    (1,839)  $   (16,152)
Basic and diluted loss per
  share(1).......................  $     (1.45)  $     (0.90)  $    (0.90)  $     (0.16)  $     (1.16)
Shares used in per share
  calculations(1)................    2,808,411     2,814,115    3,045,568    11,475,335    13,868,960
BALANCE SHEET DATA:
Cash, cash equivalents and short-
  term investments...............  $     3,049   $     3,205   $    1,861   $    34,896   $    21,255
Working capital..................        2,972         3,247          904        34,498        21,182
Total assets.....................        4,329         7,257       10,493        46,299        38,950
Long-term obligations............           --            --          271            --           138
Total stockholders' equity.......        3,142         3,623        2,054        36,508        26,121
</TABLE>
 
---------------
 
(1) Restated for adoption of Statement of Financial Accounting Standards No.
    128, "Earnings Per Share"; see Note 2 of the Notes to the Consolidated
    Financial Statements.
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
 
     In addition to historical information contained herein, Management's
Discussion and Analysis of Financial Condition and Results of Operations
contains forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended, and Section 27A of the Securities
Act of 1933, as amended. The forward-looking statements contained herein are
subject to certain risks and uncertainties including those discussed below that
could cause actual results to differ materially from those
 
                                       10
<PAGE>   13
 
reflected herein. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date hereof. The Company undertakes no obligation to publicly revise any
forward-looking statements in order to reflect events or circumstances after the
date hereof.
 
OVERVIEW
 
     Prism designs, develops, markets and supports data warehouse management
software that assists customers in developing, managing and maintaining data
warehouses. The Company was incorporated in California in March 1991 and
reincorporated in Delaware in January 1996. Through the end of 1992, the Company
was in the development stage and was engaged primarily in research and
development and the establishment of a sales and marketing infrastructure. The
Company began shipping its principal products, Prism Warehouse Manager, in
December 1992 and Prism Directory Manager in April 1995. In December 1996, Prism
Warehouse Manager and Prism Directory Manager were replaced with Prism Warehouse
Executive and Prism Warehouse Directory, respectively, as the Company's next
generation software. In the fourth quarter of 1996, Prism also completed the
first transactions for Iterations, its consulting methodology. The majority of
the Company's total revenues to date have been derived from software license
revenues, which accounted for 52% of total revenues in 1997. Services and other
revenues (including maintenance) accounted for the remaining revenues in 1997.
The Company expects that license revenues will continue to account for a
significant portion of the Company's total revenues for the foreseeable future.
 
     During June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
Income." This statement establishes requirements for disclosure of comprehensive
income and becomes effective for the Company for fiscal years beginning after
December 15, 1997, with reclassification of earlier financial statements for
comparative purposes. Comprehensive income generally represents all changes in
stockholders' equity except those resulting from investments or contributions by
stockholders. The Company is evaluating alternative formats for presenting this
information, but does not expect this pronouncement to materially impact the
Company's results of operations.
 
     During October 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition."
This statement establishes requirements for revenue recognition for software
companies for fiscal years beginning after December 15, 1997. The Company is
currently evaluating the impact of SOP 97-2 and has not yet determined the
result, if any, on the Company's financial position, results of operations or
cash flows.
 
     On July 1, 1997, the Company issued an aggregate of 258,621 shares of its
Common Stock to Object Software Pty. Limited ("Object"). The transaction,
accounted for as a purchase for accounting purposes, was completed in connection
with the acquisition by a wholly-owned Australian subsidiary of the Company of
certain of Object's assets pursuant to an Asset Purchase Agreement entered into
on July 1, 1997 between the Company, the Company's wholly-owned Australian
subsidiary, Object and Object's major shareholder.
 
     On July 21, 1997, the Company issued an aggregate of 1,143,613 shares of
its Common Stock and paid an aggregate of $1,250,000 in connection with the
acquisition by the Company of QDB Solutions, Inc., a Massachusetts corporation
("QDB"). The acquisition was accounted for as a purchase through the merger of a
wholly-owned subsidiary of the Company with and into QDB pursuant to an
Agreement and Plan of Reorganization entered into on July 21, 1997 between the
Company, the Company's wholly-owned subsidiary, and the shareholders of QDB.
 
     Goodwill related to the acquisition (see Note 2 and Note 11 in the Notes to
the Consolidated Financial Statements) is being amortized over a five-year
period.
 
     On July 22, 1997, the Company purchased certain technology from
Pergrine/Bridge Transfer Corporation for $1,300,000 in prepaid royalties.
Additionally, the Company may be obligated to make an additional $2,700,000 in
royalty payments, based upon future sales, not to exceed $4,000,000 in the
aggregate. The royalty payments are payable 45 days after the end of each of the
Company's fiscal quarters. Under the terms and conditions of this agreement, the
Company has not paid any royalties as of December 31, 1997.
 
                                       11
<PAGE>   14
 
RESULTS OF OPERATIONS
 
     The following table sets forth selected consolidated statement of
operations data as a percentage of total revenues for the periods indicated:
 
<TABLE>
<CAPTION>
                                                                   YEAR ENDED DECEMBER 31,
                                                                  -------------------------
                                                                  1995      1996      1997
                                                                  -----     -----     -----
    <S>                                                           <C>       <C>       <C>
    Revenues:
      License...................................................   71.3%     61.4%     52.2%
      Services and other........................................   28.7      38.6      47.8
                                                                  -----     -----     -----
              Total revenues....................................  100.0     100.0     100.0
                                                                  -----     -----     -----
    Cost of revenues:
      License...................................................    1.3       2.5       2.9
      Services and other........................................   18.0      21.0      31.0
                                                                  -----     -----     -----
              Total cost of revenues............................   19.3      23.5      33.9
                                                                  -----     -----     -----
                Gross margin....................................   80.7      76.5      66.1
                                                                  -----     -----     -----
    Costs and expenses:
      Sales and marketing.......................................   64.2      58.0      53.7
      Research and development..................................   19.4      18.7      20.9
      General and administrative................................   12.7      10.2      12.2
      Purchased-in-process technology...........................     --        --      19.7
                                                                  -----     -----     -----
              Total operating expenses..........................   96.3      86.9     106.5
                                                                  -----     -----     -----
      Loss from operations......................................  (15.6)    (10.4)    (40.4)
    Interest income, net........................................    0.8       4.9       3.8
    Other expense, net..........................................   (0.3)     (0.1)     (0.4)
                                                                  -----     -----     -----
              Loss before income taxes..........................  (15.1)     (5.6)    (37.0)
                                                                  -----     -----     -----
    Provision for income taxes..................................    0.3       0.5       0.2
                                                                  -----     -----     -----
              Net loss..........................................  (15.4)%    (6.1)%   (37.2)%
                                                                  =====     =====     =====
</TABLE>
 
REVENUES
 
     Total revenues were $17,760,000, $30,424,000 and $43,433,000 in 1995, 1996
and 1997, respectively, representing increases of 71.3% from 1995 to 1996 and
42.8% from 1996 to 1997. The Company's revenues are derived from license fees
for its software products and fees for services complementing its products,
including software maintenance and support, implementation, consulting and
training. Fees for services are charged separately from license fees for the
Company's software.
 
     License Revenues. Revenues from software licenses were $12,668,000,
$18,690,000 and $22,676,000 in 1995, 1996 and 1997, respectively, representing
increases of 47.5% from 1995 to 1996 and 21.3% from 1996 to 1997. The increases
in license revenues from 1995 to 1997 were primarily attributable to growing
acceptance of the Company's products and an increase in the number and tenure of
direct sales personnel, which led to increases in the number of units licensed.
In addition, license revenues in 1997 were favorably affected by the Company's
recent acquisitions, in addition to the expansion and development of the sales
force into the European and Asia Pacifc region. The Company's average
transaction size remained relatively constant in 1997. In 1995 and 1996, the
Company began to license a growing portion of its products through indirect
channels, which accounted for 8.4%, and 18.0% of the Company's total license
revenues, respectively. In 1997, sales from indirect channels accounted for
23.0% of the Company's total license revenues.
 
     Services and Other Revenues. Services and other revenues were $5,092,000,
$11,734,000 and $20,757,000 in 1995, 1996 and 1997, respectively, representing
increases of 130.4% from 1995 to 1996 and 76.9% from 1996 to 1997. The growth
from 1995 to 1997 was the primarily due to an increase in the number
 
                                       12
<PAGE>   15
 
and size of consulting engagements and, to a lesser extent, licensing activity
and maintenance renewals. As a percentage of total revenues, services and other
revenue comprised 28.7%, 38.6% and 47.8% in 1995, 1996 and 1997, respectively. A
majority of services and other revenues in 1997 came from consulting revenues.
The Company expects that services and other revenues will increase in absolute
dollars and decrease as a percentage of revenues as total license revenues
continue to increase.
 
     International Revenues. International revenues accounted for 14.8%, 30.8%
and 23.5% of total revenues in 1995, 1996 and 1997, respectively. In 1995, the
majority of international sales were made in Europe. In 1996 and 1997, the
majority of international sales were made in Europe and in the Asia Pacifc
region, where the Company significantly increased the number of direct sales
personnel and the number of international distributors and resellers marketing
the Company's products. During 1996, the Company established direct sales
offices in France, Germany and Mexico. In 1997, the Company added direct sales
offices in the Netherlands, Australia, New Zealand, Hong Kong and Singapore. A
small portion of the Company's international sales are denominated in foreign
currencies and, accordingly, the Company is subject to foreign currency exchange
risk. The Company has not engaged in foreign currency hedging activities. See
"Foreign Currency Translation" under Note 2 of the Notes to Consolidated
Financial Statements for more information.
 
COST OF REVENUES
 
     Cost of License Revenues. Cost of license revenues consists primarily of
the costs of royalties paid to thirdparty vendors, product media and
duplication, shipping expenses, manuals and packaging materials. Cost of license
revenues was $223,000, $769,000 and $1,240,000 in 1995, 1996 and 1997,
respectively, representing 1.3%, 2.5% and 2.9% of total revenues for those
years. The increase both in absolute dollars and as a percentage of revenues
from 1995 to 1996 and from 1996 to 1997 was primarily attributable to increased
royalties and commissions paid to third party vendors as license revenues
continued to increase. The Company expects that the cost of license revenues
will increase both in absolute dollars and as a percentage of license revenues
as the Company licenses additional technology and products from third parties
for inclusion in its product line.
 
