Exhibit 13.1

Boole & Babbage, Inc.
Selected Consolidated Financial Data
<TABLE>

<CAPTION>
                                                                                         Years ended September 30,
                                                                 -------------------------------------------------------------------
(In thousands, except per share amounts)                             1998           1997          1996       1995(a)        1994
------------------------------------------------------------------------------------------------------------------------------------

<S>                                                                   <C>           <C>          <C>          <C>          <C>     
Revenue                                                               $218,236      $197,097     $180,151     $169,027     $141,600

Expenses                                                               181,954       185,283      167,322      156,242      137,234
                                                                 --------------  ------------  -----------  -----------  -----------
       Operating Income                                                 36,282        11,814       12,829       12,785        4,366

Interest and other income, net                                          14,632         9,180        5,643        5,414        1,306
                                                                 --------------  ------------  -----------  -----------  -----------
Income before income taxes                                              50,914        20,994       18,472       18,199        5,672

Provision for income taxes                                              14,260         7,525        7,015        5,076        3,570
                                                                 --------------  ------------  -----------  -----------  -----------

Net income                                                             $36,654       $13,469      $11,457      $13,123       $2,102
                                                                 ==============  ============  ===========  ===========  ===========

Basic earnings per share                                                 $1.31         $0.49        $0.43        $0.51        $0.09

Diluted earnings per share                                               $1.20         $0.45        $0.40        $0.47        $0.08

Weighted average common shares outstanding                              28,045        27,715       26,565       25,535       24,285

Weighted average common shares outstanding assuming dilution            30,580        30,145       28,815       27,700       25,725


Balance sheet data:
     Cash, cash equivalents and short-term investments                 $92,506       $56,973      $62,010      $42,047      $39,794
     Total assets                                                     $309,926      $260,144     $224,540     $182,827     $145,621
     Long-term debt                                                     $1,592        $1,845       $3,269       $2,075       $7,830
     Deferred maintenance revenue                                     $113,128       $91,714      $80,190      $61,468      $49,172
     Stockholders' equity                                             $140,553      $118,502      $95,064      $78,501      $47,482

<FN>
(a) Includes  $1.507  million  ($0.06 basic earnings per share and $0.05 diluted
    per share) of extraordinary gain on forgiveness of debt in fiscal 1995.
</FN>
</TABLE>

                                       1

<PAGE>

                                  Exhibit 13.1

Boole & Babbage, Inc.
Quarterly History
(Unaudited)

<TABLE>

<CAPTION>
(In thousands, except per share amounts)                 Q1 97    Q2 97    Q3 97    Q4 97    Q1 98    Q2 98    Q3 98     Q4 98
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>      <C>      <C>      <C>      <C>      <C>      <C>       <C>    
Revenue:
   Product licensing                                     $27,278  $25,057  $26,784  $29,790  $30,209  $30,976  $29,922   $33,613
   Maintenance fees and other                             22,483   21,394   21,972   22,339   22,724   22,611   23,758    24,423
                                                        -------------------------------------------------------------------------
      Total revenue                                       49,761   46,451   48,756   52,129   52,933   53,587   53,680    58,036
                                                        -------------------------------------------------------------------------

Costs and expenses:
   Cost of product licensing                               3,978    3,312    3,676    4,064    4,211    3,295    3,741     3,122
   Cost of maintenance fees and other                      6,016    4,200    4,495    5,040    5,135    5,519    5,788     6,486
   Product development                                     6,387    5,876    6,310    6,308    6,455    6,415    6,325     6,421
   Sales and marketing                                    25,126   22,132   23,277   25,282   24,391   24,766   24,939    25,884
   General and administrative                              5,325    4,348    4,344    4,478    4,501    4,933    4,545     5,082
   Acquisition and nonrecurring costs                      --      11,309    --       --       --       --       --       --
                                                        -------------------------------------------------------------------------
      Total costs and expenses                            46,832   51,177   42,102   45,172   44,693   44,928   45,338    46,995
                                                        -------------------------------------------------------------------------

      Operating income (loss)                              2,929   (4,726)   6,654    6,957    8,240    8,659    8,342    11,041

Interest and other income, net                             1,588    2,228    2,758    2,606    3,383    4,475    3,570     3,204
                                                        -------------------------------------------------------------------------
Income (loss) before taxes                                 4,517   (2,498)   9,412    9,563   11,623   13,134   11,912    14,245
Provision (benefit) for income taxes                       2,600     (195)   2,820    2,300    3,255    3,680    3,340     3,985
                                                        -------------------------------------------------------------------------

Net income (loss)                                         $1,917  ($2,303)  $6,592   $7,263   $8,368   $9,454   $8,572   $10,260
                                                        =========================================================================

Basic earnings per share                                   $0.07   ($0.08)   $0.24    $0.26    $0.30    $0.34    $0.30     $0.37

Diluted earnings per share                                 $0.06   ($0.08)   $0.22    $0.24    $0.27    $0.31    $0.28     $0.34

Weighted average common shares outstanding                27,205   27,615   27,900   28,120   28,105   28,120   28,245    28,025

Weighted average common shares outstanding
  assuming dilution                                       29,545   30,180   30,145   30,595   30,675   30,710   30,825    30,430

Stock Price (closing bid)
   High                                                   $16.67   $18.00   $15.83   $21.33   $21.58   $24.88   $25.81    $25.25
   Low                                                    $11.00   $14.67   $13.50   $14.09   $17.29   $18.67   $21.63    $19.75

</TABLE>
                                       2

<PAGE>

                                  Exhibit 13.1

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

<TABLE>
The table  below sets forth the  results of  operations  of the  Company for the
three fiscal years ended September 30, 1998:
<CAPTION>
                                                              PERCENTAGE OF REVENUE                           YEAR-TO-YEAR
                                                            YEARS ENDED SEPTEMBER 30,                       PERCENTAGE CHANGE
                                                   ---------------------------------------------      ------------------------------
                                                      1998             1997             1996           98 vs. 97         97 vs. 96
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>              <C>              <C>               <C>                <C>  
Revenue:
     Product licensing                                  57.1%            55.3%            52.9%             14.5%             14.4%
     Maintenance fees and other                         42.9%            44.7%            47.1%              6.0%              3.8%
                                                   -----------      -----------      -----------      ------------       -----------
         Total revenue                                 100.0%           100.0%           100.0%             10.7%              9.4%

Costs and expenses:
     Cost of product licensing                           6.6%             7.6%             8.5%             -4.4%             -2.1%
     Cost of maintenance fees and other                 10.5%            10.0%            10.8%             16.1%              1.4%
     Product development                                11.8%            12.6%            12.5%              3.0%             11.4%
     Sales and marketing                                45.8%            48.6%            50.9%              4.3%              4.4%
     General and administrative                          8.7%             9.4%            10.1%              3.1%              0.6%
     Acquisition and nonrecurring costs                 --                5.7%            --                  N/A               N/A
                                                   -----------      -----------      -----------      ------------       -----------
         Total costs and expenses                       83.4%            93.9%            92.8%             -1.8%             10.7%
                                                   -----------      -----------      -----------      ------------       -----------

         Operating income                               16.6%             6.1%             7.2%            207.1%             -7.9%

Interest and other income, net                           6.7%             4.7%             3.1%             59.4%             62.7%
                                                   -----------      -----------      -----------      ------------       -----------
Income before provision for income taxes                23.3%            10.8%            10.3%            142.5%             13.7%
Provision for income taxes                               6.5%             3.8%             3.9%             89.5%              7.3%
                                                   -----------      -----------      -----------      ------------       -----------
Net income                                              16.8%             7.0%             6.4%            172.1%             17.6%
                                                   ===========      ===========      ===========      ============       ===========

</TABLE>
                                       3

<PAGE>

Forward-Looking Information
When used in this discussion,  the words "anticipate," "estimate," "project" and
similar expressions are intended to identify  forward-looking  statements.  Such
statements  are  subject to certain  risks and  uncertainties,  including  those
discussed below, that could cause actual results to differ materially from those
projected.   Readers  are  cautioned  not  to  place  undue  reliance  on  these
forward-looking statements,  which speak only as of the date hereof. The Company
undertakes  no  obligation  to publicly  release the result of any  revisions to
these  forward-looking  statements  which  may be  made  to  reflect  events  or
circumstances   after  the  date  hereof  or  to  reflect  the   occurrence   of
unanticipated events.

Accounting Pronouncements
Statement of Position (SOP) 97-2,  "Software Revenue Recognition" and (SOP) 98-4
"Deferral  of the  Effective  Date of a Provision of (SOP) 97-2" were  issued in
October  1997  and  March  1998,  respectively,  and  address  software  revenue
recognition.  SOP 97-2 and SOP 98-4  supersede  SOP 91-1 and are  effective  for
transactions entered into for fiscal years beginning after December 15, 1997 and
will therefore be adopted for the Company's fiscal year 1999,  beginning October
1, 1998. Based on its reading and  interpretation  of SOP 97-2 and SOP 98-4, the
impact will not be material to the Company's revenues and earnings.

In March 1998, the AICPA issued SOP 98-1,  "Accounting for the Costs of Computer
Software  Developed or Obtained for Internal  Use." This standard  requires that
certain costs related to the development or purchase of internal-use software be
capitalized and amortized over the estimated  useful life of the software.  This
SOP also requires that costs  related to the  preliminary  project stage and the
post-implementation/operations   stage  of  an  internal-use  computer  software
development project be expensed as incurred. SOP 98-1 is effective for financial
statements  issued for fiscal years beginning after December 31, 1998, which, in
the case of the Company is October 1, 1999.  SOP 98-1 is not  expected to have a
material impact on the Company's Consolidated Financial Statements.

In June 1997, SFAS No. 130, "Reporting  Comprehensive  Income" was issued. Under
SFAS No. 130, all items that meet the definition of comprehensive income will be
separately reported for the period in which they are recognized. The only impact
will be that comprehensive income, which will include changes in the balances of
items that are reported  separately in the  Stockholders'  Equity section of the
Consolidated  Balance Sheets, will be either reported in a separate statement or
at the bottom of the  Consolidated  Statements  of Earnings.  This  statement is
effective for fiscal years beginning after December 15, 1997, which, in the case
of the Company, is October 1, 1998.

SFAS  No.  131,  "Disclosures  about  Segments  of  an  Enterprise  and  Related
Information"  was  issued in June  1997.  SFAS No.  131  requires  that a public
business  enterprise  report  financial and  descriptive  information  about its
reportable operating segments.  Generally,  financial information is required to
be reported on the basis used internally for evaluating segment  performance and
resource allocation.  SFAS No. 131 is effective for fiscal years beginning after
December  31,  1997,  and  disclosure  is  not  required  in  interim  financial
statements  in the initial  year of  adoption.  Accordingly,  the  Company  will
reflect SFAS No. 131 information in its  Consolidated  Financial  Statements for
the September 30, 1999, fiscal year. The Company is currently assessing the SFAS
No. 131 requirements.

Year 2000
The  Company  is  currently  taking  steps to  address  Year 2000  issues in the
following three areas: (1) internal systems  (including  information  technology
such as financial and order entry systems and non-information technology systems
such as phones and  facilities);  (2) products sold by the Company;  and (3) the
readiness of third parties with whom the Company has business  relationships.  A
Year 2000 readiness plan has been implemented for world-wide operations relating
to all of these areas consisting of three phases. Phase One (inventory) consists
of  identifying  all of the  systems,  products  and  relationships  that may be
impacted by Year 2000. Phase Two (assessment)  involves  determining the current
state of Year 2000 readiness for those areas  identified in the inventory  phase
and prioritizing  areas that need to be fixed. Phase Three (action) will consist
of fixing the areas in order of that priority.  The Company currently expects to
be in  compliance  for all of the  targeted  areas by the end of the 1999 fiscal
year (September 1999).

