<PAGE>
 
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, DC  20549

                              ____________________
   
                               FORM 10-Q/A
  
                              AMENDMENT NO. 1 TO      
                QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                  For the quarterly period ended June 30, 1996

                         Commission File Number 0-25794

                              ____________________

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


                     DELAWARE                        04-3168610
          (State or other jurisdiction of          (IRS Employer
          incorporation or organization)         Identification Number)

                                25 TRAVIS STREET
                          BOSTON, MASSACHUSETTS 02134
              (Address of principal executive offices) (Zip Code)
      Registrant's telephone number, including area code:  (617) 562-0900

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.  [X]  Yes    [_]  No

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

     The Registrant had 7,562,749 shares of Common Stock, $.01 par value, 
                       outstanding as of August 6, 1996.
  

                                       1
<PAGE>
 
                          OPEN ENVIRONMENT CORPORATION
                          
                        QUARTERLY REPORT ON FORM 10-Q/A      
                       FOR THE PERIOD ENDED JUNE 30, 1996
                                     INDEX

<TABLE>     
<CAPTION> 
                                                                         Page
                                                                         ----
<S>                                                                      <C> 
PART I - FINANCIAL INFORMATION

ITEM 1.  Condensed Consolidated Financial Statements

          Condensed Consolidated Balance Sheets as of June 30, 1996 
            and December 31, 1995 (restated)                                1
 
          Condensed Consolidated Statements of Operations for the three
            months ended June 30, 1996 and 1995 and the six months
            ended June 30, 1996 and 1995 (restated)                         2
 
          Condensed Consolidated Statements of Cash Flows for the three
            months ended June 30, 1996 and 1995 and the six months
            ended June 30, 1996 and 1995 (restated)                         3
 
          Notes to Condensed Consolidated Financial Statements (restated)   4
 
ITEM 2.  Management's Discussion and Analysis of Financial
            Condition and Results of Operations, as Amended                 6
 
PART II - OTHER INFORMATION                                                

Item 6.  Exhibits and Reports on Form 8-K                                  10

SIGNATURES                                                                 11
</TABLE>      

                                       1
<PAGE>
 
                         PART I. FINANCIAL INFORMATION


ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>     
<CAPTION>

                 OPEN ENVIRONMENT CORPORATION AND SUBSIDIARIES
                     CONDENSED CONSOLIDATED BALANCE SHEETS
 
                                            JUNE 30,     DECEMBER 31,
                                              1996           1995
                                           ---------     ------------
                                           (Restated) 

ASSETS
Current assets:
<S>                                       <C>            <C>
    Cash and cash equivalents             $  5,356,953    $ 7,012,333
    Marketable securities                    7,074,662     10,678,125
    Accounts receivable, net                 4,131,432      7,609,007
    Due from related parties                                2,362,752
    Due from joint ventures                    440,465      1,428,090
    Prepaid expenses and other                
     current assets                          3,018,312      1,676,530
                                             ---------     ----------
      Total current assets                  20,021,824     30,766,837
 
Property and equipment, net                  2,756,927      3,214,341
Capitalized software costs, net                500,794        800,206
Investment in and advances to joint            
 ventures                                      600,449        858,123 
Deferred income taxes                                         547,184
Other assets                                   553,259        459,982
                                          ------------    -----------
                                          $ 24,433,253    $36,646,673
                                          ============    ===========
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Notes payable                         $  1,761,733    $ 1,545,684
    Accounts payable and accrued             
     expenses                                4,979,343      4,143,880
    Advance billings and customer              
     deposits                                  622,786        629,734
    Deferred maintenance revenue               701,395      1,054,135
    Income taxes payable                                      350,000
    Current portion of capital lease               
     obligations                               105,990        178,904
                                           -----------     ----------
      Total current liabilities              8,171,247      7,902,337
 
Obligations under capital leases, less                         
 current portion                                               27,185    
 
Stockholders' equity:
    Preferred Stock 
    Common Stock                                81,216         80,505
    Additional paid-in capital              30,884,254     30,694,500
    Retained earnings (deficit)            (11,203,464)     1,442,146
    Treasury stock                          (3,500,000)    (3,500,000)
                                          ------------     ----------
      Total stockholders' equity            16,262,006     28,717,151
                                          ------------    -----------  
                                          $ 24,433,253    $36,646,673
                                          ============    ===========
</TABLE>      

  THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

                                       1
<PAGE>
 
<TABLE>     
<CAPTION>

                                           OPEN ENVIRONMENT CORPORATION AND SUBSIDIARIES
                                          CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
                                         THREE MONTHS ENDED JUNE 30,     SIX MONTHS ENDED JUNE 30,