     Cost of Services and Other Revenues. Cost of services and other revenues
consists primarily of personnel-related costs incurred in providing consulting
and implementation services, telephone support and training to customers. Cost
of services and other revenues was $3,196,000, $6,370,000 and $13,470,000 in
1995, 1996 and 1997, respectively, representing 18.0%, 21.0% and 31.0% of total
revenues for those years. The dollar amount of cost of services and other
revenues increased significantly from 1995 to 1997 primarily because of
increased personnel-related costs as the Company continued to expand its
consulting, customer support and training organizations to support an increase
in sales. The Company expects that the cost of services and other revenues will
increase in absolute dollars and decrease as a percentage of revenues if the
Company's license revenues continue to increase in absolute dollars. In 1997,
the decrease in gross margin was primarily attributable to increases in the
infrastructure required to expand the consulting organization both domestically
and worldwide.
 
OPERATING EXPENSES
 
     The Company's operating expenses were $17,108,000, $26,436,000 and
$46,256,000, or 96.3%, 86.9% and 106.5% of total revenues, in 1995, 1996 and
1997, respectively. The growth in operating expenses in absolute dollars
occurred primarily as a result of increases in salaries and benefits, resulting
from higher staffing levels, and the expansion of facilities. The decrease in
operating expenses as a percentage of revenues from 1995 to 1996 resulted from
economies of scale associated with the Company's growing revenues. The increase
in operating expenses as a percentage of revenues from 1996 to 1997 was
primarily the result of the one time charge of $8,558,000 associated with the
write-off of the purchased in-process technology related to acquisitions made
during the 1997 fiscal year.
 
     Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses paid to sales and marketing personnel and
promotional expenses. Sales and marketing expenses were $11,395,000, $17,637,000
and $23,316,000, or 64.2%, 58.0% and 53.7% of total revenues, in 1995, 1996 and
 
                                       13
<PAGE>   16
 
1997, respectively. The increases in dollar amounts in sales and marketing
expenses were primarily due to the expansion of the Company's sales operations
and increased marketing activities, including trade shows and promotional
expenses. The decrease in sales and marketing expenses as a percentage of total
revenues resulted primarily from increases in productivity as newly hired sales
personnel and system engineers became more experienced, and due to the benefits
of economies of scale associated with the increase in total revenues. The
Company expects that sales and marketing expenses will continue to increase in
absolute dollars but decrease as a percentage of total revenues if the Company's
annual revenues continue to increase.
 
     Research and Development. Research and development expenses consist
primarily of salaries paid to the engineering staff. Research and development
expenses were $3,451,000, $5,705,000 and $9,086,000, or 19.4%, 18.7% and 20.9%
of total revenues, in 1995, 1996 and 1997, respectively. The increases in dollar
amounts in research and development expenses since 1995 were primarily
attributable to increased staffing and associated support for software engineers
required to expand and enhance the Company's product line. Software development
costs have been expensed in accordance with Statement of Financial Accounting
Standards No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed." Under this standard, capitalization of software
development costs begins upon the establishment of technological feasibility and
ends when a product is available for general release to customers. To date,
costs incurred after establishment of technological feasibility have been
immaterial and, as a result, all research and development costs have been
expensed as incurred. The Company believes that a significant level of
investment for research and development is required to remain competitive and,
accordingly, the Company anticipates that research and development expenses will
decrease in absolute dollars and slightly decrease as a percentage of revenue as
the Company's annual revenues continue to increase.
 
     General and Administrative. General and administrative expenses consist
primarily of salary expenses for administration and executive staff. General and
administrative expenses were $2,262,000, $3,094,000 and $5,296,000, or 12.7%,
10.2% and 12.2% of total revenues, in 1995, 1996 and 1997, respectively. These
expenses increased in absolute dollars from 1995 to 1997 primarily as a result
of increases in staffing and an expansion of facilities. The Company expects
that its general and administrative expenses will increase in absolute dollars
as the Company's total workforce increases and will slightly decrease as a
percentage of revenues as the Company's annual revenues continue to increase.
 
     Purchased-in-process technology. In connection with its acquisition of QDB
and the purchase of technology from Peregrine/Bridge Transfer Corporation, the
Company acquired certain in-process technology which was expensed in accordance
with Interpretation 4 to Statement of Financial Accounting Standard No. 2,
"Accounting for Research and Development Costs." Such in-process technology was
valued, along with other acquired net assets, in accordance with valuation
techniques commonly used in the technology industry. The Company intends to
integrate the acquired technologies into its existing products, but there can be
no assurance that such integration will be completed in the expected time or at
the expected cost.
 
PROVISION FOR INCOME TAXES.
 
     The provision for income taxes in 1995, 1996 and 1997 resulted primarily
from foreign withholding taxes. As of December 31, 1997, the Company had Federal
and California net operating loss carryforwards of approximately $18,561,000 and
$1,747,000, respectively, and Federal and California research and development
tax credit carryforwards of $758,000 and $519,000, respectively. These
carryforwards will expire between 1998 and 2012 if not utilized prior to that
time.
 
     The Company determines its income tax liability in accordance with
Statement of Financial Accounting Standards No. 109 ("FAS 109"), "Accounting for
Income Taxes." Under FAS 109, the liability method is used to account for income
taxes. Under this method, deferred tax assets and liabilities are determined
based on differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. The Company has
established a valuation allowance to the full extent of its net deferred tax
assets because it is not more likely than not that a benefit can be realized in
the future due to the Company's recurring operating losses.
 
                                       14
<PAGE>   17
 
LIQUIDITY AND CAPITAL RESOURCES
 
     The Company's cash, cash equivalents and other short-term investments
decreased to $21,255,000 as of December 31, 1997 from $34,896,000 as of December
31, 1996, due primarily to the Company's expansion of its workforce,
acquisitions and increased product development costs. As of December 31, 1997,
the Company had $5,900,000 in cash and cash equivalents and $15,355,000 in
short-term investments, which are classified as available for sale.
 
     In 1996 and 1997, the Company used net cash of $795,000 and $7,423,000,
respectively, in operating activities primarily as a result of net losses and
increases in accounts receivable associated with increases in revenues.
 
     In 1996, the Company's net cash used in investing activities of $21,706,000
consisted primarily of purchases of short-term financial instruments as well as
purchases of property and equipment. In 1997, the Company's net cash used in
investing activities of $633,000 consisted primarily of maturities of short-term
financial instruments, purchases of property and equipment and cash paid for
acquisitions. The Company expects that its capital expenditures will remain
constant or increase in absolute dollars as the Company's employee base grows.
As of December 31, 1997, the Company had no material commitments to make capital
expenditures. The Company's principal commitments consisted of non-cancelable
operating leases on its facilities.
 
     The Company's financing activities provided $35,484,000 in 1996,
principally due to proceeds from the Company's initial public offering completed
in March 1996. During 1996, the Company repaid $703,000 of long-term debt. In
1997, the $888,000 used in financing activities was the net result of the
Company repurchasing approximately $2,021,000 of outstanding common stock which
was used for acquisitions that occurred in 1997, while issuing nearly $1,155,000
of common stock through the exercise of employee stock options. Financing
activities provided $1,862,000 in 1995, primarily due to proceeds received on
receivable from stockholder.
 
     To date, the Company has not invested in derivative securities or any other
financial instruments that involve a high level of complexity or risk.
Management expects that, in the future, cash in excess of current requirements
will be invested in short-term, interest-bearing, investment grade securities.
 
     The Company believes its current cash balances and cash flow from
operations, if any, will be sufficient to meet its working capital and capital
expenditure requirements for at least the next 12 months. Although operating
activities may provide cash in certain periods, to the extent the Company
experiences growth in the future, the Company anticipates that its operating and
investing activities may use cash. Consequently, any such future growth may
require the Company to obtain additional equity or debt financing, which may not
be available or may be dilutive.
 
ADDITIONAL FACTORS THAT MIGHT AFFECT FUTURE RESULTS
 
     The Company's limited operating history makes the prediction of future
operating results difficult. Although the Company has experienced significant
growth in revenues in recent periods, the Company does not believe that this
growth rate is sustainable or indicative of future operating results. The
Company has never been profitable on an annual basis and currently believes that
it could experience operating losses for the first half of 1998. Future
operating results will depend on many factors, including the growth of the data
warehousing market, the length of the sales cycle, the level of product and
price competition, demand for the Company's products, transaction size, the
Company's success in expanding its direct sales force and indirect distribution
channels, the ability of the Company to support and maintain existing products,
develop and market new products and control costs, the ability to recruit and
retain software engineers and other key personnel, general economic conditions
and other factors.
 
     The Company is currently experiencing a period of rapid growth that has
placed and is expected to continue to place a strain on the Company's
administrative, financial and operational resources. From January 1, 1994 to
December 31, 1997, the size of the Company's professional staff increased from
39 to 312 full-time equivalent employees. In addition, the Company expanded
geographically in 1997 by adding
 
                                       15
<PAGE>   18
 
employees in Europe, Asia Pacific and Latin America. Further significant
increases in the number of employees are anticipated during 1998. The Company's
ability to manage its staff and facilities growth effectively will require it to
continue to improve its operational, financial and management controls,
reporting systems and procedures, and to train, motivate and manage its
employees. If the Company's management is unable to manage growth effectively
and new employees are unable to achieve performance levels, the Company's
business, operating results and financial condition could be adversely affected.
 
     The Company's future success will depend in large part upon its ability to
attract, retain and motivate highly skilled employees. There is significant
competition for employees with the skills required to perform the services
offered by the Company, particularly for software development engineers, and
there can be no assurance that the Company will be able to continue to attract
and retain sufficient numbers of highly skilled employees. The loss of a
significant number of the Company's senior management or other key research,
development, sales and marketing personnel, particularly if lost to competitors,
could have a material adverse effect on the Company's business, operating
results and financial condition, including its ability to attract employees.
 
     The licensing of the Company's products by its customers typically involves
a significant technical evaluation and commitment of capital and other
resources, with the attendant delays frequently associated with customers'
internal procedures to approve large capital expenditures and to test and accept
new technologies that affect key operations. For these and other reasons, the
sales cycle associated with the licensing of the Company's products is typically
lengthy and subject to a number of significant risks, including customers'
budgetary constraints and internal acceptance reviews, that are beyond the
Company's control. During 1996 and 1997, the Company began to experience longer
sales cycles. The Company believes the longer sales cycles are due to increased
competition and the complexity of customers' operating environments. If the
longer sales cycle persists or continues to lengthen, the Company's future
financial performance could be adversely affected.
 