                                       4

<PAGE>

For Boole & Babbage products, the Company is in the action phase of our plan. As
detailed  on its web  site  (boole.com),  most  of the  Company's  most  current
versions  of its  products  have  been  designed  and  tested  to be  Year  2000
compliant. Some of the Company's customers are running product versions that are
not year 2000  compliant.  The Company has been  encouraging  such  customers to
migrate to  current  product  versions.  It is  possible  that the  Company  may
experience increased expenses in addressing migration issues for such customers.
In addition,  there can be no assurances that the Company's  current products do
not  contain  undetected  errors  or  defects  associated  with  year  2000 date
functions that may result in material  costs to the Company.  Some analysts have
stated  that a  significant  amount of  litigation  will  arise out of year 2000
compliance  issues,  and the  Company is aware of a growing  number of  lawsuits
against other  software  vendors.  Because of the  unprecedented  nature of such
litigation,  it is  uncertain  whether  or to what  extent  the  Company  may be
affected by it.  Approximately  14% of the  Company's  total revenue is from the
products of one third-party vendor, New Dimension Software. As detailed on their
Web site  (ndsoft.com),  most  products  are Year 2000  compliant  or will be by
December 31, 1998.  Other third party vendors,  comprising less than 3% of total
revenue,  have provided us written  assurances  that all their  products will be
made compliant by the end of 1999.

The Company is currently in the assessment and action phase of the plan for both
the internal systems and third party relationships. With respect to its internal
systems,  the  Company is taking  steps to prepare its systems for the Year 2000
date change. The Company expects to substantially  complete these efforts at the
end of calendar 1998, with extensive testing to continue through 1999.  Although
the Company does not believe that it will incur any material costs or experience
material  disruptions  in its business  associated  with  preparing its internal
systems for the year 2000,  there can be no assurances that the Company will not
experience serious  unanticipated  negative  consequences  and/or material costs
caused by undetected  errors or defects in the  technology  used in its internal
systems,  which are composed of third party software,  third party hardware that
contains embedded software and the Company's own software products.  The Company
uses only large, high credit quality financial  institutions,  all of which have
made representations that they are already Year 2000 compliant. The Company does
not make  significant  purchases  from any one  vendor  and  therefore  does not
believe  that any vendor  non-compliance  related to Year 2000 would  materially
disrupt operations.

While Year 2000 costs  incurred  to date have not been  material,  we will incur
additional  costs as we  complete  the  project  phases.  Based  on  preliminary
assessments  resulting from the early phases of our plan in each of the targeted
areas, we are currently unable to determine whether  additional costs to achieve
Year 2000 readiness will be material.  Additional costs incurred may include but
are not limited to: the cost of producing and  distributing  free  solutions for
products  that  are not  Year  2000  ready;  the  impact  of lost  sales  due to
distribution  of free Year 2000  ready  solutions  for  affected  products;  the
administrative costs of completing the Year 2000 project; the cost of correcting
our internal systems; and the cost of implementing necessary contingency plans.

The above discussion  regarding costs, risks and estimated  completion dates for
the Year 2000 is based on our best estimates given information that is currently
available,  and is subject to  change.  As we  continue  to  progress  with this
initiative,  we may discover  that actual  results will differ  materially  from
these estimates.

Euro Currency
The European  Union's  adoption of the Euro single  currency raises a variety of
issues  associated  with  the  Company's  European   operations.   Although  the
transition  will be phased in over several years,  the Euro will become Europe's
single currency on January 1, 1999. The Company is assessing Euro issues related
to its product pricing,  contracts,  treasury operations and accounting systems.
Although the evaluation of these items is still in process, the Company believes
that the hardware and software  systems it uses internally will accommodate this
transition and any required policy or operating changes will not have a material
adverse effect on future results.

                                       5

<PAGE>

<TABLE>
Revenue
The Company  derives  its  revenues  primarily  from the  licensing  of computer
software  programs,   the  sales  of  software  maintenance  services  and  from
consulting  and  education  services.  The  following  table shows  year-to-year
percentage changes as reported and without the effect of currency rate changes.
<CAPTION>
                                                                             Without Currency
Growth Rates:                                     As Reported                      Effect
                                           ---------------------------    ------------------------
Product Licensing                             98 vs. 97    97 vs. 96     98 vs. 97     97 vs. 96
<S>                                               <C>          <C>           <C>           <C>
Product Group:
  Distributed                                     54.7%         4.9%         59.8%         13.2%
  Mainframe                                        0.8%        18.0%          5.2%         26.4%
                                                  -----        -----         -----         -----
                                                  14.5%        14.4%         19.1%         22.7%
                                                  =====        =====         =====         =====

Sales Channel:
  Domestic                                        27.6%        23.5%         27.6%         23.5%
  International                                    7.1%         9.8%         14.4%         22.3%
                                                  -----        -----         -----         -----
                                                  14.5%        14.4%         19.1%         22.7%
                                                  =====        =====         =====         =====

Maintenance fees and other                         6.0%         3.8%         10.1%         10.6%
                                                  =====        =====         =====         =====

Total revenue                                     10.7%         9.4%         15.1%         17.0%
                                                  =====        =====         =====         =====
</TABLE>

Product Licensing
The  Company  licenses  its  products  to  customers  for use on their  computer
systems.  As is common in the industry,  more than 50% of the Company's  license
revenue is derived from  transactions that close in the last month of a quarter,
which  can make  quarterly  revenues  difficult  to  forecast.  Since  operating
expenses are  relatively  fixed,  failure to achieve  projected  revenues  could
materially affect the Company's  operating results.  This, in turn, could result
in an immediate and adverse effect on the market price of the Company's stock.

Products
The Company  anticipates that the Distributed group of products will show higher
growth  rates for fiscal  1999.  However,  the  Company  competes  with  certain
companies who have much greater  financial and operational  resources along with
larger  customer  bases.  This could allow those  companies to bundle  competing
products  with  more  established  non-competing  products  in  order  to gain a
marketing advantage. In addition, the Company is dependent on the success of its
new Explorer  family of Windows NT and  Web-based  products  relating to its new
Desired-State  Management  initiative.  This initiative represents a significant
expansion of the SpaceView,  COMMAND/POST and Command MQ product lines. There is
also a potential  diversion of customers' business attention and project funding
toward Year 2000 projects. Due to these factors, there can be no assurances that
new or even existing  products  will achieve  significant  market  acceptance or
competitive success and thus contribute to revenue growth.

     Mainframe  products  include Plex products which enable customers to handle
large  groups of  computer  processors,  particularly  the  parallel  processing
machines from IBM. In the mainframe  market,  industry  analysts have  projected
that systems  management  spending will only grow at  approximately  5% per year
through the year 2000.  They also  project that while the majority of large data
centers have adopted a sysplex strategy,  mid-size data centers will not broadly
adopt these parallel  processors until 1999 or later.  Thus,  despite a somewhat
flat mainframe  market,  the Company's product licensing growth has benefited by
data centers adopting this new technology.  This has also helped to increase the
number of competitive  replacements  that in 1998 accounted for approximately 9%
of total revenue  compared with  approximately 5% in 1997. These occur primarily
through multi-year licensing agreements that comprised  approximately 38% of the
total  revenue  in 1998 and 36% in 1997.  Thus,  future  growth  rates  could be
materially  and  adversely  affected if these  parallel  processors  do not gain
significant  market  acceptance among the mid-

                                       6

<PAGE>

size data centers, if the rate of successful competitive  replacements slows, or
if customer  spending  shifts away from  traditional  mainframes  to  technology
platforms where the Company does not have significant product acceptance.

Markets
Domestic:

Domestic  licensing  comprised 40.2%, 36.1% and 33.5% of total product licensing
for 1998, 1997, and 1996,  respectively.  Domestic product  licensing grew 27.6%
and 23.5% in 1998 and 1997, respectively. For growth to continue in the domestic
market, the company is dependent on continued  productivity increases as well as
the ability to generate larger size  transactions,  primarily through multi-year
contracts and competitive replacements.

International:
In 1998, the Company's licensing from its international operations, comprised of
foreign  subsidiaries and marketing agents,  increased 7.1% as a result of solid
growth in Europe and South America despite unfavorable  currency exchange rates.
In the  Asia-Pacific  area,  except for its subsidiaries in Japan and Australia,
the Company took a conservative  position and only booked new revenues on a cash
basis  from the  distributors  in the  other  markets  of this  region  to avoid
potential impact from the current economic turmoil and  uncertainties  regarding
payment on product  orders.  In 1997, the increase was 9.8% as a result of solid
growth in all channels despite unfavorable  currency exchange rates. In addition
to the risks described above, since the majority of product licensing is derived
from  international  markets,  the Company's  overall  operations  and financial
results  could be  significantly  and adversely  affected by such  international
factors as changes in currency  exchange rates and specific  regional or country
political and economic circumstances.

Maintenance Fees and Other
Maintenance  revenue is generated from services the Company  provides  including
technical support, product enhancements,  system updates and user documentation.
Maintenance  revenue also includes  maintenance  services for an initial  period
ranging from six months to one year which is included in the initial charge when
the  Company  licenses  its  software  products  under  a  long-term  agreement.
Thereafter on each  anniversary  date of the license,  the customer may elect to
renew its  maintenance  agreement with the Company.  Customers may also elect to
purchase  advance  maintenance at the time of product  licensing for maintenance
periods beyond the first year. Included in maintenance fees and other is revenue
from consulting and education  services,  computer services,  hardware sales and
royalties  from IBM for the jointly  developed  CICS product.  In July 1996, the
Company  entered  into a long-term  licensing  agreement  requiring  IBM to make
royalty payments,  based upon their sales of the product, of up to approximately
$10 million for the period  from the fourth  quarter of 1996  through the second
quarter of fiscal 1999.  The Company has  recognized  $8.4 million in revenue of
which $7.4 million has been paid through  September 30, 1998. Since there are no
minimum generated amounts,  actual royalties due to the Company may be below the
annual maximum amounts. The Company records royalty revenue based upon reporting
from IBM.

     The  increases  in  maintenance  fees and other are  mainly  the  result of
increased  product licensing in the previous years combined with relatively high
renewal rates,  higher consulting revenue and increased royalties from IBM under
the July 1996 agreement.  In 1998,  consulting and education revenue was 7.8% of
maintenance fees and other compared to 5.2% in 1997.

     In both years,  the  maintenance  revenue  growth  rates are lower than the
licensing  growth rates primarily as a result of fewer customer sites due to the
consolidation  of  customer  data  centers;   reduced  revenue  associated  with
customers'  conversion to non-CPU  specific  pricing  systems such as MIPS-based
pricing;  and higher  discount  levels  offered by the Company on  multiple-year
maintenance packages.

     The Company  anticipates that maintenance revenue in 1999 will increase due
to the higher license  revenue  growth in 1998,  although it will continue to be
negatively  impacted by reduced  revenue  associated  with site  consolidations,
non-CPU specific pricing and discounted multiple-year maintenance packages.

     The Company must  continue to generate new product  licensing  revenues and
also continue to provide high quality maintenance support and upgrades to ensure
future  maintenance  revenue  increases.

