<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C.  20549
                                    FORM 10-K

[X]    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
       ACT OF 1934 [FEE REQUIRED]
       For the Fiscal Year Ended December 31, 1996

[  ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
       EXCHANGE ACT OF 1934
       For the transaction period from _______________ to ______________.

       Commission File Number:  0-21992

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

           Minnesota                               41-1437794
(State or other jurisdiction of     (I.R.S. Employer Identification Number)
incorporation or organization)

                                    Suite 450
                            7900 International Drive
                          Minneapolis, Minnesota 55425
                     (Address of principal executive office)
                                 (612) 851-1500
              (Registrant's telephone number, including area code)

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

Securities registered pursuant to Section 12(g) of the Act:  Common  Stock, $.01
par value

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

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

As of February 28, 1997, the aggregate market value of the registrant's Common
  Stock, $.01 par value, held by nonaffiliates of the registrant was $40,490,000
  (based on the closing sale price of common stock as of February 28, 1997 as
  quoted on the Nasdaq National Market).

As of February 28, 1997,  there were 9,684,104 shares of the registrant's Common
  Stock, $.01 par value, issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

The responses to items 5,6,7 and 8 herein are incorporated by reference to
  certain information in the Company's Annual Report to Shareholders for the
  year ended December 31, 1996.  The responses to items 10, 11, 12 and 13 herein
  are incorporated by reference to certain information in the Company's
  Definitive Proxy Statement for its Annual Meeting of Shareholders to be held
  May 7, 1997.

                                      -1-

<PAGE>

                                   PART I
ITEM 1.  BUSINESS.

GENERAL

     Fourth Shift Corporation (the "Company") is a developer and marketer of
client/server-based application software for industrial planning and management
processes.  The Company's principal product, the Fourth Shift-Registered
Trademark- Manufacturing Software System ("MSS"), is a family of integrated
manufacturing and financial management applications for intermediate-sized sites
of manufacturing and distribution enterprises. The MSS system operates in a
Windows NT open computing environment.  Founded in 1982, the Company
reincorporated in Minnesota in 1984.  In 1985, the Company introduced the first
modules of the MSS product line.

     The period from 1992 through 1996 was a period of steady growth for the
Company.  The Company both expanded the range of services it offers with the MSS
product line and the geography it covers.  From 1992 to 1993, revenue increased
45%, as the Company introduced six new modules of MSS, began selling third party
software that is compatible with MSS and established a new subsidiary in the
People's Republic of China.  Revenue increased approximately 15% in 1994 as the
Company worked to expand sales both domestically and internationally, instituted
new service programs, introduced CD-Rom based training aids, and introduced the
release of MSS that combined domestic and international versions of the MSS
product into a single version with increased functionality. Importantly, the
Company also began the design of its next generation product in 1994--the Fourth
Shift OBJECTS Enterprise Software.  Total revenue continued to expand during
1995, increasing 24% over 1994,  as the breadth of the MSS product line
continued to expand and the Company's sales continued to grow internationally in
Asia and the Pacific Rim.  The Company introduced a graphical user interface
providing full Windows operability and a release of a version of MSS for the
Windows NT operating system in 1995, together with new modules designed to
provide sales order processing and cash management functions.  Revenues from the
Company's subsidiary in the People's Republic of China increased more than 175%
in 1995 as a result of increased market penetration in the People's Republic of
China and further expansion into Singapore and Malaysia.

     The Company's operations during the period from 1993 to 1995 were affected
by attention devoted to a product line, the Just In Time Enterprise System
("JIT"), that was acquired in December 1992 and sold in December 1995.  JIT is a
series of information management software modules for industrial companies
involved in aerospace and defense and contract manufacturing which operate in
the UNIX/Oracle environment.  Acquired from a start-up company in Texas, the
Company devoted substantial resources, including some of the proceeds from the
initial public offering of its common stock completed in July 1993, to improving
the JIT code and instituting sales and development procedures designed to
improve the profitability of the product line.  Because of its drain on Company
resources, the product line (which was developed and marketed through a wholly-
owned subsidiary) was sold to the Interactive Group, Inc. ("IGI"). The JIT
operations are included in the Company's financial statements as discontinued
operations.

     Total revenue from continuing operations expanded during 1996, both
domestically and internationally, increasing 32% over 1995.  North American
revenue grew 25% over 1995 while international revenue grew by 51%.  The North
American growth was achieved through sales and marketing expansion and increased
product and service offerings.  MSS product enhancements (introduced in late-
1995) included the development of a graphical user interface providing full
Windows operability and a release of a version of MSS for the Windows NT
operating system.  The Company continued to expand its international operations
in 1996.   Revenues from the Company's subsidiary in the People's Republic of
China increased 70% over 1995 as a result of increased market penetration in
China and further expansion into southeast Asia.  The business in Europe showed
renewed growth in 1996, with revenues increasing by 32% over 1995.  This was
accomplished through expanded sales and marketing efforts, particularly in
Continental Europe.  In addition, in September 1996 the Company opened
subsidiary offices in Johannesburg and Port Elizabeth South Africa, increasing
the Company's global presence.

                                   -2-

<PAGE>

     In 1995, the Company significantly expanded its investment in the
development of its next generation product.  These efforts continued to grow
in 1996, taking shape as Fourth Shift OBJECTS Enterprise Software-Registered
Trademark- (OBJECTS). OBJECTS is designed as a communications-centric,
object-oriented enterprise software system enabling multi-site manufacturing
and distribution companies to globally interconnect via local-area-network,
wide-area-network, dial-up line, the internet, or wireless.  OBJECTS is
currently in beta testing and is expected to be shipped to customers in 1997.
(See additional discussion under Products-OBJECTS Enterprise Software).

