Exhibit 13.1

<TABLE>

Boole & Babbage, Inc.
Selected Consolidated Financial Data

<CAPTION>

                                                                                         Years ended September 30,
                                                           -------------------------------------------------------------------------
(In thousands, except per share amounts)                                1996         1995          1994         1993         1992
------------------------------------------------------------------------------------------------------------------------------------

<S>                                                                   <C>          <C>          <C>          <C>          <C>      
Revenue                                                               $ 167,178    $ 154,367    $ 131,796    $ 118,245    $ 110,539

Expenses (a)                                                            148,064      138,323      119,032      108,622      102,228
                                                                      ---------    ---------    ---------    ---------    ---------
       Income (loss) excluding special charges (a)                       19,114       16,044       12,764        9,623        8,311

Interest and other income (expense), net                                  5,941        3,904        2,003        1,548         (584)
                                                                      ---------    ---------    ---------    ---------    ---------
Income (loss) before income taxes                                        25,055       19,948       14,767       11,171        7,727

Provision (benefit) for income taxes                                      7,015        6,000        4,575        3,519        2,434
                                                                      ---------    ---------    ---------    ---------    ---------

Net income (loss)                                                     $  18,040    $  13,948    $  10,192    $   7,652    $   5,293
                                                                      =========    =========    =========    =========    =========

Net income (loss) per share (b)                                       $    1.00    $    0.81    $    0.63    $    0.47    $    0.35
                                                                      =========    =========    =========    =========    =========

Shares used in per share calculations (b)                                18,070       17,325       16,200       16,315       15,075
                                                                      =========    =========    =========    =========    =========


Balance sheet data:
     Cash, cash equivalents and short-term investments                $  60,055    $  38,140    $  34,019    $  23,726    $  16,113
     Total assets                                                     $ 207,064    $ 163,908    $ 131,626    $ 100,905    $  88,363
     Long-term debt                                                   $   2,489    $   1,346    $   3,080    $   5,165    $   5,196
     Deferred maintenance revenue                                     $  74,685    $  58,237    $  46,905    $  32,371    $  32,182
     Stockholders' equity                                             $  93,025    $  70,187    $  48,164    $  34,467    $  29,025

<FN>
(a) Excludes $3.3 million ($0.14 per share) of purchased R&D expense in FY94.
(b) Per share  data and number of shares  reflect a 3-for-2  stock  split  which
    became effective on December 10, 1996.
</FN>
</TABLE>

                                     Page 1

<PAGE>

                                  Exhibit 13.1

<TABLE>

Boole & Babbage, Inc.
Quarterly History
(Unaudited)

<CAPTION>

(In thousands, except per share amounts)   Q1 95     Q2 95     Q3 95     Q4 95     Q1 96     Q2 96     Q3 96    Q4 96
------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>       <C>       <C>       <C>       <C>       <C>       <C>      <C>    
Revenue:
   Product licensing                       $20,739   $18,787   $18,924   $22,404   $21,474   $21,668   $22,312  $25,198
   Maintenance fees and other               17,834    18,466    18,444    18,769    18,645    18,997    18,605   20,280
                                         -------------------------------------------------------------------------------
      Total revenue                         38,573    37,253    37,368    41,173    40,119    40,665    40,917   45,478
                                         -------------------------------------------------------------------------------

Costs and expenses:
   Cost of product licensing                 3,456     3,300     3,298     3,854     3,973     4,301     5,090    4,127
   Cost of maintenance fees and other        3,580     4,010     3,812     4,177     3,435     3,703     3,476    3,557
   Product development                       4,158     3,842     3,748     4,846     4,374     4,540     4,650    5,709
   Sales and marketing                      19,031    18,255    20,145    19,908    19,682    19,814    19,570   22,292
   General and administrative                4,177     3,792     3,006     3,928     3,851     3,851     3,987    4,082
                                         -------------------------------------------------------------------------------
      Total costs and expenses              34,402    33,199    34,009    36,713    35,315    36,209    36,773   39,767
                                         -------------------------------------------------------------------------------

      Operating income (loss)                4,171     4,054     3,359     4,460     4,804     4,456     4,144    5,711

Interest and other income, net                 631     1,116     1,037     1,120     1,306     1,408     1,519    1,707
                                         -------------------------------------------------------------------------------
Income before taxes                          4,802     5,170     4,396     5,580     6,110     5,864     5,663    7,418
Provision for income taxes                   1,490     1,600     1,230     1,680     1,825     1,530     1,585    2,075
                                         -------------------------------------------------------------------------------

Net income                                  $3,312    $3,570    $3,166    $3,900    $4,285    $4,334    $4,078   $5,343
                                         ===============================================================================

Net income per share (a)                     $0.20     $0.21     $0.18     $0.22     $0.24     $0.24     $0.22    $0.29
                                         ===============================================================================

Shares used in per share calculations (a)   16,800    17,325    17,475    17,625    17,925    17,965    18,180   18,220
                                         ===============================================================================

Stock Price (closing bid) (a)
   High                                     $11.67    $13.45    $13.89    $13.89    $17.11    $17.25    $17.59   $17.17
   Low                                       $8.85    $11.45    $12.11    $12.78    $12.89    $13.33    $15.50   $14.17

<FN>
(a) Per share  data,  number of shares and stock price  reflect a 3-for-2  stock
    split which became effective on December 10, 1996. 
</FN>
</TABLE>

                                     Page 2

<PAGE>

                                  Exhibit 13.1


<TABLE>

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

The table  below sets forth the  results of  operations  of the  Company for the
three fiscal years ended September 30, 1996:

<CAPTION>

                                                          PERCENTAGE OF REVENUE                             YEAR-TO-YEAR
                                                         YEARS ENDED SEPTEMBER 30,                        PERCENTAGE CHANGE
                                               --------------------------------------------      --------------------------------
                                                     1996            1995             1994           96 vs. 95         95 vs. 94
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>             <C>              <C>                <C>              <C>  
Revenue:
     Product licensing                               54.2%           52.4%            49.3%            12.1%             24.4%
     Maintenance fees and other                      45.8%           47.6%            50.7%             4.1%             10.0%
                                                    ------          ------           ------           ------            ------
         Total revenue                              100.0%          100.0%           100.0%             8.3%             17.1%

Costs and expenses:
     Cost of product licensing                       10.5%            9.0%             7.4%            25.8%             42.7%
     Cost of maintenance fees and other               8.5%           10.1%            12.5%            -9.0%             -5.4%
     Product development                             11.5%           10.8%            11.2%            16.1%             12.4%
     Sales and marketing                             48.7%           50.1%            48.2%             5.2%             21.7%
     General and administrative                       9.4%            9.6%            11.0%             5.8%              2.9%
     Purchased R&D expense                              --              --             2.5%             N/A               N/A
                                                    ------          ------           ------           ------            ------
         Total costs and expenses                    88.6%           89.6%            92.8%             7.0%             13.1%
                                                    ------          ------           ------           ------            ------

         Operating income                            11.4%           10.4%             7.2%            19.1%             68.7%

Interest and other income, net                        3.6%            2.5%             1.5%            52.2%             94.9%
                                                    ------          ------           ------           ------            ------
Income before provision for income taxes             15.0%           12.9%             8.7%            25.6%             73.2%
Provision for income taxes                            4.2%            3.9%             2.7%            16.9%             68.1%
                                                    ======          ======           ======           ======            ======
Net income                                           10.8%            9.0%             6.0%            29.3%             75.5%
                                                    ======          ======           ======           ======            ======

</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.