     The market for the Company's products is highly competitive, and the
Company may experience increasing pricing pressures from its current competitors
and new market entrants. Any material reduction in the price of the Company's
products or in the size of an average transaction would materially adversely
affect the Company's business, operating results and financial condition if the
Company were unable to increase unit sales. See "Competition" under Item
1 -- Business.
 
     Revenues from licensing of the Company's products and related services
outside the United States increased $6,746,000 or 257% from 1995 to 1996 and
$843,000 or 9% from 1996 to 1997. The Company intends to continue to expand its
operations in Europe and into Asia and Latin America, which will require
significant management attention and financial resources. There can be no
assurance that the Company's efforts to develop international sales and support
channels will be successful, and the failure of such efforts could have a
material adverse effect on the Company's business, operating results and
financial condition. International sales are subject to a number of risks,
including longer payment cycles, unexpected changes in regulatory requirements,
import and export restrictions and tariffs, difficulties in staffing and
managing foreign operations, the burden of complying with a variety of foreign
laws, greater difficulty in accounts receivable collection, potentially adverse
tax consequences, currency fluctuations and political and economic instability.
 
     Substantially all of the Company's revenues to date have been attributable
to licenses for Prism Warehouse Manager (replaced by Prism Warehouse Executive),
Prism Directory Manager (replaced by Prism Warehouse Directory) and related
services. The Company currently expects that revenues attributable to Prism
Warehouse Executive and Prism Warehouse Directory, including maintenance and
consulting services, will continue to account for a majority of the Company's
total revenues in 1998. A decline in demand for or failure to achieve broad
market acceptance of these products as a result of competition, technological
change or otherwise, would have a material adverse effect on the business,
operating results and financial condition of the Company. A decline in license
revenues from these products would also have a material adverse effect on sales
of other Company products. The Company's future financial performance will
depend in part on the successful development, introduction and customer
acceptance of new releases of Prism Warehouse Executive and Prism Warehouse
Directory, including new versions incorporating the new code
 
                                       16
<PAGE>   19
 
base. There can be no assurance that the Company will continue to be successful
in these or any new or enhanced products.
 
     Throughout 1998, the Company will continue to invest more in customer
services, marketing and research and development, and make personnel additions
to the Company's sales force worldwide. These additional expenses may adversely
affect the Company's operating margin in 1998 if there are no offsetting
increases in revenues or reductions in other operating expenses.
 
  Year 2000
 
     The Company and its subsidiaries are taking actions to provide that their
computer systems are capable of processing for the periods the year 2000 and
beyond. The costs associated with these actions are not expected to
significantly affect operating cash flows.
 
RISKS ASSOCIATED WITH ACQUISITIONS
 
     The Company has grown in part because of business combinations with other
companies. To date, none of the acquired products or distribution channels has
accounted for a significant portion of the Company's revenues. Additionally,
there are integration risks associated with merging two companies, including
technical, financial, administrative and cultural concerns. There can be no
assurance that sales of the Company's existing products will either continue at
historical rates or increase, or that new products introduced by the Company,
whether developed internally or acquired, will achieve market acceptance.
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
Not applicable.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
<TABLE>
<S>                                                                                       <C>
Consolidated Balance Sheets at December 31, 1997 and 1996.............................     18
Consolidated Statements of Operations for the three years ended December 31, 1997.....     19
Consolidated Statements of Stockholders' Equity for the three years ended December 31,     20
  1997................................................................................
Consolidated Statements of Cash Flows for the three years ended December 31, 1997.....     21
Notes to the Consolidated Financial Statements........................................     22
Report of Coopers & Lybrand L.L.P., Independent Accountants...........................     33
</TABLE>
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
 
     None.
 
                                       17
<PAGE>   20
 
                             PRISM SOLUTIONS, INC.
 
                          CONSOLIDATED BALANCE SHEETS
                       (IN THOUSANDS, EXCEPT SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                         DECEMBER     DECEMBER
                                                                           31,          31,
                                                                           1996         1997
                                                                         --------     --------
<S>                                                                      <C>          <C>
ASSETS
Current assets:
  Cash and cash equivalents............................................  $ 14,844     $  5,900
  Short-term investments...............................................    20,052       15,355
  Accounts receivable, net of allowance for doubtful accounts of $400
     in 1996 and $649 in 1997..........................................     8,392       11,089
  Other receivables....................................................       151          650
  Prepaid expenses and other current assets............................       836          879
                                                                         --------     --------
          Total current assets.........................................    44,275       33,873
Property and equipment, net............................................     1,861        2,911
Other assets...........................................................       163        2,166
                                                                         --------     --------
          Total assets.................................................  $ 46,299     $ 38,950
                                                                         ========     ========
 
LIABILITIES
Current liabilities:
  Current portion of long-term debt....................................  $     --     $     38
  Accounts payable.....................................................     1,298        2,528
  Accounts payable to related party....................................        28           --
  Accrued payroll and related..........................................     1,726        2,135
  Accrued commissions..................................................       703        1,169
  Deferred revenue.....................................................     4,752        4,811
  Other accrued liabilities............................................     1,270        2,010
                                                                         --------     --------
          Total current liabilities....................................     9,777       12,691
Long-term debt, less current portion...................................        --          138
Other liabilities......................................................        14           --
                                                                         --------     --------
          Total liabilities............................................     9,791       12,829
                                                                         --------     --------
Commitments and contingencies (Note 5)
 
STOCKHOLDERS' EQUITY
Convertible preferred stock, par value $0.001 per share:
  Authorized: 1,000,000 shares Issued and outstanding: none in 1996 and
     1997..............................................................        --           --
Common stock, par value $0.001 per share:
  Authorized: 50,000,000 shares Issued and outstanding: 13,275,215
     shares in 1996 and 14,760,598 in 1997.............................        14           15
Additional paid-in capital.............................................    49,876       55,655
Receivables from stockholders..........................................      (104)         (90)
Unrealized holding losses..............................................        --          (29)
Accumulated deficit....................................................   (13,278)     (29,430)
                                                                         --------     --------
          Total stockholders' equity...................................    36,508       26,121
                                                                         --------     --------
          Total liabilities and stockholders' equity...................  $ 46,299     $ 38,950
                                                                         ========     ========
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       18
<PAGE>   21
 
                             PRISM SOLUTIONS, INC.
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                                YEARS ENDED DECEMBER 31,
                                                       ------------------------------------------
                                                          1995           1996            1997
                                                       ----------     -----------     -----------
                                                       (IN THOUSANDS, EXCEPT SHARE AND PER SHARE
                                                       DATA)
<S>                                                    <C>            <C>             <C>
Revenues:
  License............................................  $   12,668     $    18,690     $    22,676
  Services and other.................................       5,092          11,734          20,757
                                                       ----------      ----------      ----------
  Total revenues.....................................      17,760          30,424          43,433
                                                       ----------      ----------      ----------
Cost of revenues:
  License............................................         223             769           1,240
  Services and other.................................       3,196           6,370          13,470
                                                       ----------      ----------      ----------
  Total cost of revenues.............................       3,419           7,139          14,710
                                                       ----------      ----------      ----------
  Gross margin.......................................      14,341          23,285          28,723
                                                       ----------      ----------      ----------
Costs and expenses:
  Sales and marketing................................      11,395          17,637          23,316
  Research and development...........................       3,451           5,705           9,086
  General and administrative.........................       2,262           3,094           5,296
  Purchased-in-process technology....................          --              --           8,558
                                                       ----------      ----------      ----------
  Total operating expenses...........................      17,108          26,436          46,256
                                                       ----------      ----------      ----------
  Loss from operations...............................      (2,767)         (3,151)        (17,533)
Interest income, net.................................         145           1,484           1,648
Other expense, net...................................         (60)            (34)           (176)
                                                       ----------      ----------      ----------
  Loss before income taxes...........................      (2,682)         (1,701)        (16,061)
Provision for income taxes...........................          56             138              91
                                                       ----------      ----------      ----------
  Net loss...........................................  $   (2,738)    $    (1,839)    $   (16,152)
                                                       ==========      ==========      ==========
Basic and diluted loss per share.....................  $    (0.90)    $     (0.16)    $     (1.16)
                                                       ==========      ==========      ==========
Shares used in per share calculation.................   3,045,568      11,475,335      13,868,960
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       19
<PAGE>   22
 
                             PRISM SOLUTIONS, INC.
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                       (IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
                                                        CONVERTIBLE
                                                      PREFERRED STOCK        COMMON STOCK       ADDITIONAL   RECEIVABLES
                                                    -------------------   -------------------    PAID-IN         FROM
                                                      SHARES     AMOUNT     SHARES     AMOUNT    CAPITAL     STOCKHOLDERS
                                                    ----------   ------   ----------   ------   ----------   ------------
                                                                      (IN THOUSANDS, EXCEPT SHARE DATA)
<S>                                                 <C>          <C>      <C>          <C>      <C>          <C>
Balance at January 1, 1995........................   7,990,817    $  8     1,573,429    $  2     $ 13,346      $ (1,032)
  Issuance of common stock under stock option
    plan..........................................                         1,281,604       1          266          (129)
  Issuance of common stock for consulting
    purposes......................................                            16,541                    4
  Repurchase of common stock......................                           (19,401)                  (5)
  Payment received on receivables from
    stockholder...................................                                                                1,032
  Net loss........................................
                                                    ----------    ----    ----------    ----      -------       -------
Balance at December 31, 1995......................   7,990,817       8     2,852,173       3       13,611          (129)
  Conversion of preferred stock...................  (7,990,817)     (8)    7,990,817       8
  Issuance of common stock in initial public
    offering......................................                         2,325,500       3       35,610
  Issuance of common stock under stock option
    plan..........................................                           116,324                   78
  Issuance of common stock under stock purchase
    plan..........................................                            42,751                  491
  Issuance of common stock for consulting
    purposes......................................                            11,472                  106
  Repurchase of common stock......................                           (63,822)                 (20)
  Payments received on receivables from
    stockholders..................................                                                                   25
  Net loss........................................
                                                    ----------    ----    ----------    ----      -------       -------
Balance at December 31, 1996......................          --      --    13,275,215      14       49,876          (104)
  Issuance of common stock under stock option
    plan..........................................                           267,669                  286
  Issuance of common stock under stock purchase
    plan..........................................                           164,016                  869
  Repurchase of common stock......................                          (348,536)              (2,021)
  Issuance of common stock related to
    acquisitions..................................                         1,402,234       1        6,645
  Payments received on receivables from
    stockholders..................................                                                                   14
  Unrealized holding losses.......................
  Net loss........................................
                                                    ----------    ----    ----------    ----      -------       -------
Balance at December 31, 1997......................          --    $ --    14,760,598    $ 15     $ 55,655      $    (90)
                                                    ==========    ====    ==========    ====      =======       =======
 