                                       7

<PAGE>

<TABLE>
Costs and expenses
The following table shows year-to-year percentage changes of costs and expenses,
excluding  acquisition  and  non-recurring  costs,  as reported  and without the
effect of currency rate changes.
<CAPTION>

                                                                              Without Currency
Growth Rates:                                     As Reported                      Effect
                                           ---------------------------    ------------------------
                                              98 vs. 97     97 vs. 96    98 vs. 97     97 vs. 96
<S>                                             <C>           <C>            <C>          <C> 
Cost of product licensing                       (4.4%)        (2.1%)         0.6%         6.9%
Cost of maintenance fees and other               16.1%          1.4%        20.7%         7.9%
Product development                               3.0%         11.4%         3.8%        13.0%
Sales and marketing                               4.3%          4.4%         8.6%        11.2%
General and administrative                        3.1%          0.6%         6.4%         5.1%
                                                  ----          ----         ----        -----
           Total costs and expenses               4.6%          4.0%         8.4%        10.0%
                                                  ====          ====         ====        =====
</TABLE>                                       

Cost of Product Licensing
Cost of product  licensing  consists  primarily of royalties paid to independent
software  authors  and  amortization  of  purchased  and  internally   developed
software.  In both years, the increases relate primarily to higher royalty costs
due to  increased  third party sales.  In the third  quarter of 1996 there was a
charge of  approximately  $1 million on the remaining  royalty  commitments on a
third-party  product.  In general,  fluctuations in the  relationship of cost of
product  licensing  to revenue  are  caused  primarily  by changes in  licensing
revenue mix, royalty agreements, and amortization of capitalized software.

Cost of Maintenance Fees and Other
Cost of  maintenance  fees  and  other  consists  primarily  of cost of  product
maintenance   support,   royalties   paid  to  independent   software   authors,
amortization of purchased and internally developed software, the cost to provide
educational  and  consulting  services  and costs  related to  certain  computer
services.  In 1998,  the  increase is  primarily  due to higher costs to provide
consulting  and  education  and to a lesser  extent,  higher  royalty  costs and
increased  support  costs.  In 1997,  the increase  was due  primarily to higher
third-party  royalties in Europe as a result of the expiration of a reduced rate
from a third-party  vendor which was in effect from the second quarter of fiscal
1995 to the fourth quarter of fiscal 1996.  Cost of  educational  and consulting
services was up in proportion to the service revenue increase  although this was
partially offset by lower maintenance support costs. In general, fluctuations in
the  relationship  of cost of  maintenance  fees and other to revenue are caused
primarily by changes in  maintenance  revenue mix,  educational  and  consulting
revenue,   maintenance   support,   royalty  agreements,   and  amortization  of
capitalized software.

Product Development
The increase in product development in 1998 is primarily  attributable to higher
research and  development  ("R&D")  personnel  costs due to increased  headcount
offset by decreased  expenses  relating to supporting the IBM jointly  developed
CICS product.  In 1997, the increase in product  development is primarily due to
increased  headcount and consulting costs. The Company  capitalizes  development
costs in accordance with Statement of Financial  Accounting Standards No. 86. To
the extent the Company  capitalizes its product development costs, the effect is
to defer such costs to future periods and match them to the revenue generated by
the products.  R&D expenditures were 17% of revenue  (excluding third party) for
1998 and 16% in 1997  while  the  amount of R&D  capitalized  was 17% and 15% of
these gross R&D expenditures in 1998 and 1997, respectively. Product development
expenses may fluctuate  annually depending in part upon the number and status of
internal software development projects.

Sales and Marketing
The  increase  in sales and  marketing  in 1998 is  primarily a result of higher
commissions  on  increased  product  licensing,  increased  headcount,  and more
product  marketing  costs.  In 1997,  the  increase in sales

                                       8

<PAGE>

and marketing was  primarily a result of higher sales  commissions  on increased
product  licensing.  In addition,  1997 had higher product  marketing  costs and
international sales costs.

General and Administrative
In 1998,  the  increase  in general and  administrative  costs was due to higher
legal costs, MIS consulting costs and performance-based  accruals.  The increase
in costs in 1997 is primarily  attributable  to higher  personnel and consulting
costs, European facility costs and performance-based accruals.

Acquisition and Non-recurring Costs
During the second quarter of 1997, the Company had  approximately  $11.3 million
of non-recurring  costs comprised of $1 million of purchased R&D costs and $10.3
million  of  acquisition  costs  related  to  the  acquisition  of  MAXM.  These
acquisition  costs  consisted  primarily  of $4.0 million of  termination  costs
related to reseller agreements,  $2.8 million of employee costs, $1.6 million of
costs  related  to  closing  redundant  facilities  and $1.9  million  of legal,
accounting, broker fees and other.

Interest and Other Income, Net
Interest and other income consists principally of interest income or expense and
gain or loss from sales of investments, currency or disposal of assets. In 1998,
the 59.4% increase  consisted  primarily of higher interest income on more lease
contracts and gains on sales of equity investments. This was partially offset by
lower  currency  gains in Europe in the current  year. An increase of 62.7% over
1996 was primarily the result of higher  interest income on more lease contracts
receivable,  lower  interest  expense as the MAXM line of credit was paid off in
1997 and less currency losses. As further described in Note 1, the Company has a
hedging program to attempt to reduce its exposure to currency fluctuations.

Income Taxes
The effective tax rates were 28.0%,  35.8%,  and 38.0% for 1998,  1997 and 1996,
respectively.  Without  the  impact  of  non-deductible  acquisition  costs  and
pre-acquisition operating losses of MAXM, the effective tax rates were 28.5% and
28.0% for 1997 and 1996,  respectively.  It is  anticipated  that the  Company's
effective  tax rate in 1999  will  approximate  the  1998  rate.  The  Company's
effective  tax rates differ from the federal  statutory  rate  primarily  due to
permanently invested earnings of foreign subsidiaries being taxed at rates lower
than the  federal  statutory  rate and tax credits for  increased  research  and
development.  At September  30, 1998,  the Company had  carryforwards  of MAXM's
pre-acquisition federal net operating losses of approximately $45.7 million that
will expire  between  2003 and 2012.  The losses were  incurred by MAXM prior to
acquisition  and are subject to limitation.  Management  believes future taxable
income  will be  sufficient  to  realize  the  deferred  tax  benefit of the net
deferred tax asset.

Quantitative and Qualitative Disclosure about Market Risk
Interest Rate Risk:
The  Company's  exposure to market risk for  changes in  interest  rates  relate
primarily to the Company's  short-term  investment  portfolio and long-term debt
obligations.  The Company does not use derivative  financial  instruments in its
investment  portfolio.  The  Company  places its  investments  with high  credit
quality issuers and, by policy,  limits the amount of credit exposure to any one
issuer.  The  Company is averse to  principal  loss and  ensures  the safety and
preservation  of its invested funds by limiting  default risk,  market risk, and
reinvestment  risk. The Company  mitigates default risk by investing in only the
highest credit quality securities and by constantly positioning its portfolio to
respond  appropriately  to a  significant  reduction  in a credit  rating of any
investment  issuer  or  guarantor.   The  portfolio   includes  only  marketable
securities  with  active   secondary  or  resale  markets  to  ensure  portfolio
liquidity. All short-term investments mature in fiscal 1999. Cash equivalents of
$16.1  million  have an  average  fixed  interest  rate of 4.0% or 6.5%  average
taxable equivalent fixed interest rate. Short-term  investments of $46.2 million
have an average fixed interest rate of 3.9% or 5.8% average  taxable  equivalent
fixed interest rate.

The Company has no cash flow  exposure  due to rate changes for its $2.4 million
capital lease obligations. The average fixed interest rate on all capital leases
is 7.6% and matures as described in Note 5. In addition,  the Company has a note
payable of $50,000 note payable due in fiscal 1999.

                                       9

<PAGE>

Foreign Exchange Risk:
The Company has a hedging strategy to attempt to minimize the short-term  impact
of  foreign  currency   fluctuations  on  its  net  asset  position  in  foreign
currencies.  The gains and losses on these  contracts  are netted with gains and
losses on the  revaluation  of the net asset position and are included in income
in the period in which the exchange rates change.  The foreign  currency forward
contracts  have a term of ninety days or less and settle  immediately  after the
end of the fiscal year.  The contracts are  marked-to-market  and the fair value
upon settlement  approximates  the carrying value. It is the Company's policy to
hedge  approximately 75% to 100% of the net asset position.  The following table
provides  information  about the Company's foreign exchange forward contracts at
September 30, 1998.

                                        Notional      Average
                                         Amount       Contract
                                         (mil $)        Rate
                                      ------------- ------------
Pound sterling                            $15.8        1.6895
Deutsche marks                             15.8        1.6640
French francs                               7.2        5.5765
Italian lira                                6.3       1649.30
Spanish peseta                              2.8        141.80
Belgium francs                              2.2         34.60
Swiss francs                                2.6         1.387
Swedish krona                               1.9         7.853
Dutch guilders                              1.0         1.891
Austrian schilling                          1.7        11.798
Japanese yen                                2.6        135.10
Australian dollars                          1.1        0.5939
                                          -----      
                                          $61.0      
                                          =====      
                                                  
Beginning the first quarter of fiscal 1998, the Company implemented a program of
purchasing  foreign currency option contracts as an economic hedge for a portion
of the net revenue of the Company's  foreign  subsidiaries.  The premium cost of
the  options is  expensed  in the period in which they are  purchased.  Realized
option  gains are  recorded  as income in the  period in which the  options  are
exercised.  Fair values are based upon quoted  prices in an active  market.  The
following table provides information about the Company's foreign currency option
contracts, all of which expire in fiscal 1999, at September 30, 1998.

                                         Notional      Average
                                          Amount      Contract     Fair Value
                                          (mil $)       Rate        (thou $)
                                      ------------- ------------ ------------
Pound sterling                              $2.7       1.6579         $30.7
Deutsche marks                               9.6       1.7238          87.2
Japanese yen                                 2.5       132.05         131.3
                                           -----                     ------
                                           $14.8                     $249.2
                                           =====                     ======


Subsequent Event
On  November  2, 1998 the Company and BMC  Software,  ("BMC"),  entered  into an
Agreement and Plan of Reorganization.  The merger  contemplated  therein will be
accomplished  by the issuance of 0.675 shares of BMC stock for each share of the
Company's  common  stock.  This  transaction  is expected to close in the second
quarter in fiscal 1999 and to be  accounted  for using the pooling of  interests
method.  The  merger is  subject to a number of  customary  closing  conditions,
including  antitrust  approval and approval by the  stockholders of the Company.
See Note 8 of Notes to Consolidated Financial Statements. See also the Company's
Current  report on Form 8-K dated  November  10,  1998 and BMC's  Form S-4 dated
November 13, 1998 for a description of the merger.

                                       10

<PAGE>

Litigation
Platinum  Technology,  Inc.,  ("Platinum"),  filed a  Complaint  and  Motion for
Preliminary  Injunction on Nov. 13, 1998 in the Circuit Court of the  Eighteenth
Judicial Circuit Chancery Division, Dupage County, Wheaton, Ill.

The  complaint  alleges  that the  Company  is in  breach  of a  standstill  and
exclusive negotiation  agreement with Platinum,  and further, that BMC Software,
Inc.  tortiously  interfered with such alleged  agreement when it negotiated and
executed the merger agreement announced on Nov. 2, 1998. Platinum seeks entry of
an  injunction  voiding  this  merger  agreement  and  requiring  the Company to
negotiate exclusively with it for an uninterrupted 120-day period.

The Company is currently  evaluating  the complaint but believes that the claims
by Platinum are without merit,  and intends to vigorously  defend itself against
the allegations in the complaint.  The Company continues to believe that the BMC
merger agreement is in the best interests of its shareholders.

