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

                              ____________________

                                   FORM 10-Q
  
                QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

               For the quarterly period ended September 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 November 4, 1996.
  

<PAGE>

                          OPEN ENVIRONMENT CORPORATION

                        QUARTERLY REPORT ON FORM 10-Q  
                    FOR THE PERIOD ENDED SEPTEMBER 30, 1996
                                     INDEX

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

ITEM 1.  Condensed Consolidated Financial Statements

          Condensed Consolidated Balance Sheets as of September 30, 1996
            and December 31, 1995                                           1
 
          Condensed Consolidated Statements of Operations for the three
            months ended September 30, 1996 and 1995 and the nine months
            ended September 30, 1996 and 1995                               2
 
          Condensed Consolidated Statements of Cash Flows for the nine
            months ended September 30, 1996 and 1995                        3
 
          Notes to Condensed Consolidated Financial Statements              4
 
ITEM 2.  Management's Discussion and Analysis of Financial
            Condition and Results of Operations                             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
 
                                                   SEPTEMBER 30, DECEMBER 31,
                                                      1996           1995
                                                   ---------     ------------
                                            
ASSETS                                      
Current assets:                             
<S>                                               <C>            <C>
    Cash and cash equivalents                     $ 4,782,721     $ 7,012,333
    Marketable securities                           3,075,796      10,678,125
    Accounts receivable, net                        3,238,060       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                                 2,726,725       1,676,530
                                                  -----------      ----------
      Total current assets                         14,263,767      30,766,837
                                                                 
Property and equipment, net                         2,535,033       3,214,341
Capitalized software costs, net                       423,129         800,206
Investment in and advances to joint                              
 ventures                                             515,414         858,123 
Deferred income taxes                                                 547,184
Other assets                                          911,944         459,982
                                                  -----------     -----------
                                                  $18,649,287     $36,646,673
                                                  ===========     ===========
                                                                 
LIABILITIES AND STOCKHOLDERS' EQUITY                             
Current liabilities:                                             
    Notes payable                                 $  817,661      $ 1,545,684
    Accounts payable and accrued                                 
     expenses                                      4,578,424        4,143,880
    Advance billings and customer                                
     deposits                                        535,825          629,734
    Deferred maintenance revenue                     790,838        1,054,135
    Income taxes payable                              82,384          350,000
    Current portion of capital lease                             
     obligations                                      67,968          178,904
                                                 -----------       ----------
      Total current liabilities                    6,873,100        7,902,337
                                                                 
Obligations under capital leases, less                                 
 current portion                                       3,330           27,185    
                                                                 
Stockholders' equity:                                            
    Preferred Stock                                              
    Common Stock                                      81,461           80,505
    Additional paid-in capital                    30,885,234       30,694,500
    Retained earnings (deficit)                  (15,693,838)       1,442,146
    Treasury stock                                (3,500,000)      (3,500,000)
                                                 -----------       ----------
      Total stockholders' equity                  11,772,857       28,717,151
                                                 -----------      -----------  
                                                 $18,649,287      $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 SEPTEMBER 30,      NINE MONTHS ENDED SEPTEMBER 30,
                                                                         
                                              1996            1995               1996               1995
                                         -------------    ------------        ------------       -----------  
<S>                                       <C>              <C>                <C>                 <C>
Revenues:                                                                                      
    Software                              $  1,505,101    $  5,876,290        $  4,908,933       $16,227,234
    Maintenance and service fees             1,132,533       1,612,988           3,972,212         4,490,413
    Education and training                     261,571         507,587             846,030         1,562,059
                                          -------------    ------------        ------------      -----------    
      Total revenues                         2,899,205       7,996,865           9,727,175        22,279,706
                                                                                               
Cost of revenues:                                                                              
    Cost of software, maintenance                                                              
      and services                           1,455,916       1,427,741           5,304,467         3,777,411
    Cost of education and training             275,681         385,756             957,332         1,184,784
                                         -------------    ------------        ------------      ------------
      Total cost of revenues                 1,731,597       1,813,497           6,261,799         4,962,195
                                         -------------    ------------        ------------      ------------ 
Gross profit                                 1,167,608       6,183,368           3,465,376        17,317,511
                                                                                               
Operating expenses:                                                                            
    Selling and marketing                    3,458,756       3,240,681          12,032,508         8,938,871
    General and administrative                 880,197         974,491           2,781,964         2,659,810
    Research and development                 1,477,065       1,103,552           4,354,336         3,111,550
    Provision for restructuring                                                                
      charges                                                  678,655           1,083,114           678,655
                                         -------------    ------------        ------------      ------------
      Total operating expenses               5,816,018       5,997,379          20,251,922        15,388,886
                                         -------------    ------------        ------------      ------------  
                                                                                               
Operating income (loss)                     (4,648,410)        185,989         (16,786,546)        1,928,625
Equity in income (loss) of                                                                     
      joint venture                              8,130                              11,577          (273,643)
Other income (expense), net                    149,905         249,989             486,481           447,398
                                         -------------    ------------        -------------      ------------ 
Income (loss) before income taxes           (4,490,375)        435,978         (16,288,488)        2,102,380
Provision for income taxes                           0         169,000             847,497           637,372
                                         -------------    ------------        ------------      ------------ 
Net income (loss)                          ($4,490,375)     $  266,978        ($17,135,985)      $ 1,465,008
                                         =============    ============        ============      ============  
Net income (loss) per share                     $(0.59)          $0.03              ($2.28)            $0.18
                                         =============    ============        ============      ============  
                                                                                               
Dividends                                                                                        $   141,844
                                                                                                ============
                                                                                               
Dividends per share                                                                                    $0.02
                                                                                                ============
                                                                                               