Revenue

The Company  derives  its  revenues  primarily  from the  licensing  of computer
software programs,  consulting and education services, and the sales of software
maintenance  services.  Total revenue  increased  over the prior year by 8.3% in
1996  compared to an  increase of 17.1% in 1995.  Without the impact of currency
exchange  rates,  total  revenue  increased  10.2%  and 9.6% in 1996  and  1995,
respectively.

Product Licensing

The  Company  licenses  its  products  to  customers  for use on their  computer
systems.  The Company also performs consulting and educational  services related
to those  products,  although  revenue from these services was not  significant.
Product  licensing  accounted for 54.2% or $90,652,000 of total revenue in 1996,
compared  to 52.4% or  $80,854,000  in 1995 and  49.3% or  $64,985,000  in 1994.
Revenue from product  licensing  increased by 12.1% in 1996 compared to 1995 and
by 24.4% for 1995 over 1994. 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.
And, 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 product area with the highest growth rate was the client/server  group which
grew by 66.0% in 1996 and 83.0% in 1995 and comprised 22.8% of the total product
licensing  in 1996  compared  to 15.4% in 1995 and  10.5% in 1994.  The  Company
anticipates  that this group will  continue to show high growth rates for fiscal
1997.  However,  the Company  competes  with certain  companies who have greater
resources  along with  products  already in the  marketplace.  In addition,  the
Company is  dependent on the  client/server  market  developing  at a rapid rate
despite  reports by  industry  analysts  that  implementation  of  client/server
networks may be more expensive and time  consuming  than users had  anticipated,
which  could  potentially  slow the growth of the  market.  Specifically,  these
circumstances  resulted  in  below-plan  sales on the Stage3 LAN backup  product
which  caused the  Company to take a charge of  approximately  $1 million in the
third  quarter  of 1996  for the  remaining  royalty  commitment.  Due to  these
factors,  there can be no assurances that new products will achieve  significant
market acceptance or competitive success and thus contribute to revenue growth.

     Mainframe products grew 2.3% and 17.6% in 1996 and 1995, respectively,  and
comprised 77.2%,  84.6%, and 89.5% of total product  licensing in 1996, 1995 and
1994,  respectively.  The mainframe  group  includes plex products  which enable
customers to handle large groups of computer  processors,  particularly  the new
parallel  processing  machines by IBM. The Company's new revenue growth could be
materially and adversely  affected if these new parallel  processors do not gain
significant market acceptance and customer spending shifts away from traditional
mainframes to technology  platforms where the Company does not have  significant
product acceptance.

     Price changes during 1996, 1995 and 1994 were not significant.



                                       4
<PAGE>

Product licensing growth:
                             ------------------
                              1996        1995
                             ------------------
   Domestic                   16.6%       10.4%
   International              10.1%       31.9%
                             ------------------
                              12.1%       24.4%
                             ------------------

Product licensing mix:
                      -----------------------------
                        1996      1995       1994
                      -----------------------------
   Domestic             32.1%     30.8%      34.8%
   International        67.9%     69.2%      65.2%
                      -----------------------------
                       100.0%    100.0%     100.0%
                      -----------------------------

Markets

Domestic:

Domestic product licensing grew 16.6% overall in 1996, as revenue from the field
sales force grew 31.8%, but was partially  offset by decreased  revenues for the
telesales group. The telesales group decreases were due primarily to ineffective
sales execution.  In 1995, domestic product licensing grew 10.4% overall, as the
telesales group produced strong growth,  but was partially offset by a flat year
for the field sales force.  For growth to continue in the domestic  market,  the
company  is  dependent  on  increased  productivity  from the  telesales  group,
continued  increases  from the field  sales  force,  and the ability to generate
larger size transactions.

International:

In 1996, the Company's revenues from its international operations,  comprised of
foreign subsidiaries and marketing agents,  increased 10.1% as a result of solid
growth in Europe  despite  unfavorable  currency  exchange  rates.  In 1995, the
Company's revenues from its international operations increased 31.9% as a result
of strong growth in South America and favorable currency exchange rates. Without
the impact of currency exchange rates,  international growth was 13.1% and 19.6%
for 1996 and 1995, respectively. As further described in Note 1, the Company has
a hedging  program to attempt to reduce its  exposure to currency  fluctuations.
Since the majority of product licensing is derived from  international  markets,
the Company's  operations  and  financial  results  could be  significantly  and
adversely affected by such international factors as changes in currency exchange
rates and specific countries' 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 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  with IBM which  replaces  the  former  agreement.  The new
agreement  requires  royalty  payments to the  Company,  based upon sales of the
product by IBM,  of up to  approximately  $10  million  for the period  from the
fourth  quarter of 1996 through the second  quarter of fiscal 1999.  Since there
are no minimum  generated  amounts,  actual  royalties due to the Company may be
significantly below the annual maximum amounts.

     For 1996,  1995 and 1994,  maintenance  fees and other accounted for 45.8%,
47.6% and 50.7%,  respectively,  of total  revenues.  Year-to-year  increases in
maintenance fees and other for 1996 and 1995 were 4.1% and 10.0%,  respectively.
Without the impact of currency  exchange rates, the increases were 5.7% and 3.5%
for 1996 and 1995,  respectively.  These  increases  are  mainly  the  result of
increased  product  licensing in the previous  years  combined with high renewal
rates and, in 1996, increased royalties from IBM under the new agreement.

     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 1997 will increase due
to the higher license  revenue  growth in 1996,  although it will 

                                       5
<PAGE>

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.

Cost of Product Licensing:

Cost of product  licensing  consists  primarily of royalties paid to independent
software authors,  amortization of purchased and internally  developed  software
and the cost of outside  consultants to provide  educational  services.  Cost of
product licensing increased 25.8% and 42.7% in 1996 and 1995, respectively,  and
represented  10.5%,  9.0%  and  7.4%  of  revenues  for  1996,  1995  and  1994,
respectively.  Without the impact of currency exchange rates, the increases were
28.7% and  31.4% for 1996 and 1995,  respectively.  In 1996,  the  increase  was
primarily  due to higher  third-party  royalties  and service costs as increased
third-party  licensing in Europe and Japan  resulted in higher  royalties  while
higher service revenue worldwide produced a corresponding increase in consulting
and  educational  costs.  In addition,  in the third quarter of 1996 there was a
charge of approximately $1 million on the remaining  royalty  commitments on the
Stage3  product.  In 1995,  the  increase  is a  result  of  higher  third-party
royalties and software  amortization.  Third-party royalties increased both as a
result of higher third-party revenue in Europe and Japan as well as the addition
of  third-party  client/server  products  to which  the  Company  has  exclusive
distribution  rights.  Software  amortization  increased from the combination of
1994's  Sysnet  a.s.  acquisition  (see Note 3) and the large  number of product
releases at the end of 1994. 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 of
hardware  associated with sales of  client/server  products and costs related to
operating the computer  services  division.  Cost of maintenance  fees and other
decreased by 9.0% and 5.4% in 1996 and 1995, respectively, and represented 8.5%,
10.1% and 12.5% of revenues for 1996, 1995 and 1994,  respectively.  Without the
impact of currency exchange rates, the decreases were 7.7% and 9.1% for 1996 and
1995, respectively. In 1996, the decrease was primarily due to lower maintenance
support costs and software  amortization.  Software  amortization is down due to
write-offs in 1995 of certain  software  products and the full  amortization  of
products purchased in July 1991.  Maintenance support costs are down as a result
of more  efficient  processes  implemented  which  allowed the  redeployment  of
personnel to research and development ("R&D"). In 1995, the decrease is a result
of lower third-party royalties and maintenance support costs partially offset by
higher  software  amortization.  Software  amortization  increased  due  to  the
write-off of certain software products at the end of 1995. A new contract with a
third-party  vendor  in  Europe  has  significantly  reduced  the  royalties  on
maintenance  from the second quarter of 1995 through the fourth quarter of 1996.
Since this reduction was in effect for both 1996 and 1995, there was no material
impact on the comparability  between these years. In 1997, the effective royalty
rate to this vendor will  increase as a result of the  expiration of the reduced
rate. In general,  fluctuations in the  relationship of cost of maintenance fees
and other to revenue are caused primarily by changes in maintenance revenue mix,
maintenance  support,  royalty  agreements,   and  amortization  of  capitalized
software.

Product Development:

Product  development  costs  increased  by 16.1%  and  12.4%  in 1996 and  1995,
respectively,  and represented 11.5%, 10.8% and 11.2% of revenues for 1996, 1995
and 1994,  respectively.  Without the impact of  currency  exchange  rates,  the
increases were 16.5% and 10.7% for 1996 and 1995, respectively.  The increase in
1996 is due to higher personnel costs as headcount  replacements were filled and
maintenance  support  employees  transferred  to R&D.  In 1995,  a  decrease  in
domestic R&D due to delayed headcount replacements was offset by higher computer
costs and a full year of R&D costs in 


                                       6
<PAGE>

Oslo  as a  result  of  the  Sysnet  acquisition  in  April  1994.  The  Company
capitalizes  certain development costs in accordance with Statement of Financial
Accounting  Standards No. 86 ("FAS 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.  Product
development and support expenses may fluctuate  annually  depending in part upon
the number and status of internal software development projects.

Sales and Marketing

Sales  and  marketing  expenses  increased  by 5.2% and  21.7% in 1996 and 1995,
respectively,  and  represented  48.7% of revenues in 1996 compared to 50.1% and
48.2% in 1995 and 1994,  respectively.  Without the impact of currency  exchange
rates,  the increases were 7.0% and 15.7% for 1996 and 1995,  respectively.  The
increase in 1996 is primarily a result of higher commissions on increased sales.
Higher sales  personnel  costs  internationally  were partially  offset by lower
product  marketing costs. In 1995, sales commissions  increased  proportionately
with product  licensing.  The remainder of the increase is a result of increased
headcount  in all  sales  channels  including  a full  year of  expenses  of the
Japanese subsidiary, which was started June 1994.

General and Administrative

General and administrative  expenses increased 5.8% in 1996 and 2.9% in 1995 and
represented  9.4%,  9.6%  and  11.0%  of  revenues  for  1996,  1995  and  1994,
respectively.  Without the impact of currency exchange rate changes, general and
administrative  expenses  increased  7.3% in 1996 and decreased 0.8% in 1995. In
the third  quarter of 1995,  the Company  negotiated a lease  termination  which
resulted in the recovery of approximately  $350,000 of previously  accrued lease
payments on an idle  facility.  The  increase in 1996 was  primarily a result of
this  prior year  non-recurring  credit as well as higher  facilities  costs for
European and Japanese office relocations.  In 1995, the decrease in net facility
expense was offset by increases in personnel both domestically and in Europe.

Purchased R&D Expense

In April 1994,  the Company  acquired  the net assets of Sysnet  a.s.,  an Oslo,
Norway-based  provider of system  administration  software  for UNIX systems and
other distributed client/server systems, for $4.1 million in cash plus potential
additional consideration based upon future results (see Note 3).

     The transaction was accounted for using the purchase method and a valuation
was performed of all assets acquired. As a result,  $3,251,000, or approximately
78% of the  purchase  price was  written  off as a  one-time  charge  related to
purchased research and development.

Interest and Other Income, Net

Interest and other income  consists  principally  of interest  income,  interest
expense,  gain or loss on sales of investments,  currency gain or loss, and gain
or loss on disposal of assets.  An increase of 52.2% over 1995 was primarily the
result of more interest  income as gross lease  contracts  receivable  was 39.0%
higher than one year ago. In addition,  there was  approximately a $300,000 gain
on sale of investment  securities  compared to an  approximate  $300,000 loss in
1995 and interest  expense  decreased as capital  leases and notes  payable were
paid down. These increases were somewhat mitigated by higher currency losses. In
1995, the 94.9% increase over 1994 was primarily attributable to interest income
as gross lease contracts receivable increased 60.4% over 1994. Additionally, net
interest  income  increased  in 1995 as a result of  approximately  $300,000  of
interest received from the IRS in settlement of an audit, more investment income
as a result of higher cash and short-term investment balances, and less interest
expense as capital  leases and notes  payable  are paid down.  The Company has a
hedging  program to attempt to minimize its exposure to  fluctuations in foreign
currencies in the Company's statement of operations.

Income Taxes

The  effective  tax rate was 28.0%,  30.0%,  and 31.0% for 1996,  1995 and 1994,
respectively.  The  Company's  effective  tax  rate  differs  from  the  federal
statutory  rate due  primarily  to  permanently  invested  earnings  of  foreign
subsidiaries being taxed at rates lower than the federal statutory rate.



                                       7
<PAGE>

Liquidity and Capital Resources

The  significant  sources of cash during 1996 include cash provided by operating
activities of $14,368,000;  proceeds from the sale of lease contracts receivable
of  $15,849,000;  the exercise of employee  stock options of  $2,885,000;  stock
purchases through the Employee Stock Purchase Plan of $1,281,000;  proceeds from
the sale of marketable  equity  securities of $717,000;  and net proceeds from a
line of credit of  $590,000.  The  significant  uses of cash during 1996 include
$8,950,000  for the net  purchases of  short-term  investments;  $3,941,000  for
internally  developed  and  purchased  capitalized   software;   $3,475,000  for
purchases of furniture,  equipment and leasehold  improvements;  $2,085,000  for
investment  in equity  securities;  $1,919,000  for  treasury  stock  purchases;
$1,456,000  for payments on capital  leases;  and $510,000 for payments on notes
payable.  In 1996, the Company incurred capital lease  obligations of $2,505,000
for the purchase of equipment for the corporate data center. Management believes
cash flows from  operations and existing cash resources will be adequate to meet
its working capital requirements for the foreseeable future.