<CAPTION>
 
                                                    UNREALIZED
                                                     HOLDING     ACCUMULATED
                                                     (LOSSES)      DEFICIT      TOTAL
                                                    ----------   -----------   --------
 
<S>                                                 <C>          <C>           <C>
Balance at January 1, 1995........................                $  (8,701)   $  3,623
  Issuance of common stock under stock option
    plan..........................................                                  138
  Issuance of common stock for consulting
    purposes......................................                                    4
  Repurchase of common stock......................                                   (5)
  Payment received on receivables from
    stockholder...................................                                1,032
  Net loss........................................                   (2,738)     (2,738)
                                                       ----        --------    --------
Balance at December 31, 1995......................       --         (11,439)      2,054
  Conversion of preferred stock...................
  Issuance of common stock in initial public
    offering......................................                               35,613
  Issuance of common stock under stock option
    plan..........................................                                   78
  Issuance of common stock under stock purchase
    plan..........................................                                  491
  Issuance of common stock for consulting
    purposes......................................                                  106
  Repurchase of common stock......................                                  (20)
  Payments received on receivables from
    stockholders..................................                                   25
  Net loss........................................                   (1,839)     (1,839)
                                                       ----        --------    --------
Balance at December 31, 1996......................       --         (13,278)     36,508
  Issuance of common stock under stock option
    plan..........................................                                  286
  Issuance of common stock under stock purchase
    plan..........................................                                  869
  Repurchase of common stock......................                               (2,021)
  Issuance of common stock related to
    acquisitions..................................                                6,646
  Payments received on receivables from
    stockholders..................................                                   14
  Unrealized holding losses.......................     $(29)                        (29)
  Net loss........................................                  (16,152)    (16,152)
                                                       ----        --------    --------
Balance at December 31, 1997......................     $(29)      $ (29,430)   $ 26,121
                                                       ====        ========    ========
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       20
<PAGE>   23
 
                             PRISM SOLUTIONS, INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                                                         YEARS ENDED DECEMBER 31,
                                                                                       -----------------------------
                                                                                        1995       1996       1997
                                                                                       -------   --------   --------
                                                                                              (IN THOUSANDS)
<S>                                                                                    <C>       <C>        <C>
Cash flows from operating activities:
  Net loss...........................................................................  $(2,738)  $ (1,839)  $(16,152)
  Adjustments to reconcile net loss to net cash used in operating activities:
    Purchased in-process technology..................................................       --         --      8,558
    Depreciation and amortization....................................................      501      1,160      1,977
    Provision for doubtful accounts..................................................      281         44        248
    Loss on disposal of property and equipment.......................................       48         --         --
    Common stock issued for consulting services......................................        4         --         --
    Proceeds from stock issued for consulting purposes...............................       --        106         --
    Changes in operating assets and liabilities:
      Accounts receivable............................................................   (3,651)    (1,623)    (2,727)
      Other receivables..............................................................       95       (128)      (499)
      Prepaid expenses and other current assets......................................     (367)      (664)       (22)
      Other assets...................................................................       --        163       (896)
      Accounts payable...............................................................      351        597      1,152
      Accounts payable to related party..............................................       38        (66)       (28)
      Accrued payroll and related....................................................      541        943        194
      Accrued commissions............................................................       --        180        466
      Deferred revenue...............................................................    2,475        (23)       (14)
      Other accrued liabilities......................................................      654        355        320
                                                                                       -------    -------    -------
         Net cash used in operating activities.......................................   (1,768)      (795)    (7,423)
                                                                                       -------    -------    -------
Cash flows from investing activities:
  Proceeds from short-term investments...............................................       --    (20,052)     4,668
  Purchases of property and equipment................................................   (1,438)    (1,654)    (2,835)
  Cash paid for acquisitions, net of cash received...................................       --         --     (2,466)
                                                                                       -------    -------    -------
         Net cash used in investing activities.......................................   (1,438)   (21,706)      (633)
                                                                                       -------    -------    -------
Cash flows from financing activities:
  Borrowings on equipment lines of credit............................................      807         --         --
  Repayments on equipment lines of credit............................................     (104)      (703)        --
  Current portion of long-term debt..................................................       --         --         38
  Long-term debt less current portion................................................       --         --        (74)
  Proceeds from sale of common stock, net............................................       --     35,613         --
  Proceeds from exercise of stock options............................................      138         78        286
  Proceeds from stock sold through employee purchase plan............................       --        491        869
  Repurchase of common stock.........................................................       (5)       (20)       (21)
  Payments received on receivable from stockholder...................................    1,032         25         14
  Acquisition of treasury stock......................................................       --         --     (2,000)
  Repayment of other liabilities.....................................................       (6)        --         --
                                                                                       -------    -------    -------
         Net cash provided by (used in) financing activities.........................    1,862     35,484       (888)
                                                                                       -------    -------    -------
Net increase (decrease) in cash and cash equivalents.................................   (1,344)    12,983     (8,944)
Cash and cash equivalents at beginning of year.......................................    3,205      1,861     14,844
                                                                                       -------    -------    -------
Cash and cash equivalents at end of year.............................................  $ 1,861   $ 14,844   $  5,900
                                                                                       =======    =======    =======
Supplemental cash flow information:
  Cash paid for income taxes.........................................................  $    58   $     81   $     82
  Cash paid for interest.............................................................  $    24   $     22   $      9
Supplemental disclosure of noncash transactions:
  Receipt of notes receivable from employees for common stock issued under the stock
    option plan......................................................................  $   129   $     --   $     --
  Property and equipment included in accounts payable................................  $    49   $     69   $     24
  Issuance of common stock for consulting services...................................  $     4   $    106   $     --
  Conversion of preferred stock into common stock in initial public offering.........  $    --   $      8   $     --
  Effect of acquisitions:
    Fair value of assets acquired (see note 11)......................................  $    --   $     --   $  7,374
    Goodwill.........................................................................  $    --   $     --   $  1,274
    Issuance of common stock.........................................................  $    --   $     --   $  6,646
    Cash paid, net of $244,000 cash received.........................................  $    --   $     --   $  2,466
    Liabilities assumed including expenses incurred..................................  $    --   $     --   $    464
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       21
<PAGE>   24
 
                             PRISM SOLUTIONS, INC.
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
 1. BUSINESS OF THE COMPANY
 
     Prism Solutions, Inc. (the "Company") designs, develops, markets and
supports data warehouse management software that assists its customers in
developing, managing and maintaining data warehouses. The Company currently
markets its software products to a wide variety of businesses and other
organizations in North and South America, Europe, South Africa, the Middle East,
Asia Pacific and Australia. Substantially all of the Company's revenues to date
have been attributable to licenses of two of the Company's products and related
services.
 
 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  Consolidation
 
     The Company has established wholly-owned subsidiaries in Mexico, Canada,
the United Kingdom, Germany, France and Spain. In 1997, the Company established
wholly-owned subsidiaries in Hong Kong and Singapore, and acquired Object
Software in Melbourne, Australia; QDB in Cambridge, Massachusetts; and the
Peregrine/Bridge Transfer Corporation in Austin, Texas. The consolidated
financial statements include the financial statements of Prism Solutions, Inc.
and its wholly-owned subsidiaries after elimination of intercompany accounts and
transactions.
 
  Use of Estimates
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that reflect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
  Cash, Cash Equivalents and Short-Term Investments
 
     The Company considers all highly liquid investments purchased with an
original or remaining maturity of three months or less to be cash equivalents.
Highly liquid investments with an original or remaining maturity beyond three
months are classified as short-term investments and carried at fair value, which
approximates cost.
 
  Concentration of Credit Risk and Fair Value of Financial Instruments
 
     As of December 31, 1996 and 1997 the Company had cash and cash equivalents
totaling $894 and $554, respectively, deposited in a major U.S. bank. Insurance
for such a deposit by the Federal Deposit Insurance Corporation is limited to
$100 per account. In addition, the Company maintained $13,695 and $3,625,
respectively, of its cash and cash equivalents at three national investment
management companies in a variety of financial instruments, such as money market
accounts and government securities at December 31, 1996 and 1997, respectively.
The balance of the Company's cash and cash equivalents was held in various
foreign banks. Through December 31, 1997, no material losses had been
experienced on such investments.
 
     As of December 31, 1996 and 1997 the Company had short-term investments
totaling $20,052 and $15,355, respectively, which are available for sale.
Short-term investments principally consist of municipal securities and corporate
bonds. Through December 31, 1997, no material losses had been experienced on
such investments. The amortized cost of debt securities is adjusted for
amortization of premiums and accretion of discounts to maturity, both of which
are included in interest income. Realized gains and losses are recorded on the
specific identification method.
 
                                       22
<PAGE>   25
 
                             PRISM SOLUTIONS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     The Company markets its software products directly and through resellers,
and generally does not require collateral. The Company performs ongoing credit
evaluations of its customers and maintains an allowance for doubtful accounts.
As of December 31, 1996 and 1997, no one customer accounted for more than 10% of
accounts receivable.
 
     For financial instruments consisting of cash and cash equivalents, accounts
receivable, other receivables, deposits, long-term debt, accounts payable,
accrued liabilities and receivables from stockholders included in the Company's
consolidated financial statements, the carrying amounts are reasonable estimates
of fair value.
 
  Property and Equipment
 
     Property and equipment are stated at cost and depreciated on a
straight-line basis over their estimated useful lives of two to three years.
Leasehold improvements are amortized on a straight-line basis over their
estimated useful lives or their lease terms, whichever is less.
 
  Goodwill
 
     Goodwill related to the Company's acquisitions (see Note 11 in the Notes to
the Consolidated Financial Statements) is included in other assets and is being
amortized over five years on a straight-line basis.
 