Liquidity and Capital Resources
At September 30, 1998,  the Company's  cash,  cash  equivalents  and  short-term
investments were $92,506,000.  The Company continues to use installment  payment
plans  to  gain a  competitive  advantage  during  the  sales  process  and  had
outstanding  installment  receivables of $128,460,000 at September 30, 1998. The
Company  periodically  sells  portions of  installments  receivables  subject to
limited recourse provisions. During 1998, the Company sold $43,986,000.

The  Company  continues  to finance  its growth  through  funds  generated  from
operations. For the year ended September 30, 1998 net cash provided by operating
activities was  $18,775,000.  Net cash used in investing  activities in 1998 was
$28,251,000,  primarily  for  purchases of  short-term  investments,  internally
developed and purchased capitalized software and acquisition of computers.  Cash
provided  by  investing  activities  was due to  proceeds  from  sales of equity
securities.  Net cash provided by financing  activities in 1998 was $20,831,000,
primarily from the sale of lease contracts receivable,  the exercise of employee
stock options and stock purchases through the Employee Stock Purchase Plan. Cash
used for financing  activities relates to the Company's stock repurchase program
and to debt payment.

         In July 1997, a share  repurchase plan was adopted which authorized the
Company  to  acquire  750,000  (post-split)  shares  of its  common  stock.  The
Company's  previous  stock  repurchase  plan was  rescinded in  accordance  with
pooling of interest  accounting  in  connection  with the MAXM  acquisition.  In
August 1998, an additional 1,000,000 shares were approved for repurchase.  Total
shares repurchased under this plan were 1,223,000 and 127,500 during fiscal 1998
and 1997,  respectively,  with  aggregate  purchase  prices of  $26,919,000  and
$2,072,000.  The Board of  Directors  rescinded  the plan  October  30,  1998 in
accordance  with  pooling  of  interest  accounting  in  connection  with  BMC's
acquisition of the Company.

         The  Company  evaluates   business   acquisition   opportunities   that
complement  its  strategic  plans and believes  existing cash balances and funds
generated from operations will be sufficient to meet its liquidity  requirements
for the foreseeable future.

                                       11

<PAGE>

                                  Exhibit 13.1

Boole & Babbage, Inc.
Consolidated Statements of Income

<TABLE>

<CAPTION>
                                                                                        Years Ended September 30,
                                                                             -------------------------------------------------
(In thousands, except per share amounts)                                        1998               1997              1996
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>                <C>                <C>
Revenue:
      Product licensing                                                         $124,720           $108,909           $95,219
      Maintenance fees and other                                                  93,516             88,188            84,932
                                                                             ------------      -------------      ------------
           Total revenue                                                         218,236            197,097           180,151
                                                                             ------------      -------------      ------------

Costs and expenses:
      Cost of product licensing                                                   14,369             15,030            15,355
      Cost of maintenance fees and other                                          22,928             19,751            19,483
      Product development                                                         25,617             24,881            22,326
      Sales and marketing                                                         99,980             95,817            91,766
      General and administrative                                                  19,060             18,495            18,392
      Acquisition and nonrecurring costs                                            --               11,309              --
                                                                             ------------      -------------      ------------
           Total costs and expenses                                              181,954            185,283           167,322
                                                                             ------------      -------------      ------------

Operating income                                                                  36,282             11,814            12,829

Interest and other income, net                                                    14,632              9,180             5,643
                                                                             ------------      -------------      ------------
Income before provision for income taxes                                          50,914             20,994            18,472

Provision for income taxes                                                        14,260              7,525             7,015

                                                                             ------------      -------------      ------------
Net income                                                                       $36,654            $13,469           $11,457
                                                                             ============      =============      ============

Basic earnings per share                                                           $1.31              $0.49             $0.43

Diluted earnings per share                                                         $1.20              $0.45             $0.40

Weighted average common shares outstanding                                        28,045             27,715            26,565

Weighted average common shares outstanding assuming dilution                      30,580             30,145            28,815

<FN>
See accompanying notes
</FN>
</TABLE>
                                       12
<PAGE>

                                  Exhibit 13.1


Boole & Babbage, Inc.
Consolidated Balance Sheets
<TABLE>

<CAPTION>
                                                                                                September 30,
                                                                               ---------------------------------------------
(Dollars in thousands)                                                            1998             1997             1996
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                              <C>              <C>             <C>
Assets
Current assets:
    Cash and cash equivalents                                                     $46,354          $33,923          $37,260
    Short-term investments                                                         46,152           23,050           24,750
    Accounts receivable, net                                                       23,213           26,412           27,955
    Installment and other receivables, net                                         64,600           65,469           46,221
    Deferred tax asset                                                              8,359            6,154            5,649
    Prepaid expenses and other current assets                                       7,136            4,513            4,383
                                                                               -----------      -----------      -----------
            Total current assets                                                  195,814          159,521          146,218

Purchased and internally developed software, net                                   12,898           12,152           11,614
Equipment, furniture and leasehold improvements, net                               11,225            9,968           12,763
Long-term installment and other receivables                                        59,089           52,290           39,141
Long-term deferred tax asset                                                       14,390           10,571            9,472
Costs in excess of net assets of purchased businesses, net                            607              634              660
Other assets                                                                       15,903           15,008            4,672
                                                                               -----------      -----------      -----------
            Total assets                                                         $309,926         $260,144         $224,540
                                                                               ===========      ===========      ===========


Liabilities and Stockholders' Equity
Current liabilities:
     Accounts payable                                                             $10,136           $8,895           $7,605
     Accrued payroll expense                                                       11,625            9,840            7,890
     Other accrued liabilities                                                     32,051           27,080           25,090
     Short-term borrowings                                                             --            1,016            3,150
     Notes payable due within one year                                                 50              319              469
     Capital lease obligations due within one year                                    791              933            1,813
     Deferred maintenance revenue                                                  57,532           53,432           51,241
                                                                               -----------      -----------      -----------
            Total current liabilities                                             112,185          101,515           97,258

Notes payable due after one year                                                       --               50              444
Capital lease obligations due after one year                                        1,592            1,795            2,825
Deferred maintenance revenue due after one year                                    55,596           38,282           28,949

Stockholders' equity:
     Preferred stock, 2,000,000 shares authorized, $.001 par value, none issued        --               --               --
     Common stock, $.001 par value, authorized--45,000,000 shares; issued--
         30,733,364 (29,969,715 and 28,667,061 in 1997 and 1996, respectively)         31               30               29
     Additional paid-in capital                                                   102,264           91,960           81,034
     Retained earnings                                                             69,454           32,800           19,331
     Unrealized gain on marketable securities                                       6,424            5,691              370
     Foreign currency translation adjustment                                       (2,226)          (3,503)             704
     Less treasury stock, 3,065,930 shares (1,843,180 and 1,715,680 shares
         in 1997 and 1996, respectively), at cost                                 (35,394)          (8,476)          (6,404)
                                                                               -----------      -----------      -----------
            Total stockholders' equity                                            140,553          118,502           95,064
                                                                               -----------      -----------      -----------
            Total liabilities and stockholders' equity                           $309,926         $260,144         $224,540
                                                                               ===========      ===========      ===========
<FN>
See accompanying notes
</FN>
</TABLE>

                                       13

<PAGE>

                                  Exhibit 13.1


Boole & Babbage, Inc.
Consolidated Statements of Cash Flows
<TABLE>

<CAPTION>

                                                                                  Years ended September 30,
                                                                         ---------------------------------------
(Dollars in thousands)                                                     1998          1997           1996
----------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>            <C>            <C>
Cash flows from operating activities:
  Net income                                                              $36,654        $13,469        $11,457
  Adjustments to reconcile net income to net cash
      provided by (used for) operating activities:
      Depreciation, amortization and write-off of capitalized software      9,134          9,672         10,415
      Loss on disposal of assets                                               42            413            279
      Gain on sale of equity securities                                    (4,788)           --            (291)
      Deferred income taxes                                                (5,896)        (4,772)        (1,634)
      Stock issued under compensatory stock plans                             150             96            272
      Changes in operating assets and liabilities excluding the effect
         of acquisitions:
         Accounts receivable and installment and other receivables        (45,431)       (45,472)       (35,976)
         Prepaid expenses and other assets                                 (3,000)        (1,926)         2,296
         Accounts payable and accrued expenses                             11,103         12,930          5,599
         Deferred maintenance revenue                                      20,807         15,572         19,267
                                                                         ---------     ----------     ----------

Net cash provided by (used for) operating activities                       18,775            (18)        11,684
                                                                         ---------     ----------     ----------

Cash flows from investing activities:
     Purchases of equipment, furniture and leasehold improvements          (5,615)        (3,752)        (5,495)
     Payments for capitalized software                                     (4,874)        (5,277)        (3,941)
     Net sales (purchases) of short-term investments                      (23,102)         1,700         (8,950)
     Investment in equity securities                                       (2,807)          (361)        (2,085)
     Proceeds from sale of equity securities                                8,147            --             717
                                                                         ---------     ----------     ----------

Net cash used for investing activities                                    (28,251)        (7,690)       (19,754)
                                                                         ---------     ----------     ----------

Cash flows from financing activities:
      Sale of lease contracts receivables                                  43,986          8,140         15,849
      Proceeds from issuance of common stock                                6,074          5,988          4,375
      Purchase of treasury stock                                          (26,918)        (2,072)        (1,919)
      Borrowings (payments) under line of credit                           (1,016)        (2,134)         2,750
      Payments on notes payable                                              (318)          (282)          (626)
      Borrowings on sales leaseback transactions                              --             --           1,184
      Payments on capital leases                                             (977)        (2,012)        (2,108)
                                                                         ---------     ----------     ----------

Net cash provided by financing activities                                  20,831          7,628         19,505
                                                                         ---------     ----------     ----------

Effect of exchange rate changes on cash                                     1,076         (3,257)          (422)
                                                                         ---------     ----------     ----------

Net increase (decrease) in cash and cash equivalents                       12,431         (3,337)        11,013

Cash and cash equivalents at beginning of year                             33,923         37,260         26,247
                                                                         ---------     ----------     ----------

Cash and cash equivalents at end of year                                  $46,354        $33,923        $37,260
                                                                         =========     ==========     ==========

Supplemental  disclosures  of cash flow  information:
      Cash paid during the year for:
          Interest                                                         $2,382         $1,638           $916
          Income taxes                                                    $10,906         $7,935         $4,783

Supplemental disclosures of non-cash investing and financing activities:
           Capital lease  obligations  of $632,000 were incurred in 1998 for the
           purchase of equipment.
           Capital lease obligations of $2,505,000 were incurred in 1996 for the
           purchase of equipment.