                                       8
<PAGE>

                                  Exhibit 13.1

Boole & Babbage, Inc.
Consolidated Statements of Income



                                                      Years ended September 30,
                                                     ---------------------------
(In thousands, except per share amounts)             1996      1995      1994
--------------------------------------------------------------------------------
Revenue:
      Product licensing                           $ 90,652   $ 80,854   $ 64,985
      Maintenance fees and other                    76,526     73,513     66,811
                                                  --------   --------   --------
           Total revenue                           167,178    154,367    131,796
                                                  --------   --------   --------

Costs and expenses:
      Cost of product licensing                     17,492     13,908      9,745
      Cost of maintenance fee and other             14,170     15,579     16,473
      Product development                           19,273     16,594     14,768
      Sales and marketing                           81,358     77,339     63,565
      General and administrative                    15,771     14,903     14,481
      Purchased R&D expense                           --         --        3,251
                                                  --------   --------   --------
           Total costs and expenses                148,064    138,323    122,283
                                                  --------   --------   --------

Operating income                                    19,114     16,044      9,513

Interest and other income, net                       5,941      3,904      2,003
                                                  --------   --------   --------
Income before provision for income taxes            25,055     19,948     11,516
Provision for income taxes                           7,015      6,000      3,570
                                                  --------   --------   --------
Net income                                        $ 18,040   $ 13,948   $  7,946
                                                  ========   ========   ========

Net income per share (a)                          $   1.00   $   0.81   $   0.49
                                                  ========   ========   ========

Shares used in per share calculations (a)           18,070     17,325     16,200
                                                  ========   ========   ========



(a) Per share  data and number of shares  reflect a 3-for-2  stock  split  which
    became effective on December 10, 1996.


                                     Page 9

<PAGE>

                                  Exhibit 13.1

<TABLE>

Boole & Babbage, Inc.
Consolidated Balance Sheets

<CAPTION>

                                                                                                          September 30,
                                                                                        --------------------------------------------
(Dollars in thousands)                                                                       1996             1995           1994
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                         <C>            <C>            <C>      
Assets
Current assets:
    Cash and cash equivalents                                                               $  35,305      $  22,340      $  34,019
    Short-term investments                                                                     24,750         15,800           --
    Accounts receivable, net                                                                   23,281         27,293         23,180
    Installment and other receivables, net                                                     44,105         28,066         18,251
    Deferred tax asset                                                                          5,649          5,810          4,959
    Prepaid expenses and other current assets                                                   3,183          4,967          3,199
                                                                                            ---------      ---------      ---------
             Total current assets                                                             136,273        104,276         83,608

Purchased and internally developed software, net                                               11,614         12,278         14,276
Equipment, furniture and leasehold improvements, net                                            8,695          7,341          8,506
Long-term installment and other receivables                                                    39,141         32,223         20,011
Long-term deferred tax asset                                                                    6,537          4,843          2,284
Costs in excess of net assets of purchased businesses, net                                        660            687            713
Other assets                                                                                    4,144          2,260          2,228
                                                                                            ---------      ---------      ---------
             Total assets                                                                   $ 207,064      $ 163,908      $ 131,626
                                                                                            =========      =========      =========


Liabilities and Stockholders' Equity
Current liabilities:
     Accounts payable                                                                       $   6,642      $   6,595      $   6,762
     Accrued payroll expense                                                                    7,890          7,149          6,603
     Other accrued liabilities                                                                 20,089         18,133         16,835
     Short-term borrowings                                                                        990            400           --
     Notes payable due within one year                                                            293            513          1,171
     Capital lease obligations due within one year                                                961          1,348          2,045
     Deferred maintenance revenue                                                              47,225         40,180         34,174
                                                                                            ---------      ---------      ---------
             Total current liabilities                                                         84,090         74,318         67,590

Notes payable due after one year                                                                  369            663          1,177
Capital lease obligations due after one year                                                    2,120            683          1,903
Deferred maintenance revenue due after one year                                                27,460         18,057         12,731

Minority interest                                                                                --             --               61

Stockholders' equity:
     Preferred stock, 2,000,000 shares authorized, $.001 par value, none issued                  --             --             --
     Common stock, $.001 par value, authorized--30,000,000 shares; issued--
         17,973,270 (17,214,075 and 16,578,850 in 1995 and 1994, respectively)                     18             17             17
     Additional paid-in capital                                                                37,630         30,838         23,834
     Retained earnings                                                                         60,712         42,672         28,724
     Unrealized gain on marketable securities                                                     370            132            170
     Foreign currency translation adjustment                                                      699          1,013            (96)
     Less treasury stock, 1,143,788 shares (1,024,988 shares
         in 1995 and 1994, respectively), at cost                                              (6,404)        (4,485)        (4,485)
                                                                                            ---------      ---------      ---------
             Total stockholders' equity                                                        93,025         70,187         48,164
                                                                                            ---------      ---------      ---------
             Total liabilities and stockholders' equity                                     $ 207,064      $ 163,908      $ 131,626
                                                                                            =========      =========      =========

</TABLE>


                                    Page 10

<PAGE>

                                  Exhibit 13.1

<TABLE>

Boole & Babbage, Inc.
Consolidated Statements of Stockholders' Equity

<CAPTION>

                                                                                            
                                                                                                                         Unrealized
                                                                   Common Stock             Additional                   Gain on   
                                                              ----------------------        Paid-in       Retained       Marketable
(Dollars in thousands)                                        Shares         Amount         Capital       Earnings       Securities
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                          <C>            <C>            <C>            <C>              <C>  
Balance, September 30, 1993                                  15,419,448     $  15          $18,996        $20,778           $--   
                                                                                                                           
Exercise of employee stock options and                                                                                     
     related tax benefit                                        983,772         2            3,876           --              --   
Sale of common stock under the employee                                                                                    
     stock purchase plan and related tax benefit                158,256      --                829           --              --   
Issuance of common stock under the                                                                                         
     employee incentive stock plan                               17,374      --                133           --              --   
Unrealized gain on marketable securities,                                                                                  
     net of taxes                                                  --        --               --             --               170
Purchase of treasury stock                                         --        --               --             --              --   
Foreign currency translation adjustment                            --        --               --             --              --   
Net income                                                         --        --               --            7,946            --   
                                                             ----------     -----          -------        -------           -----
Balance, September 30, 1994                                  16,578,850        17           23,834         28,724             170
                                                                                                                           
Exercise of employee stock options and                                                                                     
     related tax benefit                                        482,585      --              5,892           --              --   
Sale of common stock under the employee                                                                                    
     stock purchase plan and related tax benefit                141,380      --                974           --              --   
Issuance of common stock under the                                                                                         
     employee incentive stock plan                               11,260      --                138           --              --   
Unrealized loss on marketable securities,                                                                                  
     net of taxes                                                  --        --               --             --               (38)
Foreign currency translation adjustment                            --        --               --             --              --   
Net income                                                         --        --               --           13,948            --   
                                                             ----------     -----          -------        -------           -----
Balance, September 30, 1995                                  17,214,075        17           30,838         42,672             132
                                                                                                                           