  Revenue Recognition
 
     The Company's product revenues are derived from software licensing fees,
and the service revenues are derived from maintenance support services,
consulting, implementation and training. Product revenues are generally
recognized after execution of a licensing agreement, a valid purchase order for
resellers, and shipment of the product, if no significant vendor obligations
remain and collection of the resulting receivables is deemed probable. The
Company's license agreements generally do not provide a right of return.
 
     Service revenues from customer maintenance fees for ongoing customer
support and product updates are recognized ratably over the term of the service.
Payments for maintenance fees are generally received in advance and are
generally nonrefundable. Consulting, implementation and training revenues are
generally recognized following execution of a contract, performance of the
related services and if collection of the resulting receivables is deemed
probable.
 
  Advertising Costs
 
     Advertising costs, included in sales and marketing expenses, are expensed
as incurred and were $410, $380 and $260 in 1995, 1996 and 1997, respectively.
 
  Research and Development
 
     Research and development expenditures are expensed as incurred.
 
  Software Development Costs
 
     Software development costs have been expensed in accordance with Statement
of Financial Accounting Standards No. 86 ("SFAS 86"), "Accounting for the Costs
of Computer Software to be Sold, Leased or Otherwise Marketed." Under SFAS 86,
capitalization of software development costs begins upon the establishment of
technological feasibility and ends when a product is available for general
release to customers. Such costs have been immaterial to date.
 
                                       23
<PAGE>   26
 
                             PRISM SOLUTIONS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
  Income Taxes
 
     The Company determines its income tax liability in accordance with
Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting
for Income Taxes." Under SFAS 109, the liability method is used to account for
income taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between the financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amounts more likely than not to be realized.
 
  Year 2000
 
     The Company and its subsidiaries are taking actions to provide that their
computer systems are capable of processing for the periods the year 2000 and
beyond. The costs associated with these actions are not expected to
significantly affect operating cash flows.
 
  Foreign Currency Translation
 
     All subsidiaries located outside the United States operate with the U.S.
dollar as the functional currency. Net nonmonetary assets are translated at
historical exchange rates, and net monetary assets are translated at current
exchange rates. Transaction and translation gains and losses are included in the
determination of the results of operations and were not material.
 
  Basic and Diluted Loss Per Share
 
     Basic and diluted loss per share is computed in accordance with Statement
of Financial Accounting Standards No. 128 ("SFAS No. 128"). In the 1995, 1996
and 1997 computations, common equivalent shares are excluded from basic and
diluted loss per share as their effect is antidilutive. However, pursuant to the
Securities and Exchange Commission Staff Accounting Bulletin ("SAB 83"), the
1996 computation reflects common and common equivalent shares issued at prices
below the public offering price (using the treasury stock method and the initial
public offering price). The weighted average shares used in the computations for
1995, 1996 and 1997, were 3,045,568, 11,219,156 and 13,868,960. For the year
ended 1996, the number of shares was increased by 256,179 common equivalent
shares pursuant to SAB 83. Common equivalent shares that could potentially
dilute basic earnings per share in the future and that were not included in the
computation of diluted loss per share because of antidilution were 994,498,
1,113,119 and 868,262 for the years ended 1995, 1996 and 1997, respectively.
 
     SFAS 128 was adopted by the Company for the year ended December 31, 1997.
In accordance with the provisions of SFAS 128, loss per share for the years
ended December 31, 1995 and 1996 was restated, which resulted in no change to
the diluted loss per share for those years.
 
  Recent Pronouncements
 
     During June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
Income." This statement establishes requirements for disclosure of comprehensive
income and becomes effective for the Company for fiscal years beginning after
December 15, 1997, with reclassification of earlier financial statements for
comparative purposes. Comprehensive income generally represents all changes in
stockholders' equity except those resulting from investments or contributions by
stockholders. The Company is evaluating alternative formats for presenting this
information, but does not expect this pronouncement to materially impact the
Company's results of operations.
 
                                       24
<PAGE>   27
 
                             PRISM SOLUTIONS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     During October 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition."
This statement establishes requirements for revenue recognition for software
companies for fiscal years beginning after December 15, 1997. The Company is
currently evaluating the impact of SOP 97-2 and has not determined the result,
if any, on the Company's financial position, results of operations or cash
flows.
 
  Reclassifications
 
     Certain prior year balances have been reclassified to conform with the
current year financial statement presentation.
 
 3. PROPERTY AND EQUIPMENT
 
<TABLE>
<CAPTION>
                                                                      DECEMBER 31,
                                                                   -------------------
                                                                    1996        1997
                                                                   -------     -------
        <S>                                                        <C>         <C>
        Computers and equipment..................................  $ 2,424     $ 4,365
        Furniture and fixtures...................................      336         604
        Software.................................................      712       1,393
        Leasehold improvements...................................      103         124
                                                                    ------      ------
                                                                     3,575       6,486
        Less accumulated depreciation and amortization...........   (1,714)     (3,575)
                                                                    ------      ------
                                                                   $ 1,861     $ 2,911
                                                                    ======      ======
</TABLE>
 
  4. LONG-TERM DEBT
 
     In connection with the acquisition of QDB Solutions, Inc. in July of 1997,
the Company assumed a note agreement for $200. The note matures on March 31,
1999 and has an interest rate of 7.77% per annum. At December 31, 1997, the
longterm portion of the note is $117. In connection with the acquisition of
Object Software, Pty., the Company assumed a note payable which has a balance of
$8 at December 31, 1997 and bears interest at 8.55% and matures in March of
1999. Additionally, the Company has an equipment lease for $13 which bears
interest at the prime rate and matures in April 1999.
 
  5. COMMITMENTS AND CONTINGENCIES
 
  Operating Leases
 
     The Company leases its facilities under noncancelable operating leases that
expire through February 2002 with renewal options at fair market value for
additional periods. The Company is generally responsible for maintenance,
property taxes, liability and personal property insurance and utilities relating
to its facility leases.
 
     Rent expense under the operating leases amounted to approximately $475,
$860 and $1,298 in 1995, 1996 and 1997, respectively.
 
                                       25
<PAGE>   28
 
                             PRISM SOLUTIONS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     Future minimum payments to be made under noncancelable operating leases and
future payments to be received under a sublease agreement are as follows:
 
<TABLE>
<CAPTION>
                                                                  LEASE       SUBLEASE
                        YEAR ENDING DECEMBER 31,                PAYMENTS       INCOME
          ----------------------------------------------------  ---------     ---------
          <S>                                                   <C>           <C>
               1998...........................................   $   704         $18
               1999...........................................       320          --
               2000...........................................       225          --
               2001...........................................       119          --
               2002...........................................        19          --
                                                                  ------         ---
                                                                 $ 1,387         $18
                                                                  ======         ===
</TABLE>
 
  Royalty Agreements
 
     The Company is obligated to pay royalties based on sales from other
specified products under certain continuing license agreements. Royalty expense
was not material for 1995 and was $140 and $351 for 1996 and 1997, respectively.
 
  Contingencies
 
     On March 5, 1997, a class action complaint was filed by the law firm of
Milberg Weiss Bershad Hynes & Lerach LLP in Superior Court of the State of
California, County of Santa Clara, against the Company and several of its
current and former officers and directors and the underwriters of its initial
public offering. The complaint was filed on behalf of those persons who
purchased or otherwise acquired the common stock of the Company from March 14
through October 14, 1996 and alleges that the defendants artificially inflated
the demand for the common stock prior to and after the initial public offering.
The complaint seeks damages in an unspecified amount. On August 6, 1997 the
Superior Court entered an order sustaining demurrers to the California
Corporation Code claims with leave to amend and the Federal Securities Act of
1933 claims without leave to amend. On December 12, 1997, the plaintiff filed an
amended complaint which included both the California Corporation Code claims and
the Federal Securities Act of 1933 claims. The Company has filed a demurrer to
the amended complaint. On December 24, 1997, Milbury Weiss Bershad Hynes &
Lerach LLP filed a class action complaint in the United States District Court
for the Northern District of California. This action, which names the Company
and several current and former officers and directors as defendants, is based on
the same allegations as the earlier filed State Court action. The Company
believes that the complaints have no merit and will vigorously defend itself.
The Company is involved in other ongoing legal matters incidental to its
business.
 
 6. STOCKHOLDERS' EQUITY
 
  Reincorporation
 
     On February 2, 1996, the reincorporation of the Company as a Delaware
corporation was consummated. The certificate of incorporation provides for
8,990,817 authorized shares of preferred stock with a $0.001 par value per share
and for 50,000,000 authorized shares of common stock with a $0.001 par value per
share. The consolidated financial statements have been retroactively restated to
give effect to the reincorporation.
 
  Common and Convertible Preferred Stock
 
     On March 15, 1996, the Company sold 2,325,500 shares of common stock in its
initial public offering. Net proceeds to the Company, after deducting the
underwriting discount and offering expenses, were approximately $35,613. In
connection with such offering, all outstanding shares of preferred stock were
converted into 7,990,817 shares of common stock and the authorized shares of
preferred stock was reduced to 1,000,000 shares of preferred stock with a $0.001
par value.
 
                                       26
<PAGE>   29
 
                             PRISM SOLUTIONS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
  Employee Stock Purchase Plan
 
     In 1996, the Company's stockholders approved the adoption of the Employee
Stock Purchase Plan (the "Purchase Plan") wherein 500,000 shares were reserved
for issuance pursuant to such plan. The Purchase Plan is administered over
offering periods of 24 months each, with each offering period divided into four
consecutive six-month purchase periods beginning August 1 and February 1 of each
year. Eligible employees may designate not more than 10 percent of their cash
compensation to be deducted each pay period for the purchase of common stock
under the Purchase Plan. In addition, in an offering period, no employee may
purchase more than the number of shares specified by the Board of Directors for
any single purchase date or twice the number of shares an employee would be
eligible to purchase at 85 percent of the market price of a share on the first
business day of the offering period if the market price of a share on the last
business day of the purchase period drops to less than one-half of the market
price of a share on the first business day of the offering period. On the last
business day of each purchase period, shares of common stock are purchased with
the employee's payroll deductions accumulated during the six months, generally
at a price per share of 85 percent of the market price of the common stock on
the employee's entry date of the applicable offering period or the last day of
the applicable offering period, whichever is lower. The Purchase Plan will
terminate no later than 2006. A total of 42,751 and 164,016 shares were issued
under the Purchase Plan in 1996 and 1997, respectively.
 