<FN>
See accompanying notes
</FN>
</TABLE>
                                       14

<PAGE>

                                  Exhibit 13.1
<TABLE>
Boole & Babbage, Inc.
Consolidated Statements of Stockholders' Equity
<CAPTION>



                                                                                          Unrealized  Foreign               Total
                                                    Common Stock     Additional           Gain on     Currency              Stock-
                                                   --------------    Paid-in    Retained  Marketable  Translation Treasury  holders'
(Dollars in thousands)                             Shares  Amount    Capital    Earnings  Securities  Adjustment  Stock     Equity
--------------------------------------------------------------------------------------------------------------------------- --------

<S>                                               <C>          <C>   <C>         <C>         <C>      <C>       <C>        <C>    
Balance, September 30, 1995                       27,514,872   $28   $73,901     $7,874      $132     $1,051    ($4,485)   $78,501

Other equity transactions of acquired companies       13,397    --       341         --        --         --         --        341
Exercise of employee stock options and                                                     
     related tax benefit                             931,022     1     5,362         --        --         --         --      5,363
Sale of common stock under the employee                                                    
     stock purchase plan and related tax benefit     197,342    --     1,323         --        --         --         --      1,323
Issuance of common stock under the                                                         
     employee incentive stock plan                    10,428    --       107         --        --         --         --        107
Unrealized loss on marketable securities,                                                  
     net of taxes                                         --    --        --         --       238         --         --        238
Purchase of treasury stock                                --    --        --         --        --         --     (1,919)    (1,919)
Foreign currency translation adjustment                   --    --        --         --        --       (347)        --       (347)
Net income                                                --    --        --     11,457        --         --         --     11,457
                                                  ----------------  --------    -------    ------    -------    --------  --------
Balance, September 30, 1996                       28,667,061    29    81,034     19,331       370        704     (6,404)    95,064

Other equity transactions of acquired companies       (2,667)   --       (34)        --        --         --         --        (34)
Exercise of employee stock options and                                                      
     related tax benefit                           1,098,618     1     9,062         --        --         --         --      9,063
Sale of common stock under the employee                                                     
     stock purchase plan and related tax benefit     198,393    --     1,768         --        --         --         --      1,768
Issuance of common stock under the                                                          
     employee incentive stock plan                     8,310    --       130         --        --         --         --        130
Unrealized gain on marketable securities,                                                   
     net of taxes                                         --    --        --         --     5,321         --         --      5,321
Purchase of treasury stock                                --    --        --         --        --         --     (2,072)    (2,072)
Foreign currency translation adjustment                   --    --        --         --        --     (4,207)        --     (4,207)
Net income                                                --    --        --     13,469        --         --         --     13,469
                                                  ----------------  --------    -------    ------    -------    --------  --------
Balance, September 30, 1997                       29,969,715    30    91,960     32,800     5,691     (3,503)    (8,476)   118,502

Exercise of employee stock options and
     related tax benefit                             769,667     1     8,153         --        --         --         --      8,154
Sale of common stock under the employee
     stock purchase plan and related tax benefit     157,321    --     2,001         --        --         --         --      2,001
Issuance of common stock under the
     employee incentive stock plan                     7,245    --       150         --        --         --         --        150
Unrealized gain on marketable securities,
     net of taxes                                         --    --        --         --       733         --         --        733
Purchase of treasury stock                                --    --        --         --        --         --    (26,918)   (26,918)
Foreign currency translation adjustment                   --    --        --         --        --      1,277         --      1,277
Return of shares from escrow related                      
     to 1997 acquisition                            (170,584)
Net income                                                --    --        --     36,654        --         --         --     36,654
                                                  ----------------  --------    -------    ------    -------    --------  --------
Balance, September 30, 1998                       30,733,364   $31  $102,264    $69,454    $6,424    ($2,226)   ($35,394) $140,553
                                                  ================  ========    =======    ======    =======    ========  ========

<FN>
See accompanying notes
</FN>
</TABLE>
                                       15

<PAGE>

1.  Summary of Significant Accounting Policies

Business
Boole & Babbage,  Inc. ("the Company") is a worldwide leader in availability and
service level  management for  distributed  systems.  Its Enterprise  Automation
product lines provide a flexible and scalable set of solutions for the entire IT
enterprise  including  systems,  applications,  middleware,  databases  and  Web
technologies.

Basis of Presentation
The accompanying  financial statements include the wholly-owned  subsidiaries of
Boole & Babbage, and Joint Systems & Technology (JST), a majority-owned Japanese
subsidiary  of  Boole &  Babbage.  All  significant  intercompany  accounts  and
transactions  have been eliminated.  The preparation of financial  statements in
conformity with generally accepted accounting  principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements  and  accompanying  notes.  Actual  results  could  differ from those
estimates.

Cash, Cash Equivalents and Short-Term Investments
The Company  considers all highly liquid  investments  that mature within ninety
days of purchase to be cash equivalents. At September 30, 1998, cash equivalents
consisted of $15,665,000 of time deposits with original maturities of 90 days or
less and  $477,000 of money market  mutual  funds.  The Company  places its cash
equivalents  and  short-term  investments  with high  credit  quality  financial
institutions  and, by policy,  limits the amount of credit exposure with any one
financial  institution.  All of the Company's  cash  equivalents  and short-term
investments are classified as available-for-sale  and are reported at fair value
with unrealized gains and losses included in equity.  Fair values are based upon
quoted prices in an active market or if that  information is not  available,  on
quoted market prices of instruments of similar characteristics. At September 30,
1998,  cost  approximated  fair value for all cash  equivalents  and  short-term
investments. All of the Company's short-term  available-for-sale securities have
a  contractual  maturity  of one year or less.  Realized  gains and  losses  and
declines in value  judged to be other than  temporary  are  included in interest
income.  To date, there have been no significant gains or losses realized on the
Company's  cash  equivalents or short-term  investments.  The cost of securities
sold is based upon the specific identification method.
<TABLE>
Short-term investments consist of the following:
<CAPTION>
 (Dollars in thousands)                                        1998         1997         1996
----------------------------------------------------------- ------------ ------------ ------------
<S>                                                             <C>           <C>         <C>    
Municipal bonds and notes                                       $35,656       $9,600      $16,000
Auction preferred stock                                           7,050       13,450        6,750
Taxable commercial paper                                          2,737            -        2,000
Corporate notes                                                     709            -            -
                                                            ------------ ------------ ------------
                                                                $46,152      $23,050      $24,750
                                                            ============ ============ ============
</TABLE>
Receivables
Accounts  receivable  and  installment  receivables  are net of  allowances  for
doubtful accounts of $2,015,000,  $1,995,000,  and $2,277,000,  at September 30,
1998, 1997 and 1996, respectively. The Company markets computer software systems
to  customers in  diversified  industries.  Ongoing  credit  evaluations  of its
customers' financial condition are made and generally no collateral is required.

                                       16

<PAGE>

Revenue Recognition
Revenue  from  product  licensing  is  recognized  after  delivery  and customer
acceptance without contingencies. Each license contract entitles the customer to
maintenance and  enhancements  for a period ranging from six months to one year.
The  portion of the  contract  fee  associated  with  providing  maintenance  is
deferred and recognized ratably over the period as maintenance fees. The Company
uses  the  same  percentage  to  compute  maintenance  included  in the  product
licensing  amount as it uses to price subsequent year  maintenance.  Revenue and
related  royalty  and agent  commission  costs from  maintenance  contracts  are
deferred and recognized  ratably over the renewal  periods.  In connection  with
long-term  leases of  software,  the net  present  value of the  lease  payments
related to the product license is recognized as revenue upon the commencement of
the lease.  Related  interest  income and  maintenance  revenue  are  recognized
ratably over the lease term.  Revenue  from sales  through  marketing  agents in
certain  overseas  markets is recorded at the gross sales price to the customer,
and the commissions withheld by these agents are included in sales and marketing
expense.
<TABLE>
Equipment, Furniture and Leasehold Improvements
Equipment, furniture and leasehold improvements are stated at cost. Depreciation
and amortization are provided  principally on a straight-line  basis over useful
lives ranging from 3 to 10 years. Assets under capital leases are amortized over
the shorter of the asset life or the remaining lease term. Equipment,  furniture
and leasehold improvements consist of the following:
<CAPTION>
                                                            --------------------------------------
                                                                        September 30,
                                                            --------------------------------------
(Dollars in thousands)                                             1998         1997         1996
--------------------------------------------------------------------------------------------------
<S>                                                             <C>          <C>          <C>    
Equipment                                                       $33,962      $34,200      $37,938
Furniture                                                        12,211       10,381        9,288
Leasehold improvements                                            1,598        1,259        1,982
                                                            ------------ ------------ ------------
                                                                 47,771       45,840       49,208
Accumulated depreciation                                         36,546       35,872       36,445
                                                            ------------ ------------ ------------
                                                                $11,225       $9,968      $12,763
                                                            ============ ============ ============
</TABLE>
<TABLE>
Costs in Excess of Net Assets of Purchased Businesses
The excess of the purchase price over the net assets of Boole & Babbage  Europe,
a wholly-owned  subsidiary,  is being amortized on a straight-line basis over 40
years.  Costs in excess of net assets of  purchased  businesses  are  summarized
below:
<CAPTION>
                                                            --------------------------------------
                                                                        September 30,
                                                            --------------------------------------
(Dollars in thousands)                                             1998         1997         1996
--------------------------------------------------------------------------------------------------
<S>                                                              <C>          <C>          <C>
Costs in excess of net assets of
  purchased businesses                                           $1,056       $1,056       $1,056
Accumulated amortization                                            449          422          396
                                                            ------------ ------------ ------------
                                                                   $607         $634         $660
                                                            ============ ============ ============
</TABLE>
<TABLE>
Marketable Securities
Included in noncurrent other assets are marketable  equity  securities which are
classified as available for sale and stated at fair value. Fair values are based
upon quoted prices in an active market.
<CAPTION>
                                                            --------------------------------------
                                                                        September 30,
                                                            --------------------------------------
(Dollars in thousands)                                             1998         1997         1996
--------------------------------------------------------------------------------------------------
<S>                                                           <C>            <C>           <C>   
Cost of marketable securities                                 $ 2,660        $ 3,212       $2,850
Unrealized gain                                                10,509          9,546          625
                                                            ------------ ------------ ------------
                                                              $13,169        $12,758       $3,475
                                                            ============ ============ ============
</TABLE>

                                       17

<PAGE>

<TABLE>
The unrealized  gain is recorded net of tax in a separate  stockholders'  equity
account as follows:
<CAPTION>
                                                            --------------------------------------
                                                                        September 30,
                                                            --------------------------------------
(Dollars in thousands)                                             1998         1997         1996
--------------------------------------------------------------------------------------------------
<S>                                                             <C>           <C>           <C>  
Unrealized gain                                                 $10,509       $9,546        $ 625
Deferred income tax                                              (4,085)      (3,855)        (255)
                                                            ------------ ------------ ------------
                                                                 $6,424      $ 5,691        $ 370
                                                            ============ ============ ============
</TABLE>

Purchased and Internally Developed Software
Capitalized  software consists of purchases of completed  software products from
outside vendors and internal costs  associated with the development of software.
Such costs are capitalized and amortized in accordance with guidelines set forth
in  Financial  Accounting  Standard  No. 86,  "Accounting  for Costs of Computer
Software to be Sold,  Leased,  or Otherwise  Marketed".  All software  costs are
amortized to cost of revenue on the basis of each product's  projected  revenues
or on a straight-line  basis over the remaining  estimated  economic life of the
products,  whichever is greater. The estimated economic lives range from five to
seven years. Amortization of capitalized software was $4,173,000, $4,581,000 and
$4,814,000 for 1998, 1997 and 1996, respectively.

Cost of Product Licensing
Cost of product  licensing  consists of royalties  paid to software  authors and
amortization of capitalized software.