                                              1996          1995         1996           1995
                                         -------------  ------------  ------------   -----------  
                                           (Restated)    (Restated)    (Restated)     (Restated)
Revenues:
<S>                                       <C>            <C>          <C>             <C>
    Software                              $  1,881,428  $  5,714,412  $  3,403,832   $10,350,944
    Maintenance and service fees             1,440,746     1,556,935     2,839,679     2,877,426
    Education and training                     287,054       539,811       584,459     1,054,472
                                          -------------  ------------  -------------  -----------    
      Total revenues                         3,609,228     7,811,158     6,827,970    14,282,842
                                          
Cost of revenues:
    Cost of software, maintenance
      and services                           2,145,860     1,384,464     3,848,551     2,349,670
    Cost of education and training             268,969       396,898       681,651       799,028
                                         -------------  ------------  ------------  ------------
      Total cost of revenues                 2,414,829     1,781,362     4,530,202     3,148,698
                                         -------------  ------------  ------------  ------------ 
Gross profit                                 1,194,399     6,029,796     2,297,768    11,134,144
 
Operating expenses:
    Selling and marketing                    4,586,128     3,073,036     8,573,752     5,698,190
    General and administrative                 999,301       933,776     1,901,767     1,685,320
    Research and development                 1,500,173     1,051,966     2,877,271     2,007,997
    Provision for restructuring 
      charges                                1,083,114                   1,083,114             
                                         -------------  ------------  ------------  ------------
      Total operating expenses               8,168,716     5,058,778    14,435,904     9,391,507
                                         -------------  ------------  ------------  ------------  
 
Operating income (loss)                     (6,974,317)      971,018   (12,138,136)    1,742,637
Equity in income (loss) of
      joint venture                                           38,741                    (273,643)
Other income (expense), net                    142,789       189,957       340,023       197,410
                                         -------------  ------------  -------------  ------------ 
Income (loss) before income taxes           (6,831,528)    1,199,716   (11,798,113)    1,666,404
Provision for income taxes                     847,497       350,947       847,497       468,372
                                         -------------  ------------  ------------  ------------ 
Net income (loss)                          ($7,679,025)   $  848,769  ($12,645,610)  $ 1,198,032
                                         =============  ============  ============  ============  
Net income (loss) per share                     ($1.02)        $0.10        ($1.69)        $0.16
                                         =============  ============ =============  ============  
  
Dividends                                                 $  141,844                 $   141,844
                                                        ============                ============
 
Dividends per share                                            $0.02                       $0.02
                                                        ============                ============
 
Weighted average shares
      outstanding                            7,516,884     8,341,663     7,497,657     7,616,507
                                         =============  ============  ============  ============ 
 
                            THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

</TABLE>      

                                       2


<PAGE>
 
<TABLE>     
<CAPTION>

                 OPEN ENVIRONMENT CORPORATION AND SUBSIDIARIES
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<S>                                             <C>              <C>
                                                     SIX MONTHS ENDED JUNE 30,
                                                         1996           1995
                                                    ------------    -----------
                                                      (Restated)     (Restated)
OPERATING ACTIVITIES
Net income (loss)                                   ($12,645,610)  $  1,198,032
Adjustments to net income (loss):
  Depreciation                                           860,039        604,311
  Amortization of capitalized software                   322,271        135,571
  Allowance for doubtful accounts                        640,230        131,349
  Provision for restructuring charges                    786,451
  Equity in loss of joint venture                         (3,239)       273,643
  Deferred income taxes                                  847,497       (223,703)
  Changes in operating assets and liabilities:
    Accounts receivable                                2,974,802     (3,957,674)
    Due from related parties                           2,212,969         (2,347)
    Prepaid expenses and other current assets         (1,976,063)      (577,523)
    Due from joint venture                               987,625       (197,114)
    Other assets                                         (97,014)      (282,098)
    Accounts payable and accrued expenses                776,007        763,808
    Advance billings and customer deposits               (24,211)       (64,204)
    Deferred maintenance revenue                        (352,740)       (92,922)
    Income taxes payable                                (304,609)       337,204
                                                      -----------    -----------
NET CASH USED IN OPERATING ACTIVITIES                 (4,995,595)    (1,953,667)
              
INVESTING ACTIVITIES
Purchase of marketable securities                    (11,234,563)   (19,899,170)
Proceeds from maturities of 
 marketable securities                                14,840,423      8,055,212
Investment in and advances to joint ventures             115,315       (384,537)
Purchase of property and equipment                      (640,224)    (1,336,659)
Additions to capitalized software                        (21,567)      (166,828)
                                                     ------------   -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES    3,059,384    (13,731,982)
             