PRODUCTS - MSS

     The Company's principal product, the Fourth Shift-Registered Trademark-
Manufacturing Software System ("MSS"), provides client/server computing in the
DOS/Windows/Windows NT/NetWare open system environments and an integrated
approach to the industrial planning and control processes known as MRP II.  A
customer can combine any number of software modules within this product line to
provide on-line access to real-time information for MRP, bills of material,
capacity requirements planning, master production scheduling and financial
management.  Information is communicated consistently among the various
functional modules of MSS through a common database, facilitating the automatic
updating of common information used by all applications.  Using this system, a
customer manage inventory to significantly reduce carrying costs, manage
material ordering to limit manufacturing shortages,  manage manufacturing to
reduce finished goods surpluses or shortages, immediately access information
necessary to communicate customer order scheduling on-line, monitor overall
manufacturing and problem areas to maximize efficiency and quickly produce
financial reports that are consistent with manufacturing records.

     MSS is a family of more than 40 integrated manufacturing, accounting, sales
and information management applications and third party products designed to
support decision-making in an industrial company.  MSS is designed for and
primarily sold to intermediate-sized manufacturing and distribution companies
and "stand-alone" sites of larger companies, that are in need of a broadly
functional but easily implemented, off-the-shelf application system for up to
and beyond 100 users.  MSS is sold with a shrink-wrap license in standardized
modules with extensive documentation and training aids.  MSS is modular, so
users can begin with fundamental applications and add more specialized
functionality as their requirements evolve and grow.

     In 1994, the Company introduced Mentor-TM-, a self-paced interactive CD-ROM
training tool.  This product is a critical component of the Company's
performance support strategy which supplements standard training classes while
serving as an update class for the occasional user.  Mentor-TM- provides users
with constant interaction through hands-on exercises and includes over 200 job
function-oriented lessons covering manufacturing, finance, order processing and
system administration.

     The Company believes that the following features of MSS allow it to compete
successfully with other LAN-based products: (i) MSS is an integrated and
flexible system designed to allow fast, multi-user access to data; (ii) MSS
includes over 40 integrated application modules and third party products that
have been refined to provide broad, deep functionality in MRP II applications,
including international features such as multiple currency and language
translation capabilities; (iii) MSS applications generally require fewer
keystrokes and screens per task than comparable products; (iv) MSS can be
rapidly and easily implemented through a standardized process using extensive
training aids, both interactive CD-ROM and classroom; (v) MSS is easy to use and
offers seamless integration with off-the-shelf word processing, electronic mail,
spreadsheet and other applications, (vi) MSS is offered with a comprehensive
support program with local, national and international support organizations,
and (vii) MSS is designed to encourage business process reengineering and
efficiency in its customers' manufacturing processes.

     MSS is designed for use with the DOS/Windows/Windows NT/NetWare operating
environments on both LANs and wide area networks and supports industry standard
networking protocols.  The integrated system of MSS modules allows a customer to
communicate consistent priorities through a common database and on-line
inquiries and updates, establishing a framework in which an entire organization
can work together.  MSS also provides a means to interface MSS with third-party
applications through the MSS connectivity modules.  The Company licenses a
number of third-party software products that have been designed to operate with
MSS.

                                   -3-

<PAGE>

     The following is a list of current MSS product line offerings:

<TABLE>
<CAPTION>
MANUFACTURING MODULES                   FINANCIAL MODULES                     THIRD-PARTY PRODUCTS
---------------------                   -----------------                     --------------------
<S>                                     <C>                                   <C>
Approved Vendor Sourcing                Accounts Payable                      Data Net, data collection system VisiBar,
Bills of Material                       Accounts Receivable & Invoicing       collection system
Co-Products Manufacturing               General Ledger                        Integrated EDI System
Inventory Control                       Payroll  Connection                   Finite Capacity Planning
Lot Trace/Serialization                 Product Costing                       Rules-Based Configurator
Management Reports                      General Ledger Restructuring          Cash Collection & Management
Manufacturing Order Management                  Package                       Cycle Counting/Inventory
Material Management/Analysis            Multi-Currency Management                         Management
Material Requirements Planning (MRP)    Cash Management                       Manufacturing Variance Analysis
Operations Performance                                                        Message Analysis & Reporting
Purchasing                                                                    Formula Management
Repetitive Manufacturing                SYSTEM-WIDE MODULES                   Remote Communications
Shop Floor Tracking and Reporting       -------------------                   Customer Service System
                                        Configuration                         Paperless Document Management
                                        Executive Information System(EIS)     Electronic Business Forms
SALES ACTIVITY MODULES                  System Control                        Automated Timekeeping
----------------------                  Framework for Windows                 Quote Management
Sales Analysis                                                                Engineering Change Order
Rules Based Pricing                     CIM CONNECTIVITY MODULES                           Management
Custom Products                         ------------------------
Sales Order Processing                  Customizer
Shipping                                Data Export
                                        Data Import
</TABLE>


     The MANUFACTURING MODULES provide on-line information enabling users to
solve material shortage, excess inventory and manufacturing efficiency
problems. The Inventory Control Module, which maintains and provides inventory
status information, is the basic building block for all other manufacturing
applications.  It works with the MRP Module, which calculates the optimum
manufacturing plan based on continual updates from other modules, with the Bills
of Material Module, which maintains information relating to the materials,
resources and tools necessary to manufacture each product, and the Manufacturing
Order Management Module, which verifies component availability, picks materials
and calculates material usage variances.