Exercise of employee stock options and                                                                                     
     related tax benefit                                        620,682         1            5,362           --              --   
Sale of common stock under the employee                                                                                    
     stock purchase plan and related tax benefit                131,561      --              1,323           --              --   
Issuance of common stock under the                                                                                         
     employee incentive stock plan                                6,952      --                107           --              --   
Unrealized gain on marketable securities,                                                                                  
     net of taxes                                                  --        --               --             --               238
Purchase of treasury stock                                         --        --               --             --              --   
Foreign currency translation adjustment                            --        --               --             --              --   
Net income                                                         --        --               --           18,040            --   
                                                             ----------     -----          -------        -------           -----
Balance, September 30, 1996                                  17,973,270     $  18          $37,630        $60,712           $ 370
                                                             ==========     =====          =======        =======           =====
                                                             
                                                         Foreign                          Total       
                                                         Currency                         Stock-      
                                                         Translation       Treasury       holders'
                                                         Adjustment          Stock        Equity      
                                                         ------------------------------------------
                                                                                                   
                                                                                                   
Balance, September 30, 1993                               ($1,542)         ($ 3,780)       $34,467 
                                                                                                   
Exercise of employee stock options and                                                             
     related tax benefit                                     --                --            3,878 
Sale of common stock under the employee                                                            
     stock purchase plan and related tax benefit             --                --              829 
Issuance of common stock under the                                                                 
     employee incentive stock plan                           --                --              133 
Unrealized gain on marketable securities,                                                          
     net of taxes                                            --                --              170 
Purchase of treasury stock                                   --                (705)          (705)
Foreign currency translation adjustment                     1,446              --            1,446 
Net income                                                   --                --            7,946 
                                                          -------          --------        -------
                                                                                                   
Balance, September 30, 1994                                   (96)           (4,485)        48,164 
                                                                                                   
Exercise of employee stock options and                                                             
     related tax benefit                                     --                --            5,892 
Sale of common stock under the employee                                                            
     stock purchase plan and related tax benefit             --                --              974 
Issuance of common stock under the                                                                 
     employee incentive stock plan                           --                --              138 
Unrealized loss on marketable securities,                                                          
     net of taxes                                            --                --              (38)
Foreign currency translation adjustment                     1,109              --            1,109 
Net income                                                   --                --           13,948 
                                                          -------          --------        -------
                                                                                                   
Balance, September 30, 1995                                 1,013            (4,485)        70,187 
                                                                                                   
Exercise of employee stock options and                                                             
     related tax benefit                                     --                --            5,363 
Sale of common stock under the employee                                                            
     stock purchase plan and related tax benefit             --                --            1,323 
Issuance of common stock under the                                                                 
     employee incentive stock plan                           --                --              107 
Unrealized gain on marketable securities,                                                          
     net of taxes                                            --                --              238 
Purchase of treasury stock                                   --              (1,919)        (1,919)
Foreign currency translation adjustment                      (314)             --             (314)
Net income                                                   --                --           18,040 
                                                          -------          --------        -------
                                                                                                   
Balance, September 30, 1996                               $   699          ($ 6,404)       $93,025 
                                                          =======          ========        =======
                                                                                          

</TABLE>

                                    Page 11

<PAGE>
                                  Exhibit 13.1

<TABLE>

Boole & Babbage, Inc.
Consolidated Statements of Cash Flows

<CAPTION>
                                                                                                  Years ended September 30,
                                                                                     -----------------------------------------------
(Dollars in thousands)                                                                     1996             1995             1994
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                      <C>              <C>              <C>     
Cash flows from operating activities:
  Net income                                                                             $ 18,040         $ 13,948         $  7,946
  Adjustments to reconcile net income to net cash
      provided by operating activities:
      Depreciation, amortization and write-off of capitalized software                      8,890            9,667           11,922
      Loss on disposal of assets                                                              279              103             --
      Gain on sale of equity securities                                                      (291)            --               --
      Write-off of investment in equity securities                                           --               --                150
      Deferred income taxes                                                                (1,634)            (960)          (1,117)
      Stock issued under compensatory stock plans                                             107              138              133
      Minority interest                                                                      --                (62)            (199)
      Changes in operating assets and liabilities excluding the effect of
         acquisitions:
         Accounts receivable and installment and other receivables                        (35,468)         (25,041)         (20,272)
         Prepaid expenses and other assets                                                  1,835           (1,439)          (1,040)
         Accounts payable and accrued expenses                                              5,617            3,042            2,955
         Deferred maintenance revenue                                                      16,993           10,643           12,941
                                                                                         --------         --------         --------

Net cash provided by operating activities                                                  14,368           10,039           13,419
                                                                                         --------         --------         --------

Cash flows from investing activities:
     Purchases of equipment, furniture and leasehold improvements                          (3,475)          (3,326)          (2,848)
     Payments for capitalized software                                                     (3,941)          (3,048)          (6,542)
     Net purchases of short-term investments                                               (8,950)         (15,800)            --
     Investment in equity securities                                                       (2,085)            (346)            (997)
     Proceeds from sale of equity securities                                                  717             --               --
                                                                                         --------         --------         --------

Net cash used for investing activities                                                    (17,734)         (22,520)         (10,387)
                                                                                         --------         --------         --------

Cash flows from financing activities:
      Sale of lease contracts receivables                                                  15,849             --              6,376
      Proceeds from issuance of common stock                                                4,166            2,835            3,703
      Proceeds from minority interest investors                                              --               --                252
      Purchase of treasury stock                                                           (1,919)            --               (705)
      Borrowings under line of credit                                                         590              400             --
      Payments on notes payable                                                              (510)          (1,186)          (1,450)
      Payments on capital leases                                                           (1,456)          (2,019)          (2,063)
                                                                                         --------         --------         --------

Net cash provided by financing activities                                                  16,720               30            6,113
                                                                                         --------         --------         --------

Effect of exchange rate changes on cash                                                      (389)             772            1,148
                                                                                         --------         --------         --------

Net increase (decrease) in cash and cash equivalents                                       12,965          (11,679)          10,293

Cash and cash equivalents at beginning of year                                             22,340           34,019           23,726
                                                                                         --------         --------         --------

Cash and cash equivalents at end of year                                                 $ 35,305         $ 22,340         $ 34,019
                                                                                         ========         ========         ========

Supplemental  disclosures  of cash flow  information:
      Cash paid during the year for:
          Interest                                                                       $    508         $  1,081         $  1,510
          Income taxes                                                                   $  4,783         $  3,355         $  1,814

Supplemental disclosures of noncash investing and financing activities:
             Capital lease obligations of $2,505,000 was incurred in 1996 for the purchase of equipment. 
             A capital lease obligation of $103,000 was incurred in 1995 for the purchase of equipment.
             Notes payable of $901,000 were incurred in 1994 when the Company purchased the net assets of Sysnet a.s.
             A note payable of $283,000 was incurred in 1994 for the purchase of various equipment.

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

1.  Summary of Significant Accounting Policies


Business

Boole & Babbage,  Inc. ("the Company") provides  enterprise  automation software
that helps users worldwide to organize and manage complex computer systems.

Basis of Presentation

The accompanying  financial  statements  include the accounts of Boole & Babbage
Europe  (BBE),  Boole & Babbage  Australasia  (BBA),  and Boole & Babbage  a.s.,
Norway (BBN),  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, 1996, cash equivalents
consisted of $5,541,000 of time deposits with original  maturities of 30 days or
less.  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, 1996,  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.