Cost of Maintenance Fees and Other
Cost of maintenance fees and other consists of the cost of maintenance  support,
royalties paid to software authors,  amortization of capitalized  software,  the
cost to provide  educational and consulting  services,  and the costs of certain
computer services.
<TABLE>
Product Development
Product development costs include expenditures for research and development, net
of amounts  capitalized.  Research  and  development  expenditures  included  in
product development costs are as follows:
<CAPTION>
                                                            --------------------------------------
                                                                  Years Ended September 30,
                                                            --------------------------------------
(Dollars in thousands)                                         1998         1997         1996
--------------------------------------------------------------------------------------------------
<S>                                                             <C>          <C>          <C>    
Total costs                                                     $28,806      $26,379      $24,483
Less amounts capitalized                                          4,748        4,022        3,611
                                                            ------------ ------------ ------------
                                                                $24,058      $22,357      $20,872
                                                            ============ ============ ============
</TABLE>

These  costs do not  include  either  the  expenditures  relating  to the  joint
development  project with IBM to develop systems management  products in support
of new CICS  releases nor the IBM  reimbursements  which  totaled  $1,375,000 in
1996.  In 1997,  the company  acquired  the rights to a  client/server  software
product  for   $1,000,000,   which  was  expensed  as  purchased   research  and
development.  This  expense  in  included  under  the  caption  acquisition  and
nonrecurring costs on the consolidated statements of income.

Accounting for Income Taxes
Income taxes are computed in accordance  with Statement of Financial  Accounting
Standards No. 109, "Accounting for Income Taxes."

Net Income Per Share
In 1997, the Financial  Accounting Standards Board issued Statement of Financial
Accounting   Standards  No.  128,  "Earnings  Per  Share,"  which  replaced  the
previously  reported primary and fully diluted earnings per share with basic and
diluted earnings per share.  Unlike primary  earnings per share,  basic earnings
per share excludes any diluted  effects of options,  warrants,  and  convertible
securities. Diluted earnings per common share is computed by adding the weighted
average number of common shares  outstanding  during

                                       18

<PAGE>

the period to the number of dilutive  common  shares that would be issuable upon
the  exercise  of  outstanding  options  using  the  treasury  stock  method  of
computation.  Diluted  earnings  per  share is very  similar  to the  previously
reported  fully diluted  earnings per share.  All earnings per share amounts for
all periods have been  presented to conform to the Statement  128  requirements.
All shares and per share amounts have been restated to retroactively reflect the
3 - for - 2 stock split described in note 6.
<TABLE>
The calculation of basic earnings per share and diluted earnings per share is as
follows:
<CAPTION>
                                                                     Years Ended September 30,
                                                                  1998         1997         1996
<S>                                                             <C>          <C>          <C>
TOTAL BASIC SHARES
Weighted average number of common shares outstanding
during the year                                                  28,045       27,715       26,565

Net income                                                      $36,654      $13,469      $11,457
                                                                =======      =======      =======
Net income per share                                            $  1.31      $  0.49      $  0.43
                                                                =======      =======      =======

DILUTED SHARES
Weighted average number of common shares outstanding
during the year                                                  28,045       27,715       26,565
Incremental common shares attributable to exercise of
outstanding options (assuming proceeds would be used to
purchase treasury stock)                                          2,535        2,430        2,250
                                                                -------      -------      -------

Total diluted shares                                             30,580       30,145       28,815
                                                                =======      =======      =======

Net income                                                      $36,654      $13,469      $11,457
                                                                =======      =======      =======
Net income per share                                            $  1.20      $  0.45      $  0.40
                                                                =======      =======      =======
</TABLE>

Foreign Currency
The assets and  liabilities of foreign  subsidiaries  are  translated  into U.S.
dollars at  current  exchange  rates.  Revenue  and  expense  accounts  of these
operations are translated at average exchange rates prevailing during the year.
Translation  gains and losses are  included as an  adjustment  to  stockholders'
equity.

      The Company has a hedging  strategy to attempt to minimize the  short-term
impact of foreign  currency  fluctuations  on its net asset  position in foreign
currencies.  The criteria the Company uses for  designating  an  instrument as a
hedge  include  the  instrument's   effectiveness  in  the  risk  reduction  and
one-to-one matching of derivative  instruments to underlying  transactions.  The
foreign exchange forward contracts have a term of ninety days or less and settle
immediately after the end of the fiscal year. The contracts are marked-to-market
and the fair value upon settlement  approximates  the carrying value.  The gains
and  losses  on  these  contracts  are  netted  with  gains  and  losses  on the
revaluation  of the net asset  position and are included in income in the period
in which the exchange  rates change.  Aggregate  transaction  gains and (losses)
included in  determining  net income in 1998,  1997 and 1996 were  approximately
($452,000),  $992,000, and ($958,000),  respectively. These amounts are included
in the consolidated  statements of income under the caption  "interest and other
income,  net." The Company had  approximately  $61.0 million,  $50.4 million and
$34.5 million of open forward exchange contracts at September 30, 1998, 1997 and
1996, respectively.

      Beginning  the first  quarter of fiscal 1998,  the Company  implemented  a
program of purchasing foreign currency option contracts as an economic hedge for
a portion of the anticipated net revenue of the Company's foreign  subsidiaries.
The  premium  cost of the  options is  expensed  in the period in which they are
purchased;  the cost of foreign exchange options expensed during fiscal 1998 was
approximately  $679,000.  Realized  option  gains are  recorded as income in the
period in which the options are exercised;  option gains recorded in fiscal 1998
were  $106,000.  The Company had $14.8 million of open foreign  currency  option
contracts as of September 30, 1998 which will expire  during  fiscal 1999.  Fair
value on

                                       19

<PAGE>

foreign  currency  option  contracts  as  of  September  30,  1998  approximated
$249,000.  Fair values are based upon quoted prices in an active  market.  Gains
and losses on any instruments not meeting the above criteria would be recognized
in  income  in the  current  period.  If an  underlying  hedged  transaction  is
terminated earlier than initially anticipated the offsetting gain or loss on the
related derivative instrument would be recognized in income in the same period.

Recent Accounting Pronouncements
Statement of Position (SOP) 97-2,  "Software Revenue Recognition" and (SOP) 98-4
"Deferral  of the  Effective  Date of a Provision of (SOP)  97-2"were  issued in
October  1997  and  March  1998,  respectively,  and  address  software  revenue
recognition.  SOP 97-2 and SOP 98-4  supersede  SOP 91-1 and are  effective  for
transactions entered into for fiscal years beginning after December 15, 1997 and
will therefore be adopted for the Company's fiscal year 1999,  beginning October
1, 1998. Based on its reading and  interpretation  of SOP 97-2 and SOP 98-4, the
impact will not be material to the Company's revenues and earnings.

In March 1998, the AICPA issued SOP 98-1,  "Accounting for the Costs of Computer
Software  Developed or Obtained for Internal  Use." This standard  requires that
certain costs related to the development or purchase of internal-use software be
capitalized and amortized over the estimated  useful life of the software.  This
SOP also requires that costs  related to the  preliminary  project stage and the
post-implementation/operations   stage  of  an  internal-use  computer  software
development project be expensed as incurred. SOP 98-1 is effective for financial
statements  issued for fiscal years beginning after December 31, 1998, which, in
the case of the Company is October 1, 1999.  SOP 98-1 is not  expected to have a
material impact on the Company's Consolidated Financial Statements.

In June 1997, SFAS No. 130, "Reporting  Comprehensive  Income" was issued. Under
SFAS No. 130, all items that meet the definition of comprehensive income will be
separately reported for the period in which they are recognized. The only impact
will be that comprehensive income, which will include changes in the balances of
items that are reported  separately in the  Stockholders'  Equity section of the
Consolidated  Balance Sheets, will be either reported in a separate statement or
at the bottom of the  Consolidated  Statements  of Earnings.  This  statement is
effective for fiscal years beginning after December 15, 1997, which, in the case
of the Company, is October 1, 1998.

SFAS  No.  131,  "Disclosures  about  Segments  of  an  Enterprise  and  Related
Information"  was  issued in June  1997.  SFAS No.  131  requires  that a public
business  enterprise  report  financial and  descriptive  information  about its
reportable operating segments.  Generally,  financial information is required to
be reported on the basis used internally for evaluating segment  performance and
resource allocation.  SFAS No. 131 is effective for fiscal years beginning after
December  31,  1997,  and  disclosure  is  not  required  in  interim  financial
statements  in the initial  year of  adoption.  Accordingly,  the  Company  will
reflect SFAS No. 131 information in its  Consolidated  Financial  Statements for
the September 30, 1999, fiscal year. The Company is currently assessing the SFAS
No. 131 requirements.

2.  Acquisitions
On January 16, 1997, the Company  acquired all of the outstanding  capital stock
of MAXM Systems Corporation, a privately held company, in exchange for 1,535,082
shares of Boole & Babbage  common  stock.  The Company  incurred a charge in the
quarter  ending March 31,1997  (which is included in the income  statement  line
"acquisition and nonrecurring  costs") in connection with activities to complete
this  acquisition  and  eliminate  redundant   facilities  and  personnel.   The
acquisition  costs  consisted  primarily  of $4.0 million of  termination  costs
related to reseller agreements,  $2.8 million of employee costs, $1.6 million of
costs  related  to  closing  redundant  facilities  and $1.9  million  of legal,
accounting,  broker fees and other.  The transaction was accounted for using the
pooling of interests method and the Company's  consolidated financial statements
for all prior periods have been restated to include the results of MAXM.

     The table below sets forth the  composition  of combined  revenues  and net
income  (loss)  for  the  periods  indicated.  Information  for the  year  ended
September  30, 1997 with  respect to MAXM  reflects  the period  October 1, 1996
through  January 16, 1997,  the date MAXM was acquired.  The net loss of MAXM in
1995 includes  $1,507,000 of extraordinary  gain, net of taxes, from forgiveness
of debt.

                                       20

<PAGE>

                                                   ----------------------------
                                                   Years Ended September 30
                                                   ------------- --------------
(Dollars in thousands)                                 1997          1996
-------------------------------------------------------------------------------
Revenues:
Boole & Babbage                                      $195,032      $165,077
MAXM (Pre-Acquisition)                                  2,065        15,074
                                                   ------------- --------------
Consolidated                                         $197,097      $180,151
                                                   ============= ==============

Net income (loss):
Boole & Babbage                                      $ 27,908      $ 18,040
Acquisition costs                                     (10,309)            -
MAXM                                                   (4,130)       (6,583)
                                                   ------------- --------------
Consolidated                                         $ 13,469      $ 11,457
                                                   ============= ==============


3.  Installment and Other Receivables
Installment and other receivables consists of lease contracts receivables, sales
tax and  value-added  tax on  trade  receivables,  and  other  receivables.  The
Company's leasing operations consist of the leasing of various computer software
products under term or perpetual licensing  agreements with payment periods from
one to five years.
<TABLE>
Following are the components of the lease contracts receivable:
<CAPTION>
                                                   --------------------------------------
                                                               September 30,
                                                   --------------------------------------
(Dollars in thousands)                                1998         1997         1996
-----------------------------------------------------------------------------------------
<S>                                                   <C>          <C>           <C>    
Minimum lease payments receivable                     $128,460     $124,792      $89,054
Less unearned interest                                  11,634       13,105        8,853
                                                   ------------ ------------ ------------
Net investment in sales type leases                    116,826      111,687       80,201
Amount due within one year                              57,737       59,397       41,060
                                                   ------------ ------------ ------------
Amount  due after one year                             $59,089      $52,290      $39,141
                                                   ============ ============ ============
</TABLE>
Minimum lease payments receivable during each of the succeeding fiscal years are
as follows:

------------------------------------------------------------------------
Year                                             (Dollars in thousands)
------------------------------------------------------------------------
1999                                                            $63,684
2000                                                             36,786
2001                                                             20,240
2002                                                              6,701
2003                                                              1,049
                                                            ------------
                                                               $128,460
                                                            ============

The Company  periodically  sells portions of its lease  contracts  receivable to
finance  companies  subject  to limited  recourse  provisions.  The total  lease
contracts  receivables  sold during  1998,  1997 and 1996 had present  values of
$43,986,000,  $8,140,000 and $15,849,000,  respectively. The uncollected present
value  of  receivables  that  have  been  sold  was  approximately  $48,951,000,
$18,478,000 and $17,842,000 at September 30, 1998, 1997 and 1996, respectively.