  Stock Option Plan
 
     In 1996, the Company's stockholders approved an increase in the number of
common shares reserved under the 1992 Stock Option Plan (the "1992 Plan") by
400,000 shares. In addition, the Company's stockholders approved the adoption of
the 1996 Equity Incentive Plan and the 1996 Directors Stock Option Plan
(together known as the "1996 Plans") wherein 2,000,000 and 300,000 shares,
respectively, were reserved for issuance pursuant to these plans. The 1992 Plan
and the 1996 Plans together are known as "the Plans". In 1997, the 1996 Equity
Incentive Plan was amended to increase the number of shares reserved for
issuance to 3,500,000.
 
     The Plans provide for the grant of incentive stock options and nonqualified
stock options to employees, directors and consultants of the Company at prices
ranging from 85% to 110% (depending on the type of grant and the individual
receiving the grant) of the fair market value of the common stock on the date of
grant as determined by the Board of Directors.
 
     The vesting and exercise provisions of the option grants under the Plans
are determined by the Board of Directors. Options granted under the Plans are
generally immediately exercisable, but any shares acquired pursuant to exercises
are subject to repurchase by the Company until they have vested. Options
generally vest ratably over a four-year period commencing from the date of
grant, subject to one year of employment and expire ten years from date of
grant.
 
                                       27
<PAGE>   30
 
                             PRISM SOLUTIONS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     Information with respect to the Plans is summarized as follows:
 
<TABLE>
<CAPTION>
                                                                 OUTSTANDING OPTIONS
                                             ------------------------------------------------------------
                                                                                  WEIGHTED
                              AVAILABLE        NUMBER            PRICE          AVERAGE PRICE   AGGREGATE
                              FOR GRANT      OF SHARES         PER SHARE          PER SHARE       PRICE
                              ----------     ----------     ----------------    -------------   ---------
<S>                           <C>            <C>            <C>                 <C>             <C>
Balance at December 31,
  1994......................   1,416,858      1,011,863          $0.20             $  0.20      $     203
  Granted...................  (1,585,280)     1,585,280      $0.20 - $ 5.50        $  1.34          2,122
  Canceled..................     176,781       (176,781)     $0.20 - $ 3.00        $  0.25            (44)
  Exercised.................          --     (1,281,604)     $0.20 - $ 5.50        $  0.23           (296)
                              ----------     ----------                                          --------
Balance at December 31,
  1995......................       8,359      1,138,758      $0.20 - $ 5.50        $  1.74          1,985
  Additional shares
     reserved...............   2,700,000             --            --                   --             --
  Granted...................  (1,817,525)     1,817,525      $4.88 - $36.00        $  9.76         17,738
  Canceled..................     873,843       (873,843)     $0.20 - $36.00        $ 12.63        (11,033)
  Exercised.................          --       (116,324)     $0.20 - $ 7.50        $  0.67            (78)
                              ----------     ----------                                          --------
Balance at December 31,
  1996......................   1,764,677      1,966,116                            $  4.38          8,612
  Additional shares
     reserved...............   5,500,000             --            --                   --             --
  Granted...................  (3,426,680)     3,426,680      $0.20 - $ 8.25        $  5.58         18,774
  Canceled..................     757,619       (757,619)     $0.20 - $ 8.25        $  0.96         (3,831)
  Exercised.................          --       (267,669)     $0.10 - $ 5.63        $  5.12           (286)
                              ----------     ----------                                          --------
Balance at December 31,
  1997......................   4,595,616      4,367,508                            $  5.38      $  23,269
                              ==========     ==========                             ======       ========
</TABLE>
 
     As of December 31, 1997, the Company had reserved 8,963,124 shares of
common stock for future issuance under the Plans. As of December 31, 1997,
1,442,388 options outstanding under the Plans had vested and 72,055 shares of
common stock acquired under the Plans were subject to the Company's rights of
repurchase. Of the 4,595,616 shares available for grant, 4,000,000 are subject
to shareholder approval.
 
     The following information concerning the Company's stock option and
employee stock purchase plans is provided in accordance with Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation." The Company accounts for such plans in accordance with the
Accounting Principles Board No. 25 ("APB No. 25") and related interpretations.
 
<TABLE>
<CAPTION>
                                     OPTIONS OUTSTANDING
                    -----------------------------------------------------              VESTED OPTIONS
                                    WEIGHTED AVERAGE                          --------------------------------
                      NUMBER           REMAINING                                NUMBER
   RANGE OF         OUTSTANDING       CONTRACTUAL        WEIGHTED AVERAGE     EXERCISABLE     WEIGHTED AVERAGE
EXERCISE PRICES     AT 12/31/97       LIFE (YEARS)        EXERCISE PRICE      AT 12/31/97      EXERCISE PRICE
---------------     -----------     ----------------     ----------------     -----------     ----------------
<S>                 <C>             <C>                  <C>                  <C>             <C>
$ 0.10 - $ 5.00       1,546,241           8.52                $ 3.03              927,276          $ 1.77
$ 5.13 - $ 5.75       1,460,913           9.33                $ 5.46              221,956          $ 5.52
$ 6.00 - $17.00       1,360,354           9.35                $ 8.08              293,156          $10.92
                      ---------           ----                 -----            ---------          ------
$ 0.10 - $17.00       4,367,508           9.05                $ 5.38            1,442,388          $ 4.21
</TABLE>
 
     The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1995, 1996 and 1997:
 
<TABLE>
<CAPTION>
                                                              1995      1996        1997
                                                            --------  --------    --------
        <S>                                                 <C>       <C>         <C>
        Risk-free interest rates..........................  5.18%     5.18%       5.5%
        Expected life.....................................  4 years   4 years     4 years
        Volatility........................................  0.44%     0.44%       0.93%
        Dividend yield....................................  0%        0%          0%
</TABLE>
 
                                       28
<PAGE>   31
 
                             PRISM SOLUTIONS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     The weighted average expected life was based on the exercise behavior. The
weighted average fair value of those options granted in 1995, 1996 and 1997 was
$1.34, $10.65 and $5.29 per share, respectively.
 
     At December 31, 1997, the Company had two stock-based compensation plans,
which are described above. As the Company applies APB Opinion 25 and related
interpretations in accounting for its plans, no compensation cost has been
recognized for its fixed stock option plans and its stock purchase plan.
 
     Had compensation cost for the Company's two stock-based compensation plans
been determined consistent with FAS 123, the Company's net loss and loss per
share would have been increased to the pro forma amounts indicated below:
 
<TABLE>
<CAPTION>
                                  YEAR                             1996         1997
        --------------------------------------------------------  -------     --------
        <S>                                                       <C>         <C>
        Net loss
          as reported...........................................  $(1,839)    $(16,152)
          Pro forma.............................................   (1,945)     (16,709)
        Basic and diluted loss per share
          as reported...........................................  $ (0.16)    $  (1.16)
          Pro forma.............................................    (0.17)       (1.21)
</TABLE>
 
     The above pro forma effects on net loss may not be representative of the
effects in future years as option grants typically vest over several years and
are generally granted each year.
 
 7. INCOME TAXES
 
     The components of the provision for income taxes for 1995, 1996 and 1997
were as follows:
 
<TABLE>
<CAPTION>
                                                                     YEAR ENDED DECEMBER
                                                                             31,
                                                                    ----------------------
                                                                    1995     1996     1997
                                                                    ----     ----     ----
    <S>                                                             <C>      <C>      <C>
    Current:
      State and Other.............................................  $--      $ 43     $ 5
      Foreign.....................................................   56        95      86
                                                                    ---       ---     ---
                                                                    $56      $138     $91
                                                                    ===       ===     ===
</TABLE>
 
     The principal items accounting for the difference between the income tax
benefits computed at the United States statutory rate and the provision for
income taxes is as follows:
 
<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                               ----------------------------
                                                                1995      1996       1997
                                                               ------     -----     -------
    <S>                                                        <C>        <C>       <C>
    U.S. Federal statutory tax benefit at 34%................  $ (912)    $(578)    $(5,460)
    State taxes, net of U.S. federal income tax effect.......     (52)      (51)        (77)
    Tax credits..............................................    (247)       (6)       (648)
    Foreign withholding taxes................................      56        95          57
    In-process research and development......................      --        --       2,328
    Other....................................................      60        43         171
    Unbenefited net operating loss...........................   1,151       635       3,720
                                                               ------      ----      ------
                                                               $   56     $ 138     $    91
                                                               ======      ====      ======
</TABLE>
 
                                       29
<PAGE>   32
 
                             PRISM SOLUTIONS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. Significant components of
deferred tax assets for federal and state income taxes are as follows:
 
<TABLE>
<CAPTION>
                                                                      DECEMBER 31,
                                                                   -------------------
                                                                    1996        1997
                                                                   -------     -------
        <S>                                                        <C>         <C>
        Net operating loss carryforwards.........................  $ 3,241     $ 6,449
        Research credits.........................................      495       1,277
        Capitalized research and development.....................      518         368
        Other temporary differences..............................      594         727
                                                                   -------     -------
                  Total deferred tax assets......................    4,848       8,821
        Valuation allowance for deferred tax assets..............   (4,848)     (8,821)
                                                                   -------     -------
                  Net deferred tax assets........................  $    --     $    --
                                                                   =======     =======
</TABLE>
 
     The Company has established a valuation allowance to the full extent of its
net deferred tax assets because it is more likely than not that a benefit cannot
be realized in the future due to the Company's recurring operating losses. The
net change in the Company's valuation allowance was an increase of $1,300,000,
$92,000 and $3,973,000 for the years ended December 31, 1995, 1996 and 1997,
respectively.
 
     As of December 31, 1997, the Company had Federal and California net
operating loss carryforwards of approximately $18,561 and $1,747, respectively.
The Company also had Federal and California research and development tax credit
carryforwards of $758 and $519, respectively. The net operating loss and credit
carryforwards will expire at various dates from 1998 through 2012, if not
utilized.
 
     Utilization of the net operating losses and credits may be subject to an
annual limitation due to the ownership change limitations provided by the
Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
 
 8. EMPLOYEE BENEFIT PLAN
 
     During 1994, the Company adopted a qualified profit sharing plan and trust
under Internal Revenue Service Code 401(k) (the "401(k) Plan"). The 401(k) Plan
provides for tax deferred salary deductions. Employees can elect to contribute
to the 401(k) Plan up to 20% of their salary, subject to current statutory
limits. The Company is not required to contribute to the 401(k) Plan and has
made no contributions since the inception of the 401(k) Plan.
 