Short-term investments as of September 30, 1996 consisted of the following:

                              (Dollars in thousands)
---------------------------------------------------
Municipal bonds and notes                 $16,000
Auction preferred stock                     6,750
Taxable commercial paper                    2,000
                                          -------
                                          $24,750
                                          =======


Receivables

Accounts  receivable  and  installment  receivables  are net of  allowances  for
doubtful accounts of $1,888,000,  $1,734,000,  and $1,781,000,  at September 30,
1996, 1995, and 1994, 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.

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  portion of the
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 corresponding 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.

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:

                        ---------------------------------
                                   September 30,
                        ---------------------------------
(Dollars in thousands)         1996      1995       1994
---------------------------------------------------------
Equipment                   $29,272   $25,065    $23,644
Furniture                     9,288     8,572      7,704
Leasehold improvements          912       742        613
                        ---------------------------------
                             39,472    34,379     31,961
Accumulated depreciation   
  and amortization           30,777    27,038     23,455
                        ---------------------------------
                            $ 8,695   $ 7,341    $ 8,506
                        =================================
                          
                        

                                       13
<PAGE>

Costs in Excess of Net Assets of Purchased Businesses

The excess of the purchase  price over the net assets of BBE is being  amortized
on a  straight  line  basis  over 40 years.  Costs in  excess  of net  assets of
purchased businesses are summarized below:

                             --------------------------
                                    September 30,
                             --------------------------
(Dollars in thousands)          1996     1995     1994
-------------------------------------------------------
Costs in excess of net
   assets of purchased 
   businesses                 $1,056   $1,056   $1,056
Accumulated amortization         396      369      343
                             --------------------------
                              $  660   $  687   $  713
                             ==========================

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.

                             --------------------------
                                    September 30,
                             --------------------------
(Dollars in thousands)          1996     1995     1994
-------------------------------------------------------
Cost of marketable            
   securities                 $2,850  $ 1,193   $  847
Unrealized gain                  625      230      293
                             --------------------------
                              $3,475  $ 1,423   $1,140
                             ==========================

The unrealized  gain is recorded net of tax in a separate  stockholders'  equity
account as follows:

                             --------------------------
                                    September 30,
                             --------------------------
(Dollars in thousands)          1996     1995     1994
-------------------------------------------------------
Unrealized gain                $ 625    $ 230    $ 293
Deferred income tax             (255)     (98)    (123)
                             --------------------------
                               $ 370    $ 132    $ 170
                             ==========================

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" (FAS 86). 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  $4,814,000,
$5,315,000, and $4,112,000 for 1996, 1995, and 1994, respectively.

Cost of Product Licensing

Cost of product  licensing  consists  of  royalties  paid to  software  authors,
amortization of capitalized software,  and outside costs of providing consulting
and educational services to customers.

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 of hardware associated with sales of certain  client/server  products,  and
the costs of operating a computer services division.

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:

                              ---------------------------
                                Years Ended September 30,
                              ---------------------------
(Dollars in thousands)          1996      1995      1994
---------------------------------------------------------
Total costs                   $21,430   $18,700   $16,850
Less amounts capitalized        3,611     3,050     3,365
                             ---------------------------
                              $17,819   $15,650   $13,485
                              ===========================

These  costs do not  include  expenditures  relating  to the  joint  development
project with IBM to develop systems  management  products in support of new CICS
releases  which were  reimbursed  by IBM  totaling  $1,375,000,  $2,080,000  and
$2,540,000 in 1996, 1995 and 1994, respectively.

Accounting for Income Taxes

The Company adopted  Statement of Financial  Accounting  Standards No. 109 ("FAS
109"),  "Accounting  for Income  Taxes," in its first quarter of fiscal 1994 and
applied its provisions retroactively.

Net Income Per Share

Net income per share is computed  using the  weighted  average  number of common
shares  outstanding  and shares  issuable  assuming the exercise of  outstanding
options using the treasury stock method. Fully diluted earnings per share is not
disclosed  because it is not  materially  different  from  primary  earnings per
share.

      All shares  and per share  amounts  have been  restated  to  retroactively
reflect the 3-for-2 stock split described in Note 8.

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 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 losses
included in determining  net income in 1996,  1995, and 1994 were  


                                       14
<PAGE>

approximately $919,000, $513,000, and $764,000,  respectively. These amounts are
included in the consolidated statements of income under the caption interest and
other income,  net. The Company had approximately  $34.5 million,  $26.3 million
and $20.4 million of open forward exchange contracts at September 30, 1996, 1995
and 1994, respectively.

      Beginning  the last quarter of fiscal  1994,  the Company  implemented  an
economic hedge strategy for a portion of its  anticipated  intercompany  royalty
transactions. Gains and losses on these contracts are deferred and recognized in
the  period  in which the  transaction  is  complete.  In  connection  with this
strategy,  the Company had no  outstanding  contracts at September 30, 1996, but
had  approximately  $9.7  million  and $18.3  million  of forward  contracts  at
September 30, 1995 and 1994,  respectively.  At September 30, 1994, the carrying
value  approximated  the market value while at September 30, 1995,  the deferred
loss was approximately $670,000.

Reclassifications

Beginning  in  the  first  quarter  of  1996,  changes  have  been  made  in the
classification of revenue and operating  expense in the Consolidated  Statements
of Income. 1995 and 1994 have been reclassified to conform to these changes.

      "Product licensing" consists of licensing of software products (net of the
bundled  maintenance)  plus consulting and education  services  related to those
products.  "Maintenance  Fees and Other"  consists of revenue from  maintenance,
hardware sales,  computer services and royalties from IBM related to the jointly
developed  CICS  product  now being  sold by IBM.  "Cost of  Product  Licensing"
includes  royalties  paid  to  independent  software  authors,  amortization  of
purchased and  internally  developed  software and the outside cost of providing
consulting and educational services to customers.  "Cost of Maintenance Fees and
Other"  includes the cost of  maintenance  support as well as royalties  paid to
independent software authors, amortization of purchased and internally developed
software,  the cost of hardware  associated with certain sales of  client/server
products and costs related to operating the computer services division. "Product
Development"   consists  of  engineering  and   development   costs  less  costs
capitalized under FAS86.

2.  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.

      Following are the components of the lease contracts receivable:

                          -----------------------------
                                 September 30,
                          -----------------------------
(Dollars in thousands)      1996      1995      1994
-------------------------------------------------------
Minimum lease
  payments receivable      $86,937   $62,553   $39,001
Less unearned  interest      8,852     6,399     4,177
                          -----------------------------
Net investment in
  sales type leases         78,085    56,154    34,824
Amount due within one
  year                      38,944    23,931    14,813
                          -----------------------------
Amount due after one
  year                     $39,141   $32,223   $20,011
                          =============================

Minimum lease payments receivable during each of the succeeding fiscal years are
as follows:

-------------------------------------------------
Year                       (Dollars in thousands)
-------------------------------------------------
1997                                    $43,424
1998                                     23,283
1999                                     13,817
2000                                      5,598
2001                                        815
                                        --------
                                        $86,937
                                        ========

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  1996  and  1994  had  present  values  of
$15,849,000 and $6,376,000,  respectively.  No lease contract  receivables  were
sold during 1995. The  uncollected  present value of receivables  that have been
sold was approximately $17,842,000,  $4,050,000, and $6,950,000 at September 30,
1996, 1995 and 1994, respectively.