     The function of these modules can be further enhanced for use in specific
manufacturing environments with the Repetitive Manufacturing Module, the Co-
Products Manufacturing Module or the Custom Products Module.  In addition, the
Purchasing Module helps buyers manage vendor relationships, the Lot
Trace/Serialization Module provides detailed material and finished goods
tracking and the Material Management/Analysis Module allows for simulations and
engineering-change control.

     The SALES ACTIVITY MODULES address customer service issues.  The Sales
Order Processing Module gives customer service representatives on-line support
for entering and tracking orders.  Representatives can act on credit problems
and reschedule orders to meet changing delivery dates.  The Rules Based Pricing
Module further extends order entry functionality to allow the user to create
pricing models for individual customers or buying groups.  Using the Shipping
Module, users can prepare, record and track shipping information to improve shop
room efficiency, monitor the shipping process and create shipping lists, labels
and airbills.  The Custom Products Module helps plan and control make-to-order
and engineer-to-order products enabling users to estimate and track job costs,
control inventory, provide quotes and configure products on-line.

     The FINANCIAL MODULES are tightly integrated with the manufacturing and
sales activity modules so that financial transactions are automatically created
as a result of business activity.  The General Ledger Module provides
comprehensive management of a company's financial position and generates
financial reports.  The Accounts Payable Module handles processing of supplier
invoices from invoice entry to check printing and reconciliation.  The Accounts
Receivable & Invoicing Module processes customer invoices and payments, tracks
current and aged receivables, handles service charges and helps resolve billing
questions.  The Product Costing Module helps ensure that costs are accurately
developed and maintained, and contains flexible tools for analysis and

                                   -4-

<PAGE>

simulation.  The Multi-Currency Management Module offers exchange rate tracking
and allows transactions to be stated in the trading partners' currency.  The
Cash Management Module allows customers to track cash transactions and banking
activity while providing period-end reconciliations of cash activity.

     The SYSTEM-WIDE MODULES extend and enhance the manufacturing, sales
activity and financial modules.  The Configuration Module and System Controls
Modules are used to tailor the MSS modules to each customer's needs, and
contains key features such as audit trails, multi-language support, VAT tax,
system-wide security and Novel or Windows NT support.  The EIS Module provides
decision makers a key performance measurement tool that displays a quick
overview of the state of the entire business.  The Framework for Windows Module
allows Open Database Connectivity ("ODBC") access to the MSS database via ODBC
enabled applications, i.e., MICROSOFT CORPORATION'S OFFICE SUITE OF PRODUCTS.
In addition, the Framework for Windows Module also provides graphical user
interface support to the core MSS Modules.

     The CIM CONNECTIVITY MODULES provide the capability to interface third-
party applications, either commercial applications or user-developed
applications, to the MSS database.  The CIM Customizer Module allows the user to
extend the MSS applications by imbedding other application software into the
processing flow of the MSS system.

     The typical customer licenses between $40,000 and $75,000 of MSS software.
MSS license revenue totaled $22,947,000 for the year ended December 31, 1996, or
approximately 47% of the overall revenue of the Company.

     THIRD-PARTY PRODUCTS.  The Company also licenses, implements and supports
third-party software and hardware products which have been integrated to
function with the MSS software.  These products extend the functionality of
Fourth Shift's software and provide a broader solution to Fourth Shift clients.
At December 31, 1996, the Company had 12 agreements with various third-party
software and hardware vendors to sell third-party products.  Third-party
products revenue totaled $2,541,000 during the year ended December 31, 1996.

PRODUCTS - OBJECTS ENTERPRISE SOFTWARE

     Fourth Shift OBJECTS Enterprise Software will be the industry's first
communications-centric, extensible and open enterprise software system designed
to meet the growing needs of decentralized manufacturing and distribution
enterprises worldwide.  It will provide the benefits of autonomous site
operations and the ability to consolidate information at the enterprise level.
OBJECTS will extend the functionality of MSS by providing real-time information
to operations around the globe by way of the Internet.  In addition, OBJECTS
message bus architecture will allow it to operate with in-place legacy systems,
enabling the software to be implemented into the enterprise in an evolutionary
manner without replacing all existing systems at once.

     Based on Microsoft Windows NT platform, OBJECTS will incorporate TIBCO's
industry leading TIB  (The Information Bus) publish and subscribe middleware as
the messaging backbone for enterprise-wide communications.  The unique publish-
subscribe middleware enables event-driven information exchange among distributed
applications throughout the enterprise, unifying all business processes.  Using
a subject-based addressing scheme, publish-subscribe communications technology
enables users to receive information they need without requesting it and without
knowledge of its location.  The Information Bus has been the de facto standard
for information integration in the data-intensive financial services market for
more than a decade.

     The first components of OBJECTS are currently in beta testing and the
Company is planning for  a general release in 1997.

SERVICES

     The Company offers a broad range of services for its MSS product line,
including a comprehensive customer support program, implementation consulting,
network-related technical consulting, custom software

                                   -5-

<PAGE>


development and extensive training programs.  Such services constituted 48%,
49%, and 46% of the Company's revenue from continuing operations during 1996,
1995, and 1994, respectively.