 
FINANCING ACTIVITIES
Net proceeds of notes payable to bank                    216,049      1,362,203
Repayment of capital lease obligations                  (150,435)      (117,696)
Net proceeds from issuance of Common Stock                           22,996,104
Dividends paid                                                         (141,844)
Exercise of stock options                                125,067         91,978
Issuance of Common Stock under stock purchase plan        65,398
                                                     -----------    -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES                256,079     24,190,745
                                                     -----------    ----------- 
Effect of exchange rates on cash                          24,752        (48,371)
             
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS       (1,655,380)     8,456,725
Cash and equivalents at beginning of period            7,012,333      1,693,118
                                                     ------------   -----------
CASH AND EQUIVALENTS AT END OF PERIOD                $ 5,356,953   $ 10,149,843
                                                     ============   ===========
 
  THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
 
</TABLE>      
 
                                       3
<PAGE>
     
                 OPEN ENVIRONMENT CORPORATION AND SUBSIDIARIES
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS      


1.  BASIS OF PRESENTATION

    
The unaudited condensed consolidated financial statements presented have been
prepared by Open Environment Corporation and subsidiaries (the "Company")
without audit and, in the opinion of management, reflect all adjustments,
consisting only of normal recurring adjustments, necessary for the fair
presentation of the financial results for the interim periods shown. The results
of operations for the interim periods shown in this report are not necessarily
indicative of results for any future interim period or for the entire fiscal
year. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted, although the Company believes that the disclosures
included are adequate to make the information presented not misleading. The
condensed consolidated financial statements and the notes included herein should
be read in conjunction with the financial statements and notes for the fiscal
year ended December 31, 1995 included in the Company's Annual Report on Form 
10-K for the fiscal year ended December 31, 1995 as amended on Form 10-K/A as
filed with the Securities and Exchange Commission on October 11, 1996.     
    
Restatement of Financial Statements     
    
In December 1995, the Company entered into an agreement (the "Reseller
Agreement") with a reseller (the "Reseller") whereby the Reseller agreed to
purchase products from the Company. In the first quarter of 1996, the Company
sold and shipped to the Reseller an aggregate of $2,500,000 worth of products.
The Reseller Agreement provided the Reseller with certain product return and
exchange rights, and, therefore, the Company established a reserve in the first
quarter of 1996 of $1,440,000 to provide for potential returns from the
Reseller. Based on the actual product return and exchange rate experienced under
the Reseller Agreement, the Company increased the reserve by $400,000 in the
second quarter of 1996. This product return and exchange rate was higher than
originally anticipated by the Company. After a review by the staff of the
Securities and Exchange Commission of the Company's reports filed pursuant to
the Securities Exchange Act of 1934 (the "Reports"), the Company determined that
due to the high return and exchange rate, that the Company did not have a
sufficient basis under generally accepted accounting principles to estimate the
amount of returns and exchanges and therefore should have recognized revenue as
the Reseller actually sold product to its customers. This amended Report
reflects the restatement of the Company's' financial statements to recognize
revenues under the Reseller Agreement as the Reseller sells product to its
customers.    

         

   The following summarizes the effect of the restatement on the condensed 
consolidated financial statements of the Company for the periods presented:


<TABLE>     
<CAPTION> 

                                             Quarter Ended                             Six Months Ended
                                              June 30,1996                               June 30, 1996
                                   As Reported            Restated             As Reported             Restated
                                  --------------        -----------          ---------------         ----------- 
<S>                               <C>                   <C>                  <C>                   <C>  
Revenues                            $ 2,756,228         $ 3,609,228            $  7,034,970        $  6,827,970
Cost of software, maintenance                                                                                    
  and services                        2,004,860           2,145,860               3,848,551           3,848,551 
Gross profit                            482,399           1,194,399               2,504,768           2,297,768
Net loss                             (8,391,025)         (7,679,025)            (12,438,610)        (12,645,610)
Net loss per share                        (1.12)              (1.02)                  (1.66)              (1.69)
Accounts receivable                   4,338,432           4,131,432               4,338,432           4,131,432
Total assets                         24,640,253          24,433,253              24,640,253          24,433,253 
Accounts payable and
  accrued expenses                    4,979,343           4,979,343               4,979,343           4,979,343
Stockholders' equity                 16,469,006          16,262,006              16,469,006          16,262,006
</TABLE>      

                                       4
<PAGE>
 
2.  CONSOLIDATED FINANCIAL STATEMENT INFORMATION

Net Income (Loss) Per Share

Net income (loss) per share is computed using the weighted average number of
common and dilutive common equivalent shares outstanding during each fiscal
period. Included in these amounts are dilutive common stock options and
1,428,571 shares of Series A Convertible Preferred Stock which automatically
converted upon the closing of the Company's initial public offering into 999,998
shares of common stock on April 13, 1995. Fully diluted and primary earnings per
share data are the same for each period presented.