3.  Product Acquisitions

In April 1994,  the Company  acquired the net assets of Sysnet,  a.s.,  an Oslo,
Norway-based  provider of system  administration  software  for UNIX systems and
other distributed  client/server  systems, for $4.1 million in cash plus maximum
potential  additional  consideration  of $1.4 million based upon future results.
Payment terms  included an initial  payment of $3.0 million in cash with another
$1.1 million to be paid in four annual  installments  of $275,000 which began in
April 1995. (See Note 5.)

      The  transaction  was  accounted  for using  the  purchase  method  and an
independent  appraisal  was  performed  of all  assets  acquired.  As a  result,
$3,251,000  or  approximately  78% of the  purchase  price was  written off as a
one-time  charge  related to purchased  research and  development.  Revenues and
expenses of Sysnet prior to the acquisition  were  insignificant.  The Company's
consolidated  financial  statements  include  the results of  operations  of the
acquired entity subsequent to the purchase date.


                                       15
<PAGE>

4.  Income Taxes

Pretax income consists of the following:

                        -------------------------------
                            Years Ended September 30,
                        -------------------------------
(Dollars in thousands)      1996      1995       1994
-------------------------------------------------------
Domestic                  $13,388   $ 9,944    $ 5,675
Foreign                    11,667    10,004      5,841
                        -------------------------------
                          $25,055   $19,948    $11,516
                        ===============================

The provision for taxes on income consists of the following:

                        -------------------------------
                            Years Ended September 30,
                        -------------------------------
(Dollars  in thousands)    1996       1995      1994
-------------------------------------------------------
Federal
  Current                 $4,756    $1,884      $ 672
  Deferred                (1,141)     (293)      (850)
                        -------------------------------
                           3,615     1,591       (178)
State
  Current                  1,013     1,075        899
  Deferred                  (322)     (516)      (314)
                        -------------------------------
                             691       559        585
Foreign
  Current                  2,880     4,001      3,116
  Deferred                  (171)     (151)        47
                        -------------------------------
                           2,709     3,850      3,163
                        -------------------------------
                          $7,015    $6,000     $3,570
                        ===============================


No  provision  for  residual  federal  taxes  has  been  made  on  approximately
$42,000,000  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.

       The  provision  for taxes on income  differs from the amount  computed by
applying  the  statutory  tax  rate of 35% for 1996 and 1995 and 34% for 1994 to
income before taxes as follows:

                             --------------------------
                               Years Ended September 30,
                             --------------------------
                               1996     1995    1994
                             --------------------------
Computed expected
   tax provision              35.0%    35.0%   34.0%
State income tax, net
   of federal benefit          1.8%     1.4%    3.4%
Permanently invested
   earnings of foreign                 
   subsidiaries, net          
   of foreign income taxes    (5.9%)   (8.0%)  (5.4%)
Goodwill  amortization and
   other permanent items       0.4%     0.5%    0.5%
Research & development        
   credit                     (0.6%)   (2.3%)  (1.5%)
Net change in valuation
   allowance                  (2.0%)    3.7%     --
Other                         (0.7%)   (0.3%)    --
                             --------------------------
                              28.0%    30.0%   31.0%
                             ==========================


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:

                             -------------------------
                                    September 30,
                             -------------------------
(Dollars in thousands)        1996      1995     1994
------------------------------------------------------
Deferred Tax Assets:
 Net operating loss         
   carryforwards            $ 2,513  $ 1,791   $ 1,218
 Foreign tax credit
   carryforwards                 29       17       237
 Research credit                               
   carryforwards                 52      898     3,266
 AMT credit carryforwards       --       650       531
 Deferred maintenance   
   revenue                   11,307    9,564     7,395
 Accrued expenses             2,134    1,694     1,251
 Bad debt allowance             563      520       533
 Other                          594      506       194
                            ---------------------------
    Total gross deferred     
      tax asset              17,192   15,640    14,625
Less valuation allowance      1,340    1,946     3,946
                            ---------------------------
    Total deferred tax       
      asset                  15,852   13,694    10,679
                            ---------------------------
Deferred Tax Liabilities:
 Unrealized gain on
   marketable securities       (255)     (98)     (123)
 Software capitalization,    
   net                       (3,065)  (2,943)   (2,870)
 Other                         (346)     --       (443)
                            ---------------------------
    Total deferred tax       
      liability              (3,666)  (3,041)   (3,436) 
                            ---------------------------
Net deferred tax asset      $12,186  $10,653    $7,243
                            ===========================

The net valuation  allowance decreased $606,000 from 1995 to 1996 as a result of
reversing  allowances for capital losses carryforwards and foreign net operating
losses.  The effect of this  decrease is reflected in the  effective  income tax
rate. The net valuation  allowance  decreased  $2,000,000 from 1994 to 1995 as a
result of reversing the allowance of $2,782,000  for foreign tax credits.  Since
these  credits were  attributable  to stock option  deductions,  the benefit was
credited to paid-in  capital and does not affect the effective  income tax rate.
This reversal was  partially  offset by an addition of $782,000 to the allowance
for  carryforwards of capital losses and foreign net operating  losses.  None of
the allowance at September 30, 1996 is attributable to stock option  deductions.
Management  believes  future  taxable  income will be  sufficient to realize the
deferred tax benefit of the net deferred tax asset.

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, 1996 are as follows:

----------------------------------------------
Year                    (Dollars in thousands)
----------------------------------------------
1997                                   $7,742
1998                                    6,643
1999                                    5,140
2000                                    2,729
2001                                      814
Thereafter                              2,266
                                    ----------
                                      $25,334
                                    ==========



                                       16
<PAGE>

Total rent  expense  under  operating  leases  was  $7,760,000,  $7,700,000  and
$5,800,000, for 1996, 1995, and 1994, respectively.

Capital Leases

The Company leases certain  computer  equipment under long-term  capital leases.
Capitalized costs of $13,745,000,  $11,343,000, and $11,235,000, are included in
equipment,  furniture and leasehold improvements at September 30, 1996, 1995 and
1994,   respectively.   Accumulated   depreciation   amounted  to   $11,131,000,
$9,944,000, and $8,254,000, at September 30, 1996, 1995 and 1994, 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, 1996:

-------------------------------------------------------
Year                             (Dollars in thousands)
-------------------------------------------------------
1997                                            $1,150
1998                                               653
1999                                               593
2000                                               582
2001                                               611
                                             ----------
Total minimum lease payments                     3,589
Less amount representing interest                  508
                                             ----------
Present value of future minimum lease            
   payments                                      3,081
Amount due within one year                         961
                                             ----------
Amount due after one year                     $  2,120
                                             ==========

Notes Payable

The Company  incurred a note payable as a result of the  acquisition  in 1994 as
described in Note 3. The noninterest bearing  obligation,  net of discount based
on an imputed interest rate of 8.25%, had a balance of $492,000 at September 30,
1996. The Company has an equipment note at 8.25% which had a balance of $170,000
at September 30, 1996. The notes payable are due as follows:

------------------------------------------------
Year                     (Dollars in thousands)
------------------------------------------------
1997                                      $ 293
1998                                        319
1999                                         50
                                      ----------
Total notes payable                         662
Amount due within one year                  293
                                      ----------
Amount due after one year                 $ 369
                                      ==========


Total interest  expense  related to capital lease  obligations and notes payable
was $223,000, $438,000, and $655,000 in 1996, 1995 and 1994, respectively.