     CUSTOMER SUPPORT PROGRAM. The Company offers a standardized customer
support program ("CSP") for MSS.  CSP is a comprehensive, fee-based program
designed to help customers obtain the maximum benefit from their business
management software.  CSP subscribers pay an annual fee equal to 15% of the
current list price of the modules licensed.  Approximately 80% of the currently
active users of MSS products subscribe to CSP.  The Company believes CSP is a
stable and reliable source of revenue which the Company intends to continue to
emphasize to its new and existing customer base.

     Included among the materials and services furnished through CSP are new
product releases, telephone technical and application support, a software tool
kit, an electronic bulletin board, and newsletter and application notes.
Updated and enhanced versions of the Company's software products are provided to
CSP subscribers as part of the annual subscription fee.  Telephone support calls
are handled by manufacturing, financial and technical experts in the United
States, United Kingdom and Peoples Republic of China.

     PROFESSIONAL SERVICES.  The Company offers implementation consulting and
training for use of its MSS products, as well as custom software development
services.  Implementation consulting services, available on a fee basis, include
implementation planning, project management and specialized custom training.
The Company offers a special implementation workshop designed to ease the MSS
implementation process, a readiness audit to identify problems prior to using
the system, business reviews to maximize the utility of the system once
installed and several benchmarking tests to measure performance against
competitors.

     The Company offers a series of classroom and individual on-site training
options.  Training includes classroom instruction at the Company's offices in
the United States, United Kingdom and Peoples Republic of China and at
authorized training centers or at customer sites.  Customers may also purchase
Mentor-TM-, the self-paced interactive CD-Rom training module, to supplement
standard training classes while serving as an update class for the occasional
user.  The Company continues to expand and develop its training offerings.

     The Company also offers, on a limited basis, custom software development
services to meet specific customer requirements, and to integrate MSS with a
customer's existing computer systems and/or third-party software providers.

MARKETS

     MSS is licensed primarily to mid-sized manufacturing companies, or business
units of larger manufacturing companies, that generate more than $5 million of
revenue annually and require up to approximately 100 simultaneous users.  In
addition, MSS is licensed to manufacturing sites of Fortune 500 companies.  MSS
is used by discrete manufacturers, which assemble or machine parts into finished
products, and by process manufacturers, which mix, separate and otherwise
combine or control ingredients to create finished products.  It has broad
application and use in the electronics, industrial, machinery, medical device,
transportation, metal fabrication, food processing and chemical industries.  MSS
is currently licensed for use in over 2,600 customer sites worldwide.

SALES AND MARKETING

     The Company sells its products and services through a direct sales force
and value-added resellers in major markets and through sales agents in secondary
markets.  The Company maintains regional sales offices located in San Diego, Los
Angeles, San Jose and San Ramon, California; Atlanta, Georgia;  Boston,
Massachusetts; Chicago, Illinois; Cleveland, Ohio; Dallas, Texas; and
Piscataway, New Jersey, in addition to its headquarters located in Minneapolis,
Minnesota.  The Company sells directly through wholly owned subsidiaries in the
United Kingdom, Mexico, the People's Republic of China, South Africa, Malaysia,
Singapore; and through distributors in Europe, Africa, the Middle-East, and
Asia.  During 1996, approximately 87% of the Company's software license revenue
from continuing operations was generated through direct sales personnel and 13%
was generated through resellers
                                   -6-

<PAGE>


and agents.  Of such software license revenues, approximately 61% was
generated in North America and 39% was generated abroad. See footnote 11
included in the Company's 1996 Annual Report to Shareholders for information
as to revenue and operating income from continuing operations generated by
each of the significant geographic areas in which the Company does business.

     The Company's direct sales personnel are compensated on a salary plus
commission basis with commissions paid monthly, in contrast to the quarterly
commission plans often present in the software industry.  This monthly
commission plan assists the Company in managing the level of its sales activity
throughout the quarter.  The Company's reseller agreements generally provide
that sales will be made by authorized resellers on a nonexclusive basis from
offices within a designated territory.  The agreements obligate the Company to
license to the end-user through a value added reseller (VAR) at specified prices
and to provide training to each reseller.  The Company also maintains a staff of
systems consultants who offer pre- and post-sales support to the sales force and
to customers.

     The Company markets its products through advertising campaigns in national
trade periodicals, direct mail and telemarketing.  These efforts are
supplemented by listings in relevant directories and trade show and conference
appearances.  The Company also receives leads from its hardware and services
vendors, customers and various accounting and consulting firms.  To encourage
familiarity with its products by the next generation of business executives, the
Company has established a program through which it licenses its software to
educational institutions at a substantial discount.  Currently over 115
institutions of higher education have licensed MSS systems under this program.

     Sales cycles for the Company's products vary substantially based on the
degree of integration, consulting and training required and also on the status
of the customer's implementation of a hardware system.  The MSS sales cycle is
usually four to six months from the time an initial sales presentation is made
to a customer until the software is delivered and licensed.  MSS products are
typically shipped within 48 hours of receipt of order.  Generally 20-30% of the
price is paid when the order is made and the balance is due 30 days after
delivery of the product.

STRATEGIC ARRANGEMENTS

     Part of the Company's sales and marketing strategy is to build and develop
relationships with companies that the Company believes will play an important
role in the successful marketing of the Company's products.  These companies
include system software suppliers (such as Microsoft Corporation and TIBCO,
Inc.), hardware vendors (such as Compaq Computer Corporation and Tricord
Systems, Inc.) and database companies (such as Micro Data Base Systems, Inc.,
Microsoft Corporation and Oracle Corporation).  The Company uses products from
system software suppliers to develop the Company's application software
products.  The suppliers also serve as technical references for future
prospects.  Under arrangements with hardware vendors, the Company is authorized
to resell certain products in conjunction with the sale of the Company's
products.  Arrangements with database companies allow the Company to sublicense
database management systems with its products and to provide fee-based support
for licensees.