                                       21

<PAGE>

<TABLE>
4.  Income Taxes
Pretax income consists of the following:
<CAPTION>

                                                            --------------------------------------
                                                                  Years Ended September 30,
                                                            --------------------------------------
(Dollars in thousands)                                             1998         1997         1996
--------------------------------------------------------------------------------------------------
<S>                                                             <C>          <C>          <C>    
Domestic                                                        $34,038      $ 7,236      $ 7,599
Foreign                                                          16,876       13,758       10,873
                                                            ------------ ------------ ------------
                                                                $50,914      $20,994      $18,472
                                                            ============ ============ ============

The provision for taxes on income consists of the following:

                                                            --------------------------------------
                                                                  Years Ended September 30,
                                                            --------------------------------------
(Dollars  in thousands)                                           1998          1997         1996
----------------------------------------------------------- ------------ ------------ ------------
Federal
  Current                                                       $13,429      $ 7,637      $ 4,756
  Deferred                                                       (4,238)      (3,921)      (1,141)
                                                            ------------ ------------ ------------
                                                                  9,191        3,716        3,615
State
  Current                                                         3,117        1,515        1,013
  Deferred                                                       (1,037)      (1,107)        (322)
                                                            ------------ ------------ ------------
                                                                  2,080          408          691
Foreign
  Current                                                         3,610        3,145        2,880
  Deferred                                                         (621)         256         (171)
                                                            ------------ ------------ ------------
                                                                  2,989        3,401        2,709
                                                            ------------ ------------ ------------
                                                                $14,260      $ 7,525      $ 7,015
                                                            ============ ============ ============
</TABLE>
No  provision  for residual  federal  taxes has been made on  approximately  $60
million  of  accumulated   undistributed   earnings  of  the  Company's  foreign
subsidiaries,  since it is the Company's  intention to  permanently  invest such
earnings in its foreign operations.  Determination of the amount of unrecognized
deferred tax liabilities is not practicable.
<TABLE>
      The  provision  for taxes on income  differs  from the amount  computed by
applying the statutory tax rate of 35% to income before taxes as follows:
<CAPTION>
                                                            --------------------------------------
                                                                  Years Ended September 30,
                                                            --------------------------------------
                                                               1998         1997         1996
                                                            --------------------------------------
<S>                                                            <C>          <C>         <C>  
Computed expected tax provision                                35.0%        35.0%       35.0%
State income tax, net of federal benefit                        2.7%         1.3%        0.9%
Permanently invested earnings of foreign subsidiaries,
net of foreign income taxes                                    (4.9%)      (10.6%)      (8.0%)
Goodwill  amortization and other permanent items               (0.7%)        2.7%        0.6%
Research & development credit                                  (2.4%)       (3.1%)      (0.9%)
FSC benefit                                                    (0.5%)       (0.4%)      (0.1%)
Net change in valuation allowance                              (0.6%)       10.4%       11.4%
Other                                                          (0.6%)        0.5%       (0.9%)
                                                            ------------ ------------ ------------
                                                               28.0%        35.8%       38.0%
                                                            ============ ============ ============

</TABLE>
                                       22

<PAGE>

<TABLE>
Deferred  income  taxes  reflect  the net tax effects of  temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets are as follows:
<CAPTION>
                                                            --------------------------------------
                                                                        September 30,
                                                            --------------------------------------
(Dollars in thousands)                                         1998         1997         1996
--------------------------------------------------------------------------------------------------
<S>                                                           <C>          <C>          <C>
Deferred Tax Assets:
 Net operating loss carryforwards                              $18,021      $18,235      $16,578
 Foreign tax credit carryforwards                                   9           36           29
 Research credit carryforwards                                  --           --              52
 Deferred maintenance revenue                                  22,762       16,078       11,307
 Accrued expenses                                               3,710        2,784        2,134
 Bad debt allowance                                               604          612          563
 Other                                                            611          644          594
                                                            ------------ ------------ ------------
    Total gross deferred tax asset                             45,717       38,389       31,257
 Less valuation allowance                                      15,113       14,603       12,470
                                                            ------------ ------------ ------------
    Total deferred tax asset                                   30,604       23,786       18,787
                                                            ------------ ------------ ------------
Deferred Tax Liabilities:
 Unrealized gain on marketable securities                      (4,080)      (3,850)        (255)
 Software capitalization, net                                  (3,775)      (3,211)      (3,065)
 Other                                                          --           --            (346)
                                                            ------------ ------------ ------------
    Total deferred tax liability                               (7,855)      (7,061)      (3,666)
                                                            ------------ ------------ ------------
Net deferred tax asset                                        $22,749      $16,725      $15,121
                                                            ============ ============ ============
</TABLE>
The net valuation  allowance increased $510,000 from 1997 to 1998 and $2,133,000
from  1996  to  1997  primarily  as  a  result  of  establishing  allowances  on
pre-acquisition  net operating  losses of MAXM and net operating losses incurred
in certain  foreign tax  jurisdictions.  None of the  allowance at September 30,
1998 is attributable to stock option deductions;  consequently,  any reversal of
the  valuation  allowance  will be  reflected  in a lower tax  rate.  Management
believes  future  taxable  income will be sufficient to realize the deferred tax
benefit of the net deferred tax asset.

      At  September  30,  1998,  the  Company had  federal  net  operating  loss
carryforwards of  approximately  $45.7 million that will expire between 2003 and
2012. The losses were incurred by MAXM prior to  acquisition  and are subject to
limitation.

5.  Leases, Notes Payable and Contingencies

Operating Leases
The Company leases its facilities and certain  equipment under operating  leases
expiring at various dates through 2018. Minimum lease commitments for facilities
and equipment at September 30, 1998 are as follows:

------------------------------------------------------------------------
Year                                             (Dollars in thousands)
------------------------------------------------------------------------
1999                                                             $8,225
2000                                                              5,304
2001                                                              2,387
2002                                                              1,292
2003                                                                928
Thereafter                                                        2,333
                                                            ------------
                                                                $20,469
                                                            ============

Total rent  expense  under  operating  leases  was  $7,897,000,  $8,692,000  and
$8,793,000, for 1998, 1997 and 1996, respectively.

                                       23

<PAGE>

Capital Leases
The Company leases certain  computer  equipment under long-term  capital leases.
Capitalized costs of $13,354,176,  $12,721,000 and $16,484,000,  are included in
equipment,  furniture and leasehold improvements at September 30, 1998, 1997 and
1996,   respectively.   Accumulated   depreciation   amounted  to   $11,255,603,
$10,288,000 and $12,378,000, at September 30, 1998, 1997 and 1996, respectively.

The following is a schedule of future  minimum lease  payments  under  long-term
capital leases together with the present value of the net minimum lease payments
as of September 30, 1998:

------------------------------------------------------------------------
Year                                              (Dollars in thousands)
------------------------------------------------------------------------
1999                                                               $933
2000                                                                750
2001                                                                773
2002                                                                153
2003                                                                 73
                                                            -----------
Total minimum lease payments                                      2,682
Less amount representing interest                                   299
                                                            ------------
Present value of future minimum lease payments                    2,383
Amount due within one year                                          791
                                                            ------------
Amount due after one year                                         1,592
                                                            ============

      Total  interest  expense  related to capital lease  obligations  and notes
payable  was   $223,000,   $482,000  and  $419,000  in  1998,   1997  and  1996,
respectively.

Notes Payable 
The Company has an equipment note at 8.25%, which had a  balance  of  $50,000 at
September 30, 1998. The note is due in fiscal year 1999.

Line of Credit
During 1995, the Company entered into  arrangements for the Japanese  subsidiary
for two lines of credit totaling $1,800,000. As of September 30, 1998, there was
no balance on this line of credit. As of September 30, 1997 and 1996, there were
outstanding balances of $1,016,000 and $990,000, respectively. Interest rates on
these lines of credit range from 1.63% to 1.75% per annum.

      During  1995,  MAXM  Systems  Corporation  entered  into a line of  credit
arrangement  for  $2,500,000.  As of September  30, 1997 the balance was paid in
full and the line of credit  cancelled.  At  September  30,  1996,  there was an
outstanding  balance of $2,160,000.  The interest rate on the line of credit was
prime rate plus 1.5%.


Litigation
The  Company is  involved in certain  legal  actions  and claims  arising in the
ordinary course of business. Management believes that such litigation and claims
will be resolved without material effect on the Company's  financial position or
results of operations.  See Note 8, Subsequent Event, for a description of legal
action entered into after September 30, 1998.

                                       24

<PAGE>

6.  Common Stock

Stock Split
On February  18, 1998,  the  Company's  Board of Directors  authorized a 3-for-2
split of common stock payable on March 25, 1998, to shareholders of record as of
March 6, 1998. The stock split is effected in the form of a stock dividend.  The
stated  par  value  of each  share  remained  $.001.  A  total  of  $10,000  was
reclassified  from  the  Company's  additional  paid-in-capital  account  to the
Company's common stock account.  All shares,  per share amounts and stock option
data have been restated to retroactively reflect the stock split.

Stock option plans
The 1997 Non-Officer  Stock Option Plan (the 1997 plan), as amended,  authorizes
the  grant  of up to  1,500,000  shares  of the  Company's  common  stock to key
employees and  consultants of the Company who are not officers or members of the
Board of Directors.  The exercise  price is 100% of the fair market value of the
stock on the date such options are granted.

      The 1995 Stock  Option Plan (the 1995 plan),  as amended,  authorizes  the
grant of up to 1,687,500  shares of the Company's  common stock to key employees
and  consultants  of the Company.  The exercise price is 100% of the fair market
value of the stock on the date such options are granted.

      The 1993  Nonemployee  Directors'  Stock  Option Plan (the 1993 plan),  as
amended,  authorizes the grant of up to 253,125  shares of the Company's  common
stock to nonemployee directors of the Company. The exercise price is 100% of the
fair market value of the stock on the date such options are granted.

      The 1986 Supplemental Stock Option Plan (the 1986 plan), as amended, which
authorized the grant up to 11,947,500 shares of the Company's common stock under
terms substantially the same as the 1995 Plan, expired November 1996.

      Options  outstanding  under  all plans are  currently  exercisable  to the
extent that the  optionees  have vested under the terms of their grant.  Options
generally  vest at a rate of  twenty-five  percent  per year and expire 10 years
after the date of grant.

The number of options  exercisable under all plans was 3,958,137,  3,583,160 and
3,554,699 at September 30, 1998, 1997 and 1996, respectively.

Employee Stock Purchase Plan
The  Company  adopted an Employee  Stock  Purchase  Plan and,  as  amended,  has
reserved an aggregate total of 3,750,000 shares.  Purchase rights under the plan
are granted at 85% of the lesser of the market value on the offering date or the
exercise date. Shares purchased under the plan were 156,121, 198,393 and 197,342
during  1998,  1997 and 1996,  respectively.  At  September  30, 1998 there were
714,814 shares  available for future purchases of which 69,196 were committed to
be issued in October 1998.