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, 1996 and 1995,
there were outstanding balances of $990,000 and $400,000, respectively. Interest
rates on these lines of credit range from 1.63% to 1.93% per annum

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.


6.  Common Stock

Stock option plans

In October 1995, the Board of Directors  adopted the 1995 Stock Option Plan (the
1995 plan).  The 1995 plan, as amended,  authorized the grant of up to 1,125,000
shares of the Company's  common stock to key employees  and  consultants  of the
Company.  The 1995 plan also authorized the transfer of the remaining  available
shares of the  expired  1986 plan (as  described  below) to the 1995  plan.  The
exercise  price is 100% of the fair  market  value of the stock on the date such
options are granted.

In November 1993, the Board of Directors adopted the 1993 Nonemployee Directors'
Stock Option Plan (the 1993 plan).  The 1993 plan,  as amended,  authorized  the
grant of up to  168,750  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.

Under the terms of the 1986 Incentive  Stock Option Plan (1986 ISO), as amended,
and the 1986  Supplemental  Stock Option Plan (the 1986 plan),  as amended,  the
Company may grant  options to purchase up to 7,965,000  shares of the  Company's
common stock to key  employees  and  directors of the Company.  The option price
must be at least  100% of the  market  value at the date of grant in the case of
the 1986 ISO plan and at least 85% of the  market  value at the date of grant in
the case of the  supplemental  plan. The 1986 plan and 1986 ISO 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 vest at a rate
of twenty to  twenty-five  percent per year,  or in the case of some  employees,
vesting occurs quarterly at the same annual rate.



                                       17
<PAGE>

The number of options exercisable under all plans was 2,369,799,  2,086,124, and
1,833,092 at September 30, 1996, 1995 and 1994, respectively.

The Company  accounts for stock options in  accordance  with APB Opinion No. 25,
"Accounting  for Stock Issued to Employees."  The Company intends to continue to
apply APB No. 25 for  purposes  of  determining  net income and to adopt the pro
forma  disclosure  requirements  under  SFAS 123.  "Accounting  for Stock  Based
Compensation," for fiscal 1997.

Employee Stock Purchase Plan

The  Company  adopted an Employee  Stock  Purchase  Plan and,  as  amended,  has
reserved an aggregate total of 1,940,625 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.  At September 30, 1996 there were 153,510  shares  available for
future purchases of which 70,346 were committed to be issued in October 1996.

Stock Incentive Plan

In April  1988,  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.  The Board has
reserved  134,438  shares for issuance  under the plan.  At September  30, 1996,
there were 11,262 shares available for future awards.



                                       18
<PAGE>

<TABLE>

The following table summarizes  activity of the stock option plans for the three
years ended September 30, 1996:

<CAPTION>
                                                                         Outstanding Options
                                                          --------------------------------------------------
                                              Options                        Potential                   
                                           Available for                     Aggregate         Price    
                                            Future Grant      Number         Proceeds        Per Share 
                                        --------------------------------------------------------------------
<S>                                         <C>              <C>            <C>            <C>        
Balance, September 30, 1993                 1,090,122        3,760,715      $14,194,314    $ 2.30 - $ 8.00
Authorized increase                           168,750           --              --                --
  Options granted                            (941,288)         941,288        7,026,663      6.97 -   8.26
  Options exercised                            --             (983,772)      (2,873,848)     2.30 -   6.63
  Options canceled                            205,438         (205,438)      (1,033,020)     2.74 -   8.00
                                        --------------------------------------------------------------------
Balance, September 30, 1994                   523,022        3,512,793       17,314,109      2.30 -   8.26
Authorized increase                         1,350,000           --              --                --
  Options granted                          (1,207,125)       1,207,125        13,486,605     9.30 -  13.47
  Options exercised                            --             (486,137)       (1,906,868)    2.30 -   8.26
  Options canceled                            115,068         (115,068)         (761,563)    2.74 -  13.33
                                        --------------------------------------------------------------------
Balance, September 30, 1995                   780,965       4,118,713         28,132,283     2.74 -  13.47
Authorized increase                         1,125,000           --              --                --
  Options granted                            (930,488)         930,488        14,838,361    14.67 -  16.83
  Options exercised                            --             (620,682)       (2,888,584)    2.74 -  13.47
  Options canceled                             92,136          (92,136)         (819,734)    5.04 -  14.67
------------------------------------------------------------------------------------------------------------
Balance, September 30, 1996                 1,067,613        4,336,383       $39,262,326   $ 2.74 - $16.83
============================================================================================================

</TABLE>


                                       19
<PAGE>

7.    Foreign Operations

The following table summarizes  selected financial  information of the Company's
operations by geographic location:

                     -----------------------------------
                           Years Ended September 30, 
                     -----------------------------------
(Dollars in
thousands)              1996        1995        1994
--------------------------------------------------------
Revenues:
  United States and
      Canada          $ 61,140    $ 56,727    $ 54,432
  Europe                82,817      74,144      60,944
  Other                 23,221      23,496      16,420
                     -----------------------------------
Consolidated         $ 167,178    $154,367    $131,796
                     -----------------------------------

Operating income:
  United States and
      Canada         $   8,525    $  4,750    $  2,039
  Europe                 9,171       8,044       4,587
  Other                  1,418       3,250       2,887
                     -----------------------------------
Consolidated         $  19,114    $ 16,044    $  9,513
                     -----------------------------------

Identifiable assets:
  United States and
      Canada         $ 109,387    $ 87,403    $ 76,190
  Europe                96,338      77,711      59,787
  Other                 11,477       8,207       4,562
  Eliminations         (10,138)     (9,413)     (8,913)
                     -----------------------------------
Consolidated         $ 207,064    $163,908    $131,626
                     ===================================

Included in operating income but excluded from revenues are royalties charged to
international  operations by domestic  operations which aggregated  $19,036,000,
$17,550,000 and $15,136,000 in 1996, 1995, and 1994, respectively.


8. Events Subsequent to Auditors' Report

Stock split

On November 7, 1996, the Company's Board of Directors authorized a 3-for-2 split
of common stock  payable on December 10, 1996, to  shareholders  of record as of
November 18, 1996. The stock split is effected in the form of a stock  dividend.
The  stated  par value of each  share  remained  $0.001.  A total of $6,000  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.

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 November 30, 1996 was 473. 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 and 1996. 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.

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,  1996,  1995 and 1994,  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  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,  the financial  statements  referred to above present fairly, in
all material respects,  the consolidated  financial position of Boole & Babbage,
Inc. at September 30, 1996, 1995 and 1994, 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 25, 1996



                                       20