PRODUCT DEVELOPMENT

     The Company intends to continue to invest heavily in research and
development.  During the years ended December 31, 1996, 1995, and 1994, the
Company recorded research and development expenses from continuing operations of
$8,674,000, $5,732,000 and $2,817,000, respectively.  In addition, beginning in
third quarter of 1996, the Company began to capitalize development costs related
to OBJECTS.  In 1996 the Company capitalized $1,820,000 related to the
development of OBJECTS functionality and related modules that had reached
technological feasibility. During 1996, the Company continued to develop and
enhance the MSS product while investing significant resources in the development
of OBJECTS.


                                   -7-

<PAGE>



     The computer industry is characterized by rapid technological advances,
changes in customer requirements and frequent new product introductions and
enhancements.  The Company's future success will depend upon its ability to
enhance its current products and to develop and introduce new products that keep
pace with technological developments, respond to evolving customer requirements
and achieve market acceptance.  In particular, the Company believes it must
continue to respond quickly to users' needs for broad functionality and
multiplatform support and to advances in hardware and operating systems.  Any
failure by the Company to anticipate or respond adequately to technological
developments and customer requirements, or any significant delays in product
development or introduction, could result in a loss of competitiveness and
revenues.  In the past, the Company has experienced delays in the introduction
of new products and product enhancements.  These development efforts are
dependent upon the availability of adequate cash to fund them.  See "Item 7.
Management's Discussion of Financial Position and Results of Operations."  There
can be no assurance that the Company will be successful in developing and
marketing new products or product enhancements on a timely basis or that the
Company will not experience significant delays in the future, which could have a
material adverse effect on the Company's results of operations.  In addition,
there can be no assurance that new products or product enhancements developed by
the Company will achieve market  acceptance.

COMPETITION

     The computer industry is intensely competitive and rapidly changing.  Due
to the flexibility of the Company's products, the Company's competitors range
from providers of high-end industrial application software for use on mainframes
and minicomputers to providers of low-end application software for use on
microcomputers and LANs.  Because of the wide functionality of the Company's
product line, competitors include providers of financial and business
application software as well as industrial and manufacturing resource planning
software.  The Company competes with its competitors generally on the basis of
product features and functions, product architecture, the ability to run on a
variety of industry standard platforms, technical support and other related
services, ease of product integration with third-party application software and
price/performance.  The ability to address thoroughly the requirements for
various forms (discrete, process, etc.) of manufacturing, efficiency of the user
interfaces and commands, computational speed and responsiveness, support for
application integration, extensive training materials, and established local
support and training are key competitive factors with respect to MSS.

     MSS currently competes primarily in the market for microcomputer-based MRP
II software.  The Company's primary competitors in this market include QAD,
Inc., Symix Systems, Inc., Micro MRP Visual and Dataworks.   In addition, there
are a number of smaller, regional companies that produce MRP II software for
microcomputers.  The Company believes that purchases in this market are based
primarily on hardware platform and operating system (DOS/Windows/Windows
NT/NetWare for LANs versus UNIX systems), functionality, application integration
and industry reviews.  The Company believes that the MSS product line competes
favorably in the portion of this market intended for DOS/Windows/Windows
NT/NetWare operating systems and LANs.

     The Company's products compete indirectly with providers of financial and
accounting software for microcomputers and other specialized applications in the
markets it serves.  Competition from this market arises primarily when a
customer is seeking only a very narrow solution and the Company believes its
products compete favorably with such products on the basis of broad
functionality and complete vertical integration.

     Many of the Company's competitors have greater financial, marketing and
technological resources than the Company.  There can be no assurance that other
companies have not developed or marketed or will not develop or market software
products that are superior to those of the Company, that are offered at
substantially lower prices than those of the Company or that have achieved or
will achieve greater market acceptance than those of the Company.



                                   -8-

<PAGE>



INTELLECTUAL PROPERTY

     The Company has registered its "FOURTH SHIFT" , "FOURTH SHIFT OBJECTS
ENTERPRISE SOFTWARE", "MSS", and "MENTOR" trademark for software services and
products with the United States Patent and Trademark Office and with the
equivalent offices of most foreign countries in which it does business.

     The Company regards its software as proprietary in that title to and
ownership of the software reside exclusively with the Company.  The Company
attempts to protect its rights with a combination of trademark, copyright,
employee and third-party nondisclosure agreements.  Despite these precautions,
it may be possible for unauthorized parties to copy or reverse-engineer portions
of the Company's products.  While the Company's competitive position could
conceivably be threatened by its inability to protect its proprietary
information, the Company believes that copyright and trademark protection are
less important to the Company's success than other factors such as the
knowledge, ability and experience of the Company's personnel, name recognition
and ongoing product development and support.

     The Company's software products are licensed to end users under a
perpetual, nontransferable, nonexclusive license that stipulates which modules
can be used and how many concurrent users may use them.  The Company relies
primarily on "shrink wrap" licenses for the protection of MSS.  A "shrink wrap"
license agreement is a printed license agreement included in the packaged MSS
software that sets forth the terms and conditions under which the licensee can
use the product, and binds the licensee by its acceptance and license of MSS to
such terms and conditions.  Shrink wrap licenses typically are not signed by the
licensee and therefore may be unenforceable under the laws of certain
jurisdictions.