Stock Incentive Plan
In September  1987, the Company  adopted a Stock Incentive Plan and, as amended,
entitles  employees who have reached certain  anniversary dates with the Company
to receive the  Company's  common stock for each year of service.  Shares issued
under  the plan  were  7,245,  8,310  and  10,428  during  1998,  1997 and 1996,
respectively. The Board has reserved 225,000 shares for issuance under the plan.
At September 30, 1998, there were 24,531 shares available for future awards.

                                       25

<PAGE>

<TABLE>
The following table summarizes  activity of the stock option plans for the three
years ended September 30, 1998:
<CAPTION>
                                                                           Option Activity
                                                                    ------------------------------
                                                                                       Weighted
                                                           Options                      Average
                                                     Available for                     Exercise
                                                      Future Grant       Number          Price
                                                   ---------------- ----------------- ------------

<S>                                                    <C>                <C>           <C>   
Balance, September 30, 1995                              1,171,448         6,178,070    $ 4.55
Authorized increase                                      1,687,500                --
  Options granted                                      (1,395,732)         1,395,732     10.71
  Options exercised                                             --          (931,023)     3.10
  Options canceled                                         138,204          (138,204)     6.22
                                                   ---------------- ----------------- ------------
Balance, September 30, 1996                              1,601,420         6,504,575      6.07
  Options granted                                         (888,750)          888,750     14.86
  Options exercised                                             --        (1,098,618)     3.92
  Options canceled                                         275,445          (275,445)     9.39
                                                   ---------------- ----------------- ------------
Balance, September 30, 1997                                988,115         6,019,262      7.58
  Authorized increase                                    1,500,000                --
  Options granted                                       (1,491,850)        1,491,850     22.02
  Options exercised                                             --          (769,676)     5.30
  Options canceled                                         159,579          (159,579)    14.50
--------------------------------------------------------------------------------------------------
Balance, September 30, 1998                              1,155,844         6,581,857    $10.96
--------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
The following  tables  summarize the  information  about options  outstanding at
September 30, 1998:
<CAPTION>
                                                              Outstanding options
                                              ----------------------------------------------------
                                                                    Weighted
                                                 Number of          Average          Weighted
                                                 Shares (in       Contractual         Average
Range of Exercise Prices                         thousand)      Life (in years)   Exercise Price
--------------------------------------------------------------------------------------------------
<S>                                               <C>               <C>              <C>  
$1.83 -   $7.33                                   3,055             4.89             $4.95
$8.45 - $19.75                                    2,247             8.01             12.63
$21.45 - $25.19                                   1,280             9.79             22.36
--------------------------------------------------------------------------------------------------
                                                  6,582             6.91            $10.96
--------------------------------------------------------------------------------------------------
</TABLE>
                                                      Exercisable options
                                              ----------------------------------
                                                 Number of          Weighted
                                                 Shares (in         Average
  Range of Exercise Prices                       thousands)      Exercise Price
--------------------------------------------------------------------------------
$1.83 -   $7.33                                   2,973             $4.89
$8.45 - $19.75                                      985             11.46
$21.45 - $25.19                                     --               --
-------------------------------------------------------------------------------
Total                                             3,958             $6.52
-------------------------------------------------------------------------------

These  options  will expire if not  exercised  at specific  dates  ranging  from
October  1998 to  September  2007.  Prices  for  options  exercised  during  the
three-year period ended September 30, 1998 ranged from $1.53 to $22.44.

Pro forma information
The Company has  elected to follow APB  Opinion  No. 25,  "Accounting  for Stock
Issued to Employees," in accounting for its employee stock options  because,  as
discussed below,  the alternative fair value accounting  provided for under SFAS
No. 123, "Accounting for Stock-Based  Compensation,"  requires the use of option

                                       26

<PAGE>

valuation  models  that were not  developed  for use in valuing  employee  stock
options.  Under APB No. 25, because the exercise price of the Company's employee
stock  options  equals the market price of the  underlying  stock on the date of
grant,  no  compensation  expense  is  recognized  in  the  Company's  financial
statements.
<TABLE>
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123.  This  information  is required to be determined as if the Company
had accounted for its employee stock options  (including shares issued under the
Employee Stock Purchase Plan,  collectively called "options") granted subsequent
to September  30, 1995 under the fair value method of that  statement.  The fair
value of options  granted in fiscal years 1998, 1997 and 1996 reported below has
been estimated at the date of grant using a  Black-Scholes  option pricing model
with the following weighted average assumptions:
<CAPTION>
                                                                   Employee Stock Options
                                                            --------------------------------------
                                                               1998         1997         1996
--------------------------------------------------------------------------------------------------
<S>                                                            <C>          <C>          <C>
Expected life (in  years)                                      6.0          5.5          5.5
Risk-free interest rate                                        5.0%         6.2%         6.3%
Volatility                                                      .42          .43          .42
--------------------------------------------------------------------------------------------------

                                                                Employee Stock Purchase Plan
                                                            --------------------------------------
                                                               1998         1997         1996
--------------------------------------------------------------------------------------------------
Expected life (in  years)                                       .5           .5           .5
Risk-free interest rate                                        5.5%         5.7%         5.5%
Volatility                                                      .48          .50          .40
--------------------------------------------------------------------------------------------------
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded  options  that have no vesting  restrictions  and are fully
transferable.  In addition,  option valuation models require the input of highly
subjective assumptions,  including the expected stock price volatility.  Because
the Company's options have characteristics significantly different from those of
traded  options,  and because  changes in the subjective  input  assumptions can
materially  affect the fair value  estimate,  in the opinion of management,  the
existing models do not necessarily provide a reliable single measure of the fair
value of its options.  The  weighted  average  estimated  fair value of employee
stock options granted during 1998, 1997 and 1996 was $10.71, $7.22 and $5.13 per
share, respectively. The weighted average estimated fair value of shares granted
under the Employee  Stock  Purchase  Plan during 1998,  1997 and 1996 was $6.74,
$4.00 and 3.00, respectively.

For purposes of pro forma  disclosures,  the estimated fair value of the options
is amortized to expense over the options' vesting period.

The Company's pro forma  information  follows (in thousands  except for earnings
per share information):

                                                1998         1997         1996
--------------------------------------------------------------------------------
Pro forma net income                          $32,974      $11,344     $10,689
                                              =======      =======     =======

Pro forma basic earnings per share            $  1.18      $  0.41     $  0.40
                                              =======      =======     =======

Pro forma diluted earnings per share          $  1.10      $  0.38     $  0.37
                                              =======      =======     =======

The effects on pro forma  disclosures of applying SFAS No. 123 are not likely to
be  representative  of the  effects on pro forma  disclosures  of future  years.
Because  SFAS No.  123 is  applicable  only to  options  granted  subsequent  to
September 30, 1995, the pro forma effect will not be fully reflected until 2000.

                                       27

<PAGE>

<TABLE>
7.   Foreign Operations

The company operates  predominantly in one industry segment. The following table
summarizes  selected  financial  information  of  the  Company's  operations  by
geographic location:
<CAPTION>
                                                            --------------------------------------
                                                                  Years Ended September 30,
                                                            --------------------------------------
(Dollars in thousands)                                          1998         1997         1996
--------------------------------------------------------------------------------------------------
<S>                                                            <C>         <C>          <C>
Revenues:
  United States and Canada                                      $91,942     $78,574      $69,242
  Europe                                                         98,562      91,322       87,138
  Other                                                          27,732      27,201       23,771
                                                            ------------ ------------ ------------
Consolidated                                                   $218,236    $197,097     $180,151
                                                            ------------ ------------ ------------

Operating income:
  United States and Canada                                      $23,485      $2,252       $1,658
  Europe                                                         10,596       7,837       10,084
  Other                                                           2,201       1,725        1,087
                                                            ------------ ------------ ------------
Consolidated                                                    $36,282     $11,814      $12,829
                                                            ------------ ------------ ------------

Identifiable assets:
  United States and Canada                                     $169,111    $144,137     $126,791
  Europe                                                        141,508     115,966       98,917
  Other                                                          13,195      12,596       11,773
  Eliminations                                                  (13,888)    (12,555)     (12,941)
                                                            ------------ ------------ ------------
Consolidated                                                   $309,926    $260,144     $224,540
                                                            ------------ ------------ ------------
</TABLE>
Included in operating income but excluded from revenues are royalties charged to
international  operations by domestic  operations that  aggregated  $22,717,000,
$21,464,000 and $21,192,000 in 1998, 1997 and 1996, respectively.

8.  Subsequent Event

On  November  2, 1998 the Company and BMC  Software,  ("BMC"),  entered  into an
Agreement and Plan of Reorganization.  The merger  contemplated  therein will be
accomplished  by the issuance of 0.675 shares of BMC stock for each share of the
Company's  common  stock.  This  transaction  is expected to close in the second
quarter in fiscal 1999 and to be  accounted  for using the pooling of  interests
method.  The  merger is  subject to a number of  customary  closing  conditions,
including antitrust approval and approval by the stockholders of the Company.

Platinum  Technology,  Inc.,  ("Platinum"),  filed a  Complaint  and  Motion for
Preliminary Injunction on Nov. 13, 1998.

The  complaint  alleges  that the  Company  is in  breach  of a  standstill  and
exclusive negotiation  agreement with Platinum,  and further, that BMC Software,
Inc.  tortiously  interfered with such alleged  agreement when it negotiated and
executed the merger agreement announced on Nov. 2, 1998. Platinum seeks entry of
an  injunction  voiding  this  merger  agreement  and  requiring  the Company to
negotiate exclusively with it for an uninterrupted 120-day period.

The Company is currently  evaluating  the complaint but believes that the claims
by Platinum are without merit,  and intends to vigorously  defend itself against
the allegations in the complaint.  The Company continues to believe that the BMC
merger agreement is in the best interests of its shareholders.

                                       28

<PAGE>

Market for the Registrant's Common Stock and Related Stockholder Matters

The Company's common stock has been traded in the over-the-counter  market under
the NASDAQ symbol "BOOL" since the Company's initial public offering on February
3, 1984. The number of stockholders  of record of the Company's  common stock as
of October 31, 1998 was 626. The Company has not paid any cash  dividends  since
1978 on its common stock,  with the exception of payment of partial  shares as a
result of the stock splits in 1994, 1995, 1996 and 1998. The Company anticipates
that for the foreseeable future, it will continue to retain its earnings for use
in its business.  The table on page 2 reflects the range of high and low closing
bid quotations for each period indicated as reported by NASDAQ.

These quotations  represent prices between dealers without adjustment for retail
markups, markdowns or commissions, and may not represent actual transactions.

                                       29

<PAGE>

The Board of Directors and Stockholders
Boole & Babbage, Inc.

We have audited the accompanying consolidated balance sheets of Boole & Babbage,
Inc. as of  September  30,  1998,  1997 and 1996,  and the related  consolidated
statements of income,  stockholders'  equity,  and cash flows for the years then
ended.  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 did not audit the  financial  statements of
MAXM Systems  Corporation,  which statements reflect total assets and a net loss
constituting $14.5 million and $6.6 million,  respectively,  of the related 1996
consolidated financial statements totals. Those statements were audited by other
auditors whose report has been  furnished to us, and our opinion,  insofar as it
relates to data  included for MAXM Systems  Corporation,  is based solely on the
report of the other auditors.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  These 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,  based on our audits and the report of the other  auditors,  the
consolidated  financial  statements  referred to above  present  fairly,  in all
material respects,  the consolidated financial position of Boole & Babbage, Inc.
at  September  30,  1998,  1997 and 1996,  and the  consolidated  results of its
operations  and its cash  flows  for the years  then  ended in  conformity  with
generally accepted accounting principles.



Ernst & Young LLP
San Jose, California
October 21, 1998

                                       30