Investment Securities
    
All of the Company's investments are classified as held-to-maturity at June 30,
1996 and December 31, 1995.  Investment securities are deemed to be held-to-
maturity when the Company has the positive intent and ability to hold the
securities to maturity. The fair market value of the Company's investments
at June 30, 1996 and December 31, 1995 approximates amortized cost basis.  The
following is a summary of these investments:     

<TABLE>
<CAPTION>
                                                 JUNE 30,        DECEMBER 31, 
                                                  1996               1995
                                              -------------------------------
<S>                                         <C>               <C>
    U.S. Treasury securities and obligations 
       of U.S. government agencies            $ 7,052,847         $12,135,987
    Tax-exempt mutual and money market funds    2,038,241           1,513,183
    90-day bank notes                           2,194,927           2,136,747
                                              -------------------------------
                                              $11,286,015         $15,785,917
                                              ===============================
</TABLE>

Foreign Currency Translation
 
Assets and liabilities of foreign operations are translated at year-end exchange
rates, and statement of operations accounts are translated at average exchange
rates.  Gains and losses from translation are not material for the periods
presented.  Foreign currency transaction gains and losses are included in the
statements of operations and are not material for the periods presented.


3.  INVESTMENT IN AND ADVANCES TO JOINT VENTURES

On January 17, 1994, the Company entered into a joint venture agreement with a
Japanese corporation to develop, distribute, promote and market the Company's
software products and provide related educational services in Japan. Under the
terms of the agreement, the Company owned 50% of the outstanding voting common
stock and two shares of the non-voting preferred stock. Concurrent with this
agreement, the Company granted the joint venture an exclusive license to
establish, develop, distribute and market the Company's software products and
educational services in Japan. In return for this license, the Company receives
royalties from the sale of these products and services as follows: software
products (40%); educational services (25%); and maintenance services (60%).

On September 30, 1995, the Company sold 30.5% of the outstanding voting common
stock of the joint venture to its joint venture partner for $488,000, which
approximated the Company's cost basis in the joint venture.  As a result, the
Company currently owns 19.5% of the voting common stock of the joint venture.
The Company accounted for the joint venture using the equity method from the
inception of the joint venture until September 30, 1995.  Effective October 1,
1995, the Company accounts for its remaining investment in the joint venture
using the cost method.

At June 30, 1996, investment in and advances to joint ventures consisted of
investment in and advances to the Japanese joint venture of $464,000, and
investments in other joint ventures of $136,000.  Due from joint ventures
represents trade accounts receivable due from the Company's joint ventures.


4.  RELATED PARTY TRANSACTIONS

The Company entered into a reseller agreement with Cambridge Technology Group,
Inc. ("CTG"). CTG is principally owned by the Company's Chairman of the Board
and major stockholder. Under the terms of the reseller agreement, as amended,
CTG was appointed as a non-exclusive reseller of the Company's products in the
U.S. and Canada effective February 1, 1995. Prior to February 1, 1995, CTG did
not distribute the Company's products. Pursuant to this agreement, CTG receives
a 50% discount from list prices of the Company's software and a 30% discount
from list prices on the Company's educational programs. The Company is permitted
to cancel the agreement at any time upon payment to CTG of a termination fee
equal to $2,500,000 less 20% of aggregate list price value of software products
sold by CTG under the reseller agreement. The Company made no sales to CTG under
this agreement during the three months ended June 30, 1996. Sales to CTG under
this agreement during the three months ended June 30, 1995 amounted to $600,000.

                                       5
<PAGE>
 
                 OPEN ENVIRONMENT CORPORATION AND SUBSIDIARIES

                 
ITEM 2.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
             RESULTS OF OPERATIONS, AS AMENDED     


INTRODUCTION
------------

The Company derives revenues from product license fees and charges for services,
including education and training, on-site technical support and phone-in
customer support (maintenance).  For all periods presented, the Company has
recognized revenue in accordance with Statement of Position 91-1 entitled
"Software Revenue Recognition," ("SOP 91") issued by the American Institute of
Certified Public Accountants.  SOP 91 requires that software license revenues be
recognized upon shipment, provided no significant obligations to the customer
then exist, and that maintenance revenues be recognized ratably over the term of
the maintenance agreement.  Revenues for other services and training are
recognized upon delivery of the service.  The Company's license agreements
generally do not provide a right of return.  Reserves are maintained for
potential credit losses.