     During 1995, the Company committed to certain foreign employees to
contribute up to 5% of their salaries, subject to annual limitations, to a
defined contribution pension plan. As of December 31, 1997, the obligation for
this commitment was not material.
 
 9. RELATED PARTY TRANSACTIONS
 
     At December 31, 1997, the Company held a note receivable of $90, with
interest at 8.0% per annum, from an executive officer issued in connection with
the purchase of common stock under incentive and non-qualified stock option
plans. The principal and accrued interest on this note is due in full in July
2005.
 
10. SEGMENT INFORMATION
 
     The Company operates in one industry segment. No customer accounted for
more than 10% of the Company's total revenues in 1995, 1996 or 1997.
 
                                       30
<PAGE>   33
 
                             PRISM SOLUTIONS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     The Company's domestic and international revenues are generally denominated
in U.S. dollars and are summarized as follows:
 
<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                                                            -------------------------------
                                                             1995        1996        1997
                                                            -------     -------     -------
    <S>                                                     <C>         <C>         <C>
    North America.........................................  $15,140     $21,058     $33,224
    Europe................................................    2,620       9,366       8,806
    Asia Pacific..........................................       --          --       1,403
                                                            -------     -------     -------
                                                            $17,760     $30,424     $43,433
                                                            =======     =======     =======
</TABLE>
 
     The majority of European sales were made in the United Kingdom, France and
Germany where the Company significantly increased the number of direct sales
personnel and the number of international distributors and resellers marketing
the Company's products.
 
11. ACQUISITIONS
 
     On July 1, 1997, the Company completed the acquisition of Object Software
Pty. Limited ("Object") by issuing an aggregate of 258,621 shares of its Common
Stock and $160,000 in cash. The transaction was completed in connection with the
acquisition by a wholly-owned Australian subsidiary of the Company of certain of
Object's assets pursuant to an Asset Purchase Agreement entered into on July 1,
1997 between the Company, the Company's wholly-owned Australian subsidiary,
Object and Object's major shareholder. The transaction has been accounted for as
a purchase and results of operations subsequent to the acquisition date have
been consolidated with the Company. At December 31, 1997, accumulated
amortization of goodwill was $107,600.
 
     Consideration for the acquisition was allocated as follows:
 
<TABLE>
            <S>                                                        <C>
            Total consideration paid.................................  $1,240,000
            Fair value of net assets acquired........................     164,000
                                                                       ----------
            Goodwill.................................................  $1,076,000
                                                                       ==========
</TABLE>
 
     On July 21, 1997, the Company issued an aggregate of 1,143,613 shares of
its Common Stock and paid an aggregate of $1,250,000 in cash in connection with
the acquisition by the Company of QDB Solutions, Inc., a Massachusetts
corporation ("QDB"). The acquisition was accounted for as a purchase through the
merger of a wholly-owned subsidiary of the Company with and into QDB pursuant to
an Agreement and Plan of Reorganization entered into on July 21, 1997 between
the Company, the Company's wholly-owned subsidiary, QDB and the shareholders of
QDB. The results of operations subsequent to the acquisition date have been
consolidated with the Company. At December 31, 1997, accumulated amortization of
goodwill was $37,134.
 
     Consideration for the acquisition was allocated as follows:
 
<TABLE>
            <S>                                                        <C>
            Total consideration paid.................................  $7,409,000
            Fair value of net assets acquired........................   7,210,000
                                                                       ----------
            Goodwill.................................................  $  199,000
                                                                       ==========
</TABLE>
 
     On July 22, 1997, the Company purchased certain technology from the
Peregrine/Bridge Transfer Corporation for $1,300,000 in pre-paid royalties.
Additionally, the Company may be obligated to make an additional $2,700,000 in
royalty payments, based upon future sales, not to exceed $4,000,000 in the
aggregate. The royalty payments are payable 45 days after the end of each of the
Company's fiscal quarters. Under the terms and conditions of this agreement, the
Company has not paid any royalties as of December 31, 1997.
 
                                       31
<PAGE>   34
 
                             PRISM SOLUTIONS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     The purchase prices for all acquisitions were allocated to the tangible and
intangible net assets acquired, including in-process technology for which
technological feasibility had not been achieved. Such in-process technology was
valued in accordance with valuation techniques commonly used in the technology
industry, and was expensed upon acquisition in accordance with Financial
Accounting Standard No. 2, "Accounting for Research and Development Costs."
Amounts remaining after allocation to acquired net assets were allocated to
goodwill. Consideration provided by the Company in the form of stock and stock
options was valued at fair value based, as appropriate, upon independent
valuations and Company stock prices.
 
     The results of operations of the acquired companies did not have a material
impact on the consolidated results of the Company.
 
12. SUBSEQUENT EVENTS
 
     On January 28, 1998, the Company acquired Customer Focus International
(CFI), a California based software application company for approximately
2,800,000 shares of Prism common stock. The transaction, which should be
completed in the first quarter of fiscal 1998, will be accounted for as a
pooling of interests. At December 31, 1997, the unaudited financial statements
of CFI reported net income of approximately $800,000 on total revenues of
approximately $4,400,000.
 
                                       32
<PAGE>   35
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
The Board of Directors and Stockholders
Prism Solutions, Inc.
Sunnyvale, California
 
     We have audited the accompanying consolidated balance sheets of Prism
Solutions, Inc. and subsidiaries as of December 31, 1997 and 1996 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Prism
Solutions, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
 
                                          COOPERS & LYBRAND L.L.P.
 
San Jose, California
January 20, 1998, except for Note 12,
for which the date is January 28, 1998
 
                                       33
<PAGE>   36
 
                                    PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
     Information required by this Item regarding the Company's directors is
incorporated herein by reference from the section entitled "Election of
Directors" of the Company's proxy statement to be delivered to stockholders with
the Company's Annual Report to Stockholders. Information regarding the Company's
executive officers may be found in Part I of this Form 10-K in the section
entitled "Executive Officers of the Company" and is incorporated by reference
herein. Information required by this Item concerning compliance with Section
16(a) of the Exchange Act is incorporated herein by reference from the section
entitled "Section 16(a) Beneficial Ownership Reporting Compliance" contained in
the Company's proxy statement to be delivered to stockholders with the Company's
Annual Report to Stockholders.
 
ITEM 11. EXECUTIVE COMPENSATION
 
     Information required by this Item is incorporated herein by reference from
the section entitled "Executive Compensation" of the Company's proxy statement
to be delivered to stockholders with the Company's Annual Report to
Stockholders.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     Information required by this Item is incorporated herein by reference from
the section entitled "Stock Ownership of Certain Beneficial Owners and
Management" of the Company's proxy statement to be delivered to stockholders
with the Company's Annual Report to Stockholders.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     Information required by this Item is incorporated herein by reference from
the section entitled "Certain Transactions" of the Company's proxy statement to
be delivered to stockholders with the Company's Annual Report to Stockholders.
 
                                       34
<PAGE>   37
 
                                    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:
 
     1.  Financial Statements -- see Index to Consolidated Financial Statements
         at Item 8 on page 17 of this Report.
 
     2.  Financial Statement Schedule:
 
         Schedule II -- Valuation and Qualifying Account is filed on page 38 of
         this Report on Form 10-K
 
         All other schedules for which provision is made in the applicable
         accounting regulations of the Securities and Exchange Commission are
         omitted because they are not required under the related instructions or
         are inapplicable.
 
         The independent accountant's reports with respect to the above listed
         financial statements and financial statement schedule listed in Items
         14(a) is filed on page 33 and page 37, respectively, of this Report on
         Form 10-K.
 
     3.  Exhibits -- The following exhibits are filed as part of, or
incorporated by reference into, this Report:
 
<TABLE>
<CAPTION>
EXHIBIT
  NO.                                             EXHIBIT
--------     ----------------------------------------------------------------------------------
<S>          <C>
 2.01        Agreement and Plan of Merger by and between Prism Solutions, Inc., a Delaware
             corporation,
             and Prism Solutions, Inc., a California corporation, and material exhibits
             thereto.(1)
 3.01        Company's Certificate of Incorporation(1)
 3.02        Company's Amendment of Certificate of Incorporation(1)
 3.03        Company's Certificate of Designation(1)
 3.04        Company's Certificate of Retirement(1)
 3.05        Company's Bylaws(1)
 4.01        Amended and Restated Investor Rights Agreement dated December 19, 1994(1)
10.01        Company's 1992 Stock Option Plan(1)(2)
10.02        Company's 1996 Equity Incentive Plan, as amended (incorporated by reference to
             Exhibit 4.01
             to the Company's Registration Statement on Form S-8 filed August 11, 1997(the
             "1997 Form S-8")(2)
10.03        Company's 1996 Directors Stock Option Plan(1)(2)
10.04        Company's 1996 Employee Stock Purchase Plan(1)(2)
10.05        Company's 401(k) Plan(1)(2)
10.06        Employment Agreement dated as of March 27, 1992 between Registrant and James W.
             Ashbrook(1)(2)
10.07        Employment Agreement dated as of July 10, 1995 between Registrant and Donald N.
             Taylor
             (incorporated by reference to Exhibit 10.10 to the Company's Registration
             Statement on
             Form SB-2 (File No. 33-1180 LA) declared effective March 14, 1996 ("the Form
             SB-2"))(2)
10.08        Employment Agreement dated as of December 8, 1995 between Registrant and Philip M.
             Sakakihara (incorporated by reference to Exhibit 10.11 to the Form SB-2)(2)
10.09        Promissory Note Secured by Stock Pledge Agreement, dated as of August 15, 1995,
             and
             Stock Pledge Agreement, dated as of August 18, 1995, delivered to Registrant by
             James W. Ashbrook(incorporated by reference to Exhibit 10.17 to the Form SB-2)(2)
</TABLE>
 