     As the number of software products in the industry increases and the
functionality of these products further overlaps, the Company believes that
software programs could become increasingly the subject of infringement claims.
Although the Company's products have never been the subject of an infringement
claim, there can be no assurance that third parties will not assert infringement
claims against the Company in the future or that any such assertion will not
require the Company to enter into royalty arrangements or result in costly
litigation.

PRODUCTION

     The principal materials and components used in the Company's software
products include computer media, user manuals and training guides.  The Company
prepares master software disks, user manuals and packaging.  In some cases, the
Company uses third party vendors to duplicate disks containing its software and
to print the Company's user manuals, packaging and related materials.  To date,
the Company has not experienced any material difficulties or delays in the
manufacture and assembly of its products, or material returns due to product
defects.

EMPLOYEES

     As of December 31, 1996, the Company had 483 full-time employees, including
128 in sales and marketing, 134 in software programming and documentation, 144
in customer support services and 77 in finance and administration.  The
Company's employees are not represented by any collective bargaining
organization and the Company has never experienced a work stoppage.  The Company
believes that its relations with its employees are good.

ITEM 2.  PROPERTIES

     The Company's corporate headquarters is located in Minneapolis, Minnesota,
in a leased facility consisting of roughly 58,000 square feet, occupied under a
lease expiring October 31, 1998.  Approximately 11,000 square feet of this space
is subleased to IGI through January 1997. The Company also leases 15,400 square
feet, approximately 8,700 square feet of which is subleased to a third-party, of
space for a second principal office in San Ramon, California pursuant to leases
expiring in June 1997 and August 1999.  The Company leases additional facilities
for domestic operations in San Diego, Los Angeles and San Jose, California;
Atlanta, Georgia; Boston,

                                   -9-

<PAGE>


Massachusetts; Chicago, Illinois; Cleveland, Ohio; Dallas, Texas; Nashua, New
Hampshire and Piscataway, New Jersey.  The Company also leases facilities and
offices for its international operations in London, Mexico City,
Johannesburg, Port Elizabeth, Malaysia, Taiwan, Singapore and in Beijing,
Tianjin, Guangzhou, Nanjing, Shenzhen and Shanghai of the People's Republic
of China.  The Company believes that its existing facilities are adequate to
meet its current needs and that suitable additional or alternative space will
be available as needed to accommodate expansion of corporate operations and
for additional sales offices.  See Note 8 of Notes to Consolidated Financial
Statements for information regarding the Company's lease obligations.

ITEM 3.  LEGAL PROCEEDINGS

     From time to time the Company is involved in litigation relating to claims
arising from its operations in the normal course of business.    As of the date
of this filing, neither the Company nor any of its subsidiaries is a party to
any legal proceedings, the adverse outcome of which, in management's opinion,
would have a material adverse effect on the Company's results of operations or
financial position.

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

Not applicable

EXECUTIVE OFFICERS

Marion Melvin Stuckey, age 58, is the founder of the Company and has been the
Chief Executive Officer and Chairman of the Company since 1982.  Prior to
forming the Company, Mr. Stuckey was an executive officer of Control Data
Corporation ("CDC"), a multinational computer hardware, peripherals and services
company, from 1975 to 1982.  Prior to that Mr. Stuckey served in various sales,
marketing and management positions at IBM from 1960 to 1975.

Jimmie H. Caldwell, age 57, has been President, Chief Operating Officer and a
Director of the Company since 1984.  Prior to that time, Mr. Caldwell served in
various positions at CDC from 1964 to 1984 and held the position of Vice
President of Operations for CDC's Peripheral Products Company when he left to
join the Company.

Allen S. Peterson, age 53, joined the Company in February 1990 as Vice
President, Reseller Sales and moved to Vice President, Sales and Marketing in
May 1991, to Vice President-General Manager of MSS Operations in October 1993,
and to Executive Vice President in 1995.  Prior to joining the Company, Mr.
Peterson was Vice President of Sales and Marketing for Speech Plus, a speech
technology start-up company, from February 1986 to January 1990.  Prior to that
time he worked in various industries, including eleven years at IBM.

David G. Latzke, age 37, has been Vice President and Chief Financial Officer
since April 1994.  Mr. Latzke joined the Company as director of special projects
in April 1993.  From 1982 until April 1993, Mr. Latzke was a manager with the
Audit and Business Advisory Division of Arthur Andersen LLP


                              PART II


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

The information required by Item 5 is incorporated by reference to the
information under the caption "Price Range of Common Stock" of the Company's
Annual Report to Shareholders for the year ended December 31, 1996.


                                   -10-

<PAGE>


ITEM 6.  SELECTED FINANCIAL DATA

The information required by Item 6 is incorporated by reference to the
information under the caption "Selected Consolidated Financial Data"of the
Company's Annual Report to Shareholders for the year ended December 31, 1996.

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

The information required by Item 7 is incorporated by reference to the
information under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations" of the Company's Annual Report to
Shareholders for the year ended December 31, 1996.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following is incorporated by reference to the Company's Annual Report to
Shareholders for the year ended December 31, 1996:

          Report of Independent Public Accountants

          Consolidated Balance Sheets as of December 31, 1996 and 1995

          Consolidated Statements of Operations for the years ended December 31,
          1996, 1995 and 1994

          Consolidated Statements of Shareholders' Equity for the years ended
          December 31, 1996, 1995 and 1994

          Consolidated Statements of Cash Flows for the years ended December 31,
          1996, 1995 and 1994

          Notes to Consolidated Financial Statements


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

Not applicable.