Prior to 1994, the Company's focus was largely educational in nature.  During
1994, the Company began to shift its focus from educational services to software
development and licensing in order to capitalize on the growing demand for its
products and services which had been generated by the Company's education
seminars.  In the early stages of this transition, the Company's educational
services provided the Company with name recognition and introductory marketing
opportunities.  However, as the Company has transitioned to the business of
developing and licensing software, its continued growth is increasingly based on
a growing installed base, the continued acceptance by that installed base of the
Company's products, increased distribution and marketing channels and
technological competitiveness, rather than a continued emphasis on educational
services.  This evolution has caused the Company to shift the focus of its
education offerings from marketing to post-sales training and customer support.
As the Company shifted its focus to software development and licensing, it also
expanded its efforts in international markets, including the establishment of
joint ventures in Japan in 1994, Korea in 1995 and China/Hong Kong in 1996 and
the acquisition of Jarrah Technologies Pty. Limited ("Jarrah Technologies",
"Open Environment Australia") in 1995.

    
On May 11, 1996, the Company signed a definitive agreement to merge with a
wholly-owned subsidiary of Borland International, Inc. ("Borland"). This
agreement was amended on July 31, 1996. Completion of the merger is subject to
the approval of the stockholders of the Company. The merger is more fully
disclosed in the combined Prospectus/Proxy Statement contained in the
Registration Statement on Form S-4 to be filed by Borland with the Securities
and Exchange Commission (the "Commission") on or about October 11, 1996.     

    
For a discussion of uncertainties associated with the Company's business, see
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the fiscal year ended December 31, 1995 included in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1995, as 
amended on Form 10-K/A as filed with the Securities and Exchange Commission on 
October 11, 1996.     
    
RESTATEMENT OF FINANCIAL STATEMENTS
-----------------------------------

In December 1995, the Company entered into an agreement (the "Reseller
Agreement") with a reseller (the "Reseller") whereby the Reseller agreed to
purchase products from the Company. In the first quarter of 1996, the Company
sold and shipped to the Reseller an aggregate of $2,500,000 worth of products.
The Reseller Agreement provided the Reseller with certain product return and
exchange rights, and, therefore, the Company established a reserve in the first
quarter of 1996 of $1,440,000 to provide for potential returns from the
Reseller. Based on the actual product return and exchange rate experienced under
the Reseller Agreement, the Company increased the reserve by $400,000 in the
second quarter of 1996. This product return and exchange rate was higher than
originally anticipated by the Company. After a review by the staff of the
Securities and Exchange Commission of the Company's reports filed pursuant to
the Securities Exchange Act of 1934 (the "Reports"), the Company determined that
due to the high return and exchange rate, that the Company did not have a
sufficient basis under generally accepted accounting principles to estimate the
amount of returns and exchanges and therefore should have recognized revenue as
the Reseller actually sold product to its customers. This amended Report
reflects the restatement of the Company's' financial statements to recognize
revenues under the Reseller Agreement as the Reseller sells product to its
customers.    
          
    
     The following summarizes the effect of the restatement on the condensed 
consolidated financial statements of the Company for the periods presented:     

<TABLE>     
<CAPTION> 
                                 Quarter Ended June 30, 1996          Six Months Ended June 30, 1996
                                As Reported          Restated          As Reported         Restated
                               -------------      -------------       -------------      -------------
<S>                            <C>                <C>                 <C>                <C> 
Revenues                          2,756,228          3,609,228            7,034,970           6,827,970
Cost of software,                 
  maintenance and services        2,004,860          2,145,860            3,848,551           3,848,551
Gross profit                        482,399          1,194,399            2,504,768           2,297,768
Net loss                         (8,391,025)        (7,679,025)         (12,438,610)        (12,645,610)
Net loss per share                    (1.12)             (1.02)               (1.66)              (1.69)
Accounts receivable               4,338,432          4,131,432            4,338,432           4,131,432
Total assets                     24,640,253         24,433,253           24,640,253          24,433,253
Accounts payable and                                             
  accrued expenses                4,979,343          4,979,343            4,979,343           4,979,343
Stockholders' equity             16,469,006         16,262,006           16,469,006          16,262,006  
</TABLE>      

    
Total revenues decreased 54% to $3,609,000 in the three months ended June 30,
1996 from $7,811,000 in the three months ended June 30, 1995, and to $6,828,000
in the six months ended June 30, 1996 from $14,283,000 in the six months ended
June 30, 1995. The revenue decreases were largely attributable to a decline in
software license fees, which decreased to $1,881,000 in the three months ended
June 30, 1996 from $5,714,000 in the three months ended June 30, 1995, and to
$3,404,000 in the six months ended June 30, 1996 from $10,351,000 in the six
months ended June 30, 1995. Software revenues accounted for 52% of total
revenues for the three months ended June 30, 1996 as compared to 73% for the
three months ended June 30, 1995.     