                                       35
<PAGE>   38
 
<TABLE>
<CAPTION>
EXHIBIT
  NO.                                             EXHIBIT
--------     ----------------------------------------------------------------------------------
<S>          <C>
10.10        Form of Indemnity Agreement to be entered into by Registrant with each of its
             directors and executive officers (incorporated by reference to Exhibit 10.18 to
             the Form SB-2)
10.11        Lease Agreement between Francisco Berrueta and Registrant, dated as of February
             1995 (incorporated by reference to Exhibit 10.20 to the Form SB-2)
10.12        Lease from Smallbone & Co. (Devizes) Limited to Registrant, dated as of February
             1996 (incorporated by reference to Exhibit 10.21 to the Form SB-2)
10.13        Loan Agreement, dated as of November 10, 1995, between Registrant and CivicBank of
             Commerce and related documents, incorporated by reference to Exhibit 10.25 to the
             1996 10-K (incorporated by reference to Exhibit 10.22 to the Form SB-2)
10.14        Modification to Lease Agreement between Francisco Berrueta and Registrant, dated
             as of March 1996 (incorporated by reference to Exhibit 10.24 to the Company's
             Annual Report on Form 10-K for the year ended December 31, 1996 ("the 1996 10-K")
10.15        Employment Agreement dated as of January 23, 1997 between Registrant and Warren M.
             Weiss, (incorporated by reference to Exhibit 10.25 to the 1996 10-K)(2)
10.16        Employment Agreement dated as of March 17, 1997 between Registrant and Earl C.
             Charles(2)
10.17        QDB Solutions, Inc., 1997 Stock Incentive Plan (incorporated by reference to
             Exhibit 4.02 to the 1997 Form S-8)
10.18        Form of QDB Solutions, Inc. Nonqualified Stock Option Agreement (incorporated by
             reference to Exhibit 4.03 to the 1997 Form S-8)
11.01        Computation of Net Loss per Share
16.01        Letter on change in independent auditors(1)
21.01        List of Registrant's subsidiaries
23.01        Consent of Coopers & Lybrand L.L.P., Independent Accountants
27.01        Financial Data Schedule
</TABLE>
 
---------------
 
(1) Incorporated by reference to the exhibit with the same number in the
    Company's Registration Statement on Form SB-2 (File No. 33-1180-LA),
    declared effective March 14, 1996.
 
(2) Management contract or compensatory plan.
 
     (b) Reports on Form 8-K -- No current reports on Form 8K were filed in the
fiscal quarter ended December 31, 1997.
 
     (c) Exhibits: the Company hereby files as part of this Report the exhibits
listed in Item 14(a)(3) as set forth above.
 
     (d) Financial Statement Schedules -- See Item 14(a)(2) above.
 
                                       36
<PAGE>   39
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
                        ON FINANCIAL STATEMENT SCHEDULE
 
The Board of Directors and Stockholders
Prism Solutions, Inc.
Sunnyvale, California
 
     Our report on the consolidated financial statements of Prism Solutions,
Inc. is included on page 33 of this Form 10-K. In connection with our audits of
such financial statements, we have also audited the related financial statement
schedule listed on Item 14(a)(2) of this Form 10-K.
 
     In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information required to be
included therein.
 
                                          COOPERS & LYBRAND L.L.P.
 
San Jose, California
January 20, 1998, except for Note 12,
for which the date is January 28, 1998
 
                                       37
<PAGE>   40
 
                                  SCHEDULE II
 
                       VALUATION AND QUALIFYING ACCOUNTS
 
<TABLE>
<CAPTION>
                                            BALANCE                                              BALANCE
                                              AT       CHARGED TO   CHARGED TO                    AT END
                                           BEGINNING   COSTS AND      OTHER                         OF
                                           OF PERIOD    EXPENSES     ACCOUNTS    DEDUCTIONS(1)    PERIOD
                                           ---------   ----------   ----------   -------------   --------
<S>                                        <C>         <C>          <C>          <C>             <C>
Year ended December 31, 1995
Allowance for doubtful accounts..........  $  75,000    $106,000     $175,000             --     $356,000
Year ended December 31, 1996
Allowance for doubtful accounts..........  $ 356,000    $140,031           --      $  95,707     $400,324
Year ended December 31, 1997
Allowance for doubtful accounts..........  $ 400,324    $353,527           --      $ 105,098     $648,753
</TABLE>
 
---------------
 
(1) Deductions represent accounts receivables written off during 1996 and 1997.
 
                                       38
<PAGE>   41
 
                                   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.
 
Date: February 4, 1998                    PRISM SOLUTIONS, INC.
                                          (Registrant)
 
                                          By:       /s/  WARREN M. WEISS
                                            ------------------------------------
                                                      Warren M. Weiss
                                             President, Chief Executive Officer
                                                         and Director
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report on Form 10-K has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated:
 
<TABLE>
<CAPTION>
                    NAME                                   TITLE                     DATE
---------------------------------------------  ------------------------------  -----------------
<C>                                            <C>                             <S>
 
             /s/ WARREN M. WEISS                 President, Chief Executive    February 4, 1998
---------------------------------------------       Officer and Director
               Warren M. Weiss
 
             /s/ EARL C. CHARLES                Vice President, Finance and    February 4, 1998
---------------------------------------------      Administration, Chief
               Earl C. Charles                     Financial Officer and
                                                         Secretary
 
            /s/ JAMES W. ASHBROOK                  Chairman of the Board       February 4, 1998
---------------------------------------------
              James W. Ashbrook
 
               /s/ THUAN PHAN                    President, Customer Focus     February 4, 1998
---------------------------------------------          International
                 Thuan Phan
 
              /s/ KEVIN A. FONG                           Director             February 4, 1998
---------------------------------------------
                Kevin A. Fong
 
             /s/ FLOYD E. KVAMME                          Director             February 4, 1998
---------------------------------------------
               E. Floyd Kvamme
 
              /s/ PROMOD HAQUE                            Director             February 4, 1998
---------------------------------------------
                Promod Haque
 
           /s/ NANCY J. SCHOENDORF                        Director             February 4, 1998
---------------------------------------------
             Nancy J. Schoendorf
 
           /s/ NORRIS VAN DEN BERG                        Director             February 4, 1998
---------------------------------------------
             Norris van den Berg
</TABLE>
 
                                       39
<PAGE>   42
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
EXHIBIT
  NO.                                          EXHIBIT INDEX
--------     ----------------------------------------------------------------------------------
<S>          <C>
 2.01        Agreement and Plan of Merger by and between Prism Solutions, Inc., a Delaware
             corporation,
             and Prism Solutions, Inc., a California corporation, and material exhibits
             thereto.(1)
 3.01        Company's Certificate of Incorporation(1)
 3.02        Company's Amendment of Certificate of Incorporation(1)
 3.03        Company's Certificate of Designation(1)
 3.04        Company's Certificate of Retirement(1)
 3.05        Company's Bylaws(1)
 4.01        Amended and Restated Investor Rights Agreement dated December 19, 1994(1)
10.01        Company's 1992 Stock Option Plan(1)(2)
10.02        Company's 1996 Equity Incentive Plan, as amended (incorporated by reference to
             Exhibit 4.01
             to the Company's Registration Statement on Form S-8 filed August 11, 1997(the
             "1997 Form S-8")(2)
10.03        Company's 1996 Directors Stock Option Plan(1)(2)
10.04        Company's 1996 Employee Stock Purchase Plan(1)(2)
10.05        Company's 401(k) Plan(1)(2)
10.06        Employment Agreement dated as of March 27, 1992 between Registrant and James W.
             Ashbrook(1)(2)
10.07        Employment Agreement dated as of July 10, 1995 between Registrant and Donald N.
             Taylor
             (incorporated by reference to Exhibit 10.10 to the Company's Registration
             Statement on
             Form SB-2 (File No. 33-1180 LA) declared effective March 14, 1996 ("the Form
             SB-2"))(2)
10.08        Employment Agreement dated as of December 8, 1995 between Registrant and Philip M.
             Sakakihara (incorporated by reference to Exhibit 10.11 to the Form SB-2)(2)
10.09        Promissory Note Secured by Stock Pledge Agreement, dated as of August 15, 1995,
             and
             Stock Pledge Agreement, dated as of August 18, 1995, delivered to Registrant by
             James W. Ashbrook(incorporated by reference to Exhibit 10.17 to the Form SB-2)(2)
10.10        Form of Indemnity Agreement to be entered into by Registrant with each of its
             directors and executive officers (incorporated by reference to Exhibit 10.18 to
             the Form SB-2)
10.11        Lease Agreement between Francisco Berrueta and Registrant, dated as of February
             1995 (incorporated by reference to Exhibit 10.20 to the Form SB-2)
10.12        Lease from Smallbone & Co. (Devizes) Limited to Registrant, dated as of February
             1996 (incorporated by reference to Exhibit 10.21 to the Form SB-2)
10.13        Loan Agreement, dated as of November 10, 1995, between Registrant and CivicBank of
             Commerce and related documents, incorporated by reference to Exhibit 10.25 to the
             1996 10-K (incorporated by reference to Exhibit 10.22 to the Form SB-2)
10.14        Modification to Lease Agreement between Francisco Berrueta and Registrant, dated
             as of March 1996 (incorporated by reference to Exhibit 10.24 to the Company's
             Annual Report on Form 10-K for the year ended December 31, 1996 ("the 1996 10-K")
10.15        Employment Agreement dated as of January 23, 1997 between Registrant and Warren M.
             Weiss, (incorporated by reference to Exhibit 10.25 to the 1996 10-K)(2)
10.16        Employment Agreement dated as of March 17, 1997 between Registrant and Earl C.
             Charles(2)
10.17        QDB Solutions, Inc., 1997 Stock Incentive Plan (incorporated by reference to
             Exhibit 4.02 to the 1997 Form S-8)
</TABLE>
<PAGE>   43
 
<TABLE>
<CAPTION>
EXHIBIT
  NO.                                          EXHIBIT INDEX
--------     ----------------------------------------------------------------------------------
<S>          <C>
10.18        Form of QDB Solutions, Inc. Nonqualified Stock Option Agreement (incorporated by
             reference to Exhibit 4.03 to the 1997 Form S-8)
11.01        Computation of Net Loss per Share
16.01        Letter on change in independent auditors(1)
21.01        List of Registrant's subsidiaries
23.01        Consent of Coopers & Lybrand L.L.P., Independent Accountants
27.01        Financial Data Schedule
</TABLE>
 
---------------
 
(1) Incorporated by reference to the exhibit with the same number in the
    Company's Registration Statement on Form SB-2 (File No. 33-1180-LA),
    declared effective March 14, 1996.
 
(2) Management contract or compensatory plan.
 
     (b) Reports on Form 8-K -- No current reports on Form 8K were filed in the
fiscal quarter ended December 31, 1997.
 
     (c) Exhibits: the Company hereby files as part of this Report the exhibits
listed in Item 14(a)(3) as set forth above.
 
     (d) Financial Statement Schedules -- See Item 14(a)(2) above.