                               PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by Item 10 with respect to executive officers is
included under a separate caption entitled "Executive Officers" in Part I of the
Form 10-K.  The information with respect to directors is incorporated by
reference to the information under the caption "Election of Directors-Nominees"
of the Company's definitive proxy statement for its May 7, 1997 Annual Meeting
of Shareholders.

ITEM 11.  EXECUTIVE COMPENSATION

The information required by Item 11 is incorporated by reference to the
information under the captions "Election of Directors-Director Compensation" and
"Executive Compensation--Summary Compensation Table," " --Stock Options," and
"--Long-Term Incentive Plan Awards" of the Company's definitive proxy statement
for its May 7, 1997 Annual Meeting of Shareholders.


                                   -11-

<PAGE>


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by Item 12 is incorporated by reference to the
information under caption "Security Ownership of Certain Beneficial Owners and
Management" of the Company's definitive proxy statement for its May 7, 1997
Annual Meeting of Shareholders.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Item 13 is incorporated by reference to the
information under the caption "Election of Directors-Director Compensation" of
the Company's definitive proxy statement for its May 7, 1997 Annual Meeting of
Shareholders.


                                 PART IV

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

a.   Financial Statements

     1. See the Financial Statement information contained in Item 8 of this Form
        10-K
     2. Financial Statement Schedules

          No Financial Statement Schedules are required

b.   Reports on Form 8-K:

               None

c.   Exhibits

Exhibit No.  Description
-----------  ------------
   3.1       Restated Articles of Incorporation of the Company, as amended
             (incorporated by reference to Exhibit 4.1 of the Company's 10-Q
             for the quarter ended March 31, 1994)

   3.2       Bylaws of the Company,  as amended (incorporated by reference
             to Exhibit 3.2 to the Company's Form 10-K for the year ended
             December 31, 1994)

   4.1       Form of Certificate for Common Stock (incorporated by reference
             to Exhibit 4.1 of Amendment No. 1 to the Company's Registration
             Statement on Form S-1 filed June 28, 1993 (File No. 33-63012))

  10.1       1989 Stock Option Plan (incorporated by reference to Exhibit 10.4
             of the Company's Registration Statement of Form S-1 filed May 19,
             1993 (File No. 33-63012))

  10.2       Fourth Shift Corporation 1994 Employee Stock Purchase Plan, as
             amended (incorporated by reference to Exhibit 10.5 to the
             Company's 10-K for the year ended December 31, 1994)


                                   -12-

<PAGE>


  10.3       Fourth Shift Corporation 1993 Stock Incentive Plan, as amended
             (incorporated by reference to Exhibit 10.6 to the Company's 10-K
             for the year ended December 31, 1994)

  10.4       Office Lease dated as of December 18, 1992 among the Company and
             International Plaza Joint Venture, as amended (incorporated by
             reference to Exhibit 10.8 of the Company's Registration Statement
             on Form S-1 filed May 19, 1993 (File No. 33-63012))

  10.5       Purchase and Sale Agreement, dated December 15, 1995, between
             Fourth Shift Corporation and Interactive Group, Inc. (incorporated
             by reference to Exhibit 2.1 to the Company's 8-K dated as of
             December 15, 1995)

  10.6       Titanium Runtime Distribution License Agreement dated June 20, 1995
             between Fourth Shift Corporation and Micro Data Base Systems, Inc.
             (incorporated by reference to Exhibit 10.8 to the Company's 10-K
             for the year ended December 31, 1995)

  10.7       Loan and Security Agreement dated as of September 20, 1995 between
             Fourth Shift Corporation and Silicon Valley Bank (incorporated by
             reference to Exhibit 10.9 to the Company's 10-K for the  year
             ended December 31, 1995)

 *10.8       Severance Pay Agreement dated April 16, 1996 between the Company
             and Marion Melvin Stuckey

 *10.9       Severance Pay Agreement dated April 16, 1996 between the Company
             and Jimmie H. Caldwell

 *10.10      Severance Pay Agreement dated April 16, 1996 between the Company
             and Allen S. Peterson

 *10.11      Severance Pay Agreement dated April 16, 1996 between the Company
             and David G. Latzke

  10.12      Amendment No. 1 to Loan and Security Agreement dated as of March
             29, 1996 between Fourth Shift Corporation and Silicon Valley Bank

  10.13      Amendment No. 2 to Loan and Security Agreement dated as of April
             26, 1996 between Fourth Shift Corporation and Silicon Valley Bank

  10.14      Amendment No. 3 to Loan and Security Agreement dated as of
             September 24, 1996 between Fourth Shift Corporation and Silicon
             Valley Bank

  10.15      Amendment No. 4 to Loan and Security Agreement dated as of
             November 6, 1996 between Fourth Shift Corporation and Silicon
             Valley Bank

  10.16      License Agreement dated as of March 30, 1996 between Fourth Shift
             Corporation and Teknekron Software Systems, Inc. (a.k.a. TIBCO)

  11.1       Computation of Earnings Per Share

  13.0       Incorporated pages of the Company's Annual Report to Shareholders


                                   -13-

<PAGE>


  23.1       Consent of Arthur Andersen LLP

  27.0       Financial Data Schedule (For SEC use only)
__________________
*Management contract or compensatory plan.



                                   -14-

<PAGE>


                                SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on March 22, 1997.