                                       6
<PAGE>
 
     
These revenue decreases are attributable to a number of factors. The Company
continues to rely on major transactions each quarter to reach revenue targets.
Such reliance carries the associated risk of revenue shortfall if such
transactions are delayed or fail to close. The Company closed no transactions
over $250,000 in the three months ended June 30, 1996 as compared to closing
six transactions over $250,000 in the three months ended June 30, 1995. The
pending merger with Borland has caused certain customers to postpone purchases
until the completion of the merger, as these customers have expressed their
desire to see the impact of the merger on the Company's products prior to making
significant financial investments in the Company's products.     
    
The Company currently experiences an extended sales cycle of approximately 9 to
12 months for its products. An inconsistent marketing message has lengthened
this sales cycle beyond the 6 to 9 months experienced in the past, which has
made it even more difficult for the Company to forecast revenues for any given
period until such period has ended. Based on its analysis of operations for the 
period ending March 31, 1996, it is now the Company's business judgement that 
the manner in which it marketed products has been too broad and, in particular, 
that the Company has marketed its products into too many market segments and to 
companies at too many stages of distributed client/server application 
development and deployment.  This included expansion of the Company's marketing 
efforts to include desktop and first generation users in addition to users more 
experienced with management of computer operations in a client/server 
environment.  We believe that this has contributed to the lengthening in OEC's 
sales cycle in the following manners: a changing product positioning detracted 
from the clear understanding of our existing customer base and some qualified 
leads, thus extending the decision process; such a strategy resulted in certain 
leads entering the sales pipeline when, based on the development of additional 
data, such leads later did not appear likely to meet the criteria for qualified 
lead and, therefore, generate appropriate sales; these factors also caused 
certain operational challenges within the Company's sales and marketing 
organization, including the re-education of sales personnel, development of new 
sales and seminar presentations and marketing collateral, and changes in the 
Company's product development plans.      

Additionally, revenues from reselling Gupta software products by Open
Environment Australia decreased to $802,000 in the three months ended June 30,
1996 from $1,397,000 in the three months ended June 30, 1995, and to $1,421,000
in the six months ended June 30, 1996 from $2,397,000 in the six months ended
June 30, 1995. This decrease is the result of Open Environment Australia's
continued transition from such resale activities to the sale of the Company's
Entera product line, as well as the underlying impact of the merger with
Borland, with whom Gupta competes directly.

There has also been some level of employee and management distraction as a
result of the planning and integration process for completion of the merger and
post-merger operations. The Company believes that this has contributed to the
decline in revenues in the three months ended June 30, 1996.

Also contributing to the decrease in total revenues was a decrease in education
revenues to $287,000 in the three months ended June 30, 1996 from $540,000 in
the three months ended June 30, 1995, and to $584,000 in the six months ended
June 30, 1996 from $1,054,000 in the six months ended June 30, 1995.  These
decreases are consistent with the Company's shift away from the use of education
to further market awareness to the use of education as technical training for
software licensing.

Maintenance and service fees decreased to $1,441,000 in the three months ended
June 30, 1996 from $1,557,000 in the three months ended June 30, 1995, and to
$2,840,000 in the six months ended June 30, 1996 from $2,877,000 in the six
months ended June 30, 1995.  Although the Company has experienced continued
demand for project related services, this demand has been offset by a decrease
in maintenance revenues due to the decreased level of software license revenues
in the six months ended June 30, 1996.

    
Revenues from Open Environment Australia and other international customers
accounted for $1,272,000 (35%) of total net revenues for the three months ended
June 30, 1996, as compared to $3,393,000 (43%) for the three months ended June
30, 1995, and $2,609,000 (38%) for the six months ended June 30, 1996, as
compared to $6,362,000 (45%) for the six months ended June 30, 1995. This
decrease is attributable to the decrease in revenues from Open Environment
Australia as noted above as well as the lack of major international transactions
in the first quarter of 1996 and the timing of orders from international
resellers. The Company believes that international sales will continue to
represent a significant portion of the Company's net revenue. However, the
percentage of revenue derived from international sales may fluctuate based on
the timing of orders from international customers and resellers and the addition
of new international customers and resellers.     