                                        Fourth Shift Corporation

                                        By:  /s/ MARION MELVIN STUCKEY
                                           ---------------------------------
                                        Marion Melvin  Stuckey
                                        Chairman and Chief Executive Officer


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

       Name                        Position                          Date
      -----                        --------                          ----

/s/ MARION MELVIN STUCKEY  Chairman, Chief Executive Officer,    March 22, 1997
-------------------------- (principal executive officer) and
Marion Melvin  Stuckey     Director

/s/ JIMMIE H. CALDWELL     President, Chief Operating Officer    March 26, 1997
-------------------------- and Director
Jimmie H. Caldwell

/s/ DAVID G. LATZKE        Vice President and Chief Financial    March 26, 1997
-------------------------  Officer, Treasurer and Secretary
David G. Latzke            (principal financial officer)

/s/ MICHAEL J. WILDES      Corporate Controller (principal       March 26, 1997
-------------------------  accounting officer)
Michael J. Wildes

/s/ MICHAEL J. ADAMS       Director                              March 26, 1997
-------------------------
Michael J. Adams

/s/ DAVID J. ALLIO         Director                              March 26, 1997
-------------------------
David J. Allio

/s/ TONY J. CHRISTIANSON   Director                              March 26, 1997
-------------------------
Tony J. Christianson

/s/ ROBERT M. PRICE        Director                              March 26, 1997
-------------------------
Robert M. Price

/s/ PORTIA ISAACSON        Director                              March 26, 1997
-------------------------
Portia Isaacson



                                   -15-

<PAGE>


                            FOURTH SHIFT CORPORATION

                           ANNUAL REPORT ON FORM 10-K

                                 EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No.   Document                                                           Page No.
-----------   ---------------------------------------------------------------------------
<S>           <C>                                                                <C>
   3.1        Restated Articles of Incorporation of the Company, as amended
              (incorporated by reference to Exhibit 4.1 of the Company's 10-Q
              for the quarter ended March 31, 1994)

   3.2        Bylaws of the Company,  as amended (incorporated by reference
              to Exhibit 3.2 to the Company's Form 10-K for the year ended
              December 31, 1994)

   4.1        Form of Certificate for Common Stock (incorporated by reference
              to Exhibit 4.1 of Amendment No. 1 to the Company's Registration
              Statement on Form S-1 filed June 28, 1993 (File No. 33-63012))

  10.1        1989 Stock Option Plan (incorporated by reference to Exhibit
              10.4 of the Company's Registration Statement of Form S-1 filed
              May 19, 1993 (File No. 33-63012))

  10.2        Fourth Shift Corporation 1994 Employee Stock Purchase Plan, as
              amended (incorporated by reference to Exhibit 10.5 to the
              Company's 10-K for the year ended December 31, 1994)

  10.3        Fourth Shift Corporation 1993 Stock Incentive Plan, as amended
              (incorporated by reference to Exhibit 10.6 to the Company's 10-K
              for the year ended December 31, 1994)

  10.4        Office Lease dated as of December 18, 1992 among the Company and
              International Plaza Joint Venture, as amended (incorporated by
              reference to Exhibit 10.8 of the Company's Registration Statement
              on Form S-1 filed May 19, 1993 (File No. 33-63012))

  10.5        Purchase and Sale Agreement, dated December 15, 1995, between
              Fourth Shift Corporation and Interactive Group, Inc. (incorporated
              by reference to Exhibit 2.1 to the Company's 8-K dated as of
              December 15, 1995)

  10.6        Titanium Runtime Distribution License Agreement dated June 20, 1995
              between Fourth Shift Corporation and Micro Data Base Systems, Inc.
              (incorporated by reference to Exhibit 10.8 to the Company's 10-K for
              the year ended December 31, 1995)

  10.7        Loan and Security Agreement dated as of September 20, 1995 between
              Fourth Shift Corporation and Silicon Valley Bank (incorporated by
              reference to Exhibit 10.9 to the Company's 10-K for the  year ended
              December 31, 1995)

 *10.8        Severance Pay Agreement dated April 16, 1996 between the Company and
              Marion Melvin Stuckey

 *10.9        Severance Pay Agreement dated April 16, 1996 between the Company and
              Jimmie H. Caldwell




                                   -16-

<PAGE>



*10.10        Severance Pay Agreement dated April 16, 1996 between the Company and
              Allen Peterson

*10.11        Severance Pay Agreement dated April 16, 1996 between the Company and
              David Latzke

 10.12        Amendment No. 1 to Loan and Security Agreement dated as of March 29,
              1996 between Fourth Shift Corporation and Silicon Valley Bank

 10.13        Amendment No. 2 to Loan and Security Agreement dated as of April 26,
              1996 between Fourth Shift Corporation and Silicon Valley Bank

 10.14        Amendment No. 3 to Loan and Security Agreement dated as of September
              24, 1996 between Fourth Shift Corporation and Silicon Valley Bank

 10.15        Amendment No. 4 to Loan and Security Agreement dated as of November 6,
              1996 between Fourth Shift Corporation and Silicon Valley Bank

 10.16        License Agreement dated as of March 30, 1996 between Fourth Shift
              Corporation and Teknekron Software Systems, Inc. (a.k.a. TIBCO)

 11.1         Computation of Earnings Per Share

 13.0         Incorporated pages of the Company's Annual Report to Shareholders

 23.1         Consent of Arthur Andersen LLP

 27.0         Financial Data Schedule (For SEC use only)

</TABLE>




                                   -17-