    
Cost of revenues increased to $2,415,000 for the three months ended June 30,
1996 from $1,781,000 for the three months ended June 30, 1995, and to $4,530,000
     
                                       7
<PAGE>
    
in the six months ended June 30, 1996 from $3,149,000 in the six months ended
June 30, 1995. Gross profits decreased to 33% for the three months ended June
30, 1996 from 77% for the three months ended June 30, 1995, and to 34% for the
six months ended June 30, 1996 from 78% for the six months ended June 30, 1995.
The increase in cost of revenues is due primarily to increased staffing in the
services department, as the Company has hired additional personnel to serve the
continued demand for project related services. The decrease in gross profit is
the result of decreases in revenues without corresponding cost reductions. The
Company's cost structure is predominantly fixed in the short term because it
largely represents personnel and the infrastructure necessary to support them. A
shortfall in revenues has a direct and immediate impact on the Company's gross
profits and operating profitability due to the Company's inability to react to a
revenue shortfall from a cost perspective in the near term. Fixed costs that are
classified as cost of revenues include personnel costs in the education,
services and maintenance departments as well as amortization of capitalized
software.    
    
Selling and marketing expenses increased to $4,586,000 in the three months ended
June 30, 1996 from $3,073,000 in the three months ended June 30, 1995, and to
$8,574,000 in the six months ended June 30, 1996 from $5,698,000 in the six
months ended June 30, 1995. These increases are the result of the hiring of
additional personnel and increased marketing programs as the Company continues
to develop its direct sales force, build its marketing channels and increase its
promotional activities to broaden market awareness. The Company expects to
continue to invest a significant amount of its resources in its selling and
marketing efforts. In addition, the Company recorded specific additional
reserves for potential bad debts of $475,000 in the six months ended June 30,
1996 as a direct result of the deteriorated aging of two international accounts,
one of which is a reseller in Saudi Arabia and the other is an end-user in
India. The Company has been pursuing collection of these balances, but has been
unsuccessful in obtaining cooperation from the customers, and although the
Company is still pursuing collection of the balances, management provided for
these amounts given their age and uncertainty.     

General and administrative expenses increased to $999,000 in the three months
ended June 30, 1996 from $934,000 in the three months ended June 30, 1995, and
to $1,902,000 in the six months ended June 30, 1996 from $1,685,000 in the six
months ended June 30, 1995. The increase for the three months ended June 30,
1996 is a result of increased professional fees related to a number of corporate
matters surrounding the pending transaction with Borland. The year-to-date
increase as compared to the six months ended June 30, 1995 is largely the result
of the addition of infrastructure to support the Company's domestic and
international expansion. However, the Company has made a concerted effort to
control general and administrative expenses in recent months, as the Company has
focused on slowing growth in areas that are not revenue related. As a result,
the quarter-to-quarter level of general and administrative expenses has remained
relatively flat with the exception of the professional fees noted above, as
general and administrative expenses amounted to $902,000 in the three months
ended March 31, 1996 and $940,000 in the three months ended December 31, 1995.

    
Research and development expenses increased to $1,500,000 in the three months
ended June 30, 1996 from $1,052,000 in the three months ended June 30, 1995, and
to $2,877,000 in the six months ended June 30, 1996 from $2,008,000 in the six
months ended June 30, 1995. These increases reflect personnel increases in the
research and development department, increases in contracted work for certain
porting activities to various platforms and international localization efforts
for certain of the Company's products. Also contributing to the increases in
research and development expenses was the fact that only $22,000 of software
development costs were capitalized under FAS 86 for the six months ended June
30, 1996, as compared to $87,000 and $167,000 in the three and six month periods
ended June 30, 1995, respectively. Amortization of previously capitalized
software, which is included in the cost of software, amounted to $158,000 and
$322,000 in the three and six month periods ended June 30, 1996, respectively,
as compared to $66,000 and $136,000 in the three and six month periods ended
June 30, 1995, respectively. The decrease in software development costs
capitalized in 1996 was due to the fact that minimal activities were devoted to
projects at the point of technological feasibility as defined by FAS 86. The
Company expects to    
                                       8
<PAGE>
 
continue to increase its research and development expenses to keep pace with the
technological needs of the marketplace.

    
The Company recorded a provision for restructuring charges of $1,083,000 in the
three month period ended June 30, 1996. Charges included the write-off of
inventory and prepaid royalties related to the Company's Learning Center
division, as the Company has discontinued all activities related to the Leaning
Center ($381,000), the write-off of certain assets related to worldwide
education facilities, as the Company is no longer operating such facilities
($302,000), severance costs ($254,000), the write-off of the Company's
investment in a failed joint venture ($81,000), and other miscellaneous related
costs ($65,000). Substantially all of these charges were incurred prior to June
30, 1996.     

During the third quarter of 1995, the Company sold a portion of its interest in
its Japanese joint venture to its joint venture partner.  The transaction
results in the Company now owning 19.5% of the joint venture and accordingly,
accounting for the joint venture under the equity method has been discontinued.
The Company will continue to recognize royalty revenue from the joint venture,
but no longer recognizes any share of the venture's operating income or loss.

    
Other income decreased to $143,000 in the three months ended June 30, 1996 from
$190,000 in the three months ended June 30, 1995, but increased to $340,000 in
the six months ended June 30, 1996 from $197,000 in the six months ended June
30, 1995. The decrease for the three months ended June 30, 1996 reflects the
reduction of income generated from the remaining investment of the net proceeds
of the initial public offering of the Company's common stock in April 1995.
Those invested balances have decreased with the Company's recent operating
losses.    

The Company also recorded a provision for income taxes in the three months ended
June 30, 1996 of $847,000.  This provision represents the write off of deferred
tax assets under Statement of Financial Accounting Standards 109, Accounting for
Income Taxes, due to the Company's operating losses in the second quarter 1996,
as those losses have put the ultimate realization of the Company's deferred tax
assets in doubt.

LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
    
As of June 30, 1996, the Company's cash and cash equivalents decreased to
$5,357,000 from $7,012,000 at December 31, 1995, and the Company also held
marketable securities amounting to $7,075,000 at March 31, 1996, a decrease from
$10,678,000 at December 31, 1995.  The net decrease in cash and cash equivalents
and marketable securities was primarily the result of cash used to fund the
Company's operating losses in the first six months of 1996.      

The Company has a credit facility consisting of a demand line of credit of
$2,000,000 and a revolving equipment line of $1,000,000.  Availability under the
demand line of credit is based on a percentage of qualified accounts receivable.
Borrowings outstanding on January 1, 1996 under the revolving equipment line
converted to a two-year term note.  Interest on the demand line of credit
accrues at the prime rate, and interest on the revolving equipment line accrues
at prime plus one-quarter percent.  As of June 30, 1996, aggregate borrowings
under the line of credit amounted to $1,372,000, of which $750,000 represents
the remaining balance on the revolving equipment line that converted to a two-
year term note.  This balance is classified as currently payable due to the fact
that the Company is in violation of financial covenants related to quarterly
cash flows and operating losses.

In the event that the Company continues to experience significant losses and is
unable to consummate a strategic transaction or sale of its business, management
of the Company anticipates that it would require additional sources of working
capital by the beginning of 1997. In the absence of a strategic transaction or
sale of its business, the Company would therefore be required to make
significant reductions in its rate of expenditures during 1996 in order to defer
the requirement to obtain additional working capital, and would, in the absence
of being able to reduce expenditures appropriately on a timely basis, face the
need to obtain additional working capital either through private financing or
alternatively sell the Company. There is no assurance that, if the Company seeks
additional financing in the future, such financing will be available upon
acceptable terms, if at all.

                                       9
<PAGE>
 
                          PART II.  OTHER INFORMATION

          

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.
------------------------------------------

  A.  EXHIBITS

  Exhibit 10.1 - Merger Agreement dated as of May 11, 1996, by and among Borland
International, Inc., Aspen Acquisition Corporation and the Company (incorporated
by reference to the Company's Form 8-K filed with the Commission on June 5,
1996).
    
  Exhibit 10.2 - Amendment No. 1 to the Merger Agreement dated as of July 31,
1996, by and among Borland International, Inc., Aspen Acquisition Corporation
and the Company (incorporated by reference to the Company's Form 10-Q filed with
the Commission on August 12, 1996).    

  Exhibit 11.1 - Statement regarding computation of Net Income (Loss) Per Share
(restated).

  B. REPORTS ON FORM 8-K

  The Company filed a Current Report on Form 8-K dated June 5, 1996 with respect
to the Merger Agreement by and among Borland International, Inc., Aspen
Acquisition Corporation and the Company.

                                       10
<PAGE>
 
                                   SIGNATURES
    
  Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned hereunto duly authorized.     


                              OPEN ENVIRONMENT CORPORATION

    
Date:  October 10, 1996      
                                                       
                          By: /s/ Philip R. Copeland  
                             ---------------------------------------------------
                             Philip R. Copeland, Acting Chief Executive Officer
                             (Principal Executive Officer)     

                             
                          By: /s/ James J. Driscoll      
                             ---------------------------------------------------
                             James J. Driscoll, Vice President of Finance
                             (Principal Financial Officer and Principal
                             Accounting Officer)


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