Weighted average shares                                                                        
      outstanding                            7,560,619       8,572,125           7,518,797         7,919,327
                                         =============    ============        ============      ============ 
 
                            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
 
                                                   NINE MONTHS ENDED SEPTEMBER 30,
                                                         1996           1995
                                                    ------------    -----------
<S>                                             <C>              <C>
OPERATING ACTIVITIES
Net income (loss)                                   ($17,135,984)  $  1,465,008
Adjustments to net income (loss):
  Depreciation                                         1,298,897        991,197
  Amortization of capitalized software                   400,025        212,162
  Allowance for doubtful accounts                        775,486        221,848
  Provision for restructuring charges                    786,451
  Equity in loss of joint venture                        (11,269)       267,246
  Deferred income taxes                                  798,649       (187,935)
  Changes in operating assets and liabilities:
    Accounts receivable                                3,624,004     (7,512,926)
    Due from related parties                           2,362,752                
    Prepaid expenses and other current assets         (1,681,977)      (215,877)
    Due from joint venture                               987,625                
    Other assets                                        (456,567)      (403,154)
    Accounts payable and accrued expenses                389,347      1,324,204
    Advance billings and customer deposits              (112,024)      (140,418)
    Deferred maintenance revenue                        (263,297)       138,201
    Income taxes payable                                (222,200)       403,148
       Due to Related Party                              (54,395)        (2,347)
                                                     -----------    -----------
NET CASH USED IN OPERATING ACTIVITIES                 (8,514,477)    (3,439,643)
              
INVESTING ACTIVITIES
Purchase of marketable securities                    (12,243,398)   (35,896,244)
Proceeds from maturities of 
 marketable securities                                19,848,424     22,261,984
Investment in and advances to joint ventures             208,569     (1,206,474)
Purchase of property and equipment                      (855,702)    (2,254,530)
Additions to capitalized software                        (21,716)      (438,990)
                                                     ------------   -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES    6,936,177    (17,534,254)
             
 
FINANCING ACTIVITIES
Net proceeds of notes payable to bank                   (728,023)     1,845,726
Repayment of capital lease obligations                  (134,791)      (177,921)
Net proceeds from issuance of Common Stock                           22,879,165
Dividends paid                                                         (141,844)
Exercise of stock options                                126,292        629,813
Issuance of Common Stock under stock purchase plan        65,398
                                                     -----------    -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES               (671,124)    25,034,939
                                                     -----------    ----------- 
Effect of exchange rates on cash                          19,812        (14,139)
             
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS       (2,229,612)     4,046,903
Cash and equivalents at beginning of period            7,012,333      1,693,118
                                                    ------------   ------------
CASH AND EQUIVALENTS AT END OF PERIOD               $  4,782,721   $  5,740,021
                                                    ============   ============
 
  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.


                                       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 September
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
September 30, 1996 and December 31, 1995 approximates amortized cost basis. The
following is a summary of these investments:

<TABLE>
<CAPTION>
                                              SEPTEMBER 30,        DECEMBER 31, 
                                                  1996               1995
                                              -------------------------------
<S>                                         <C>               <C>
    U.S. Treasury securities and obligations 
       of U.S. government agencies             $3,551,696         $12,135,987
    Tax-exempt mutual and money market funds    1,431,603           1,513,183
    90-day bank notes                           2,195,558           2,136,747
                                              -------------------------------
                                               $7,178,857         $15,785,917
                                              ===============================
</TABLE>

Foreign Currency Translation
 
Assets and liabilities of foreign operations are translated at period-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 September 30, 1996, investment in and advances to joint ventures consisted of
investment in and advances to the Japanese joint venture of $379,000, 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 September 30, 1996. Sales to CTG
under this agreement during the three months ended September 30, 1995 amounted
to $550,000.

                                       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 and October 8, 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 filed by Borland with the Securities and
Exchange Commission (the "Commission") on 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.

Total revenues decreased 64% to $2,899,000 in the three months ended September
30, 1996 from $7,997,000 in the three months ended September 30, 1995, and to
$9,727,000 in the nine months ended September 30, 1996 from $22,279,000 in the
nine months ended September 30, 1995. The revenue decreases were largely
attributable to a decline in software license fees, which decreased to
$1,505,000 in the three months ended September 30, 1996 from $5,876,000 in the
three months ended September 30, 1995, and to $4,909,000 in the nine months
ended September 30, 1996 from $16,227,000 in the nine months ended September 30,
1995. Software revenues accounted for 52% of total revenues for the three months
ended September 30, 1996 as compared to 73% for the three months ended September
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 one transaction
over $250,000 in the three months ended September 30, 1996 as compared to
closing six transactions over $250,000 in the three months ended September 30,
1995. The Company believes 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 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 $117,000 in the three months ended September
30, 1996 from $502,000 in the three months ended September 30, 1995, and to
$712,000 in the nine months ended September 30, 1996 from $1,874,000 in the nine
months ended September 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 September 30, 1996.

Also contributing to the decrease in total revenues was a decrease in education
revenues to $262,000 in the three months ended September 30, 1996 from $508,000
in the three months ended September 30, 1995, and to $846,000 in the nine months
ended September 30, 1996 from $1,562,000 in the nine months ended September 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 $1,133,000 in the three months ended
September 30, 1996 from $1,613,000 in the three months ended September 30, 1995,
and to $3,972,000 in the nine months ended September 30, 1996 from $4,490,000 in
the nine months ended September 30, 1995. Project related services and
maintenance revenues have decreased due to the decreased level of software
license revenues in the nine months ended September 30, 1996.

Revenues of Open Environment Australia and other international revenues
accounted for $797,000 (27%) of total net revenues for the three months ended
September 30, 1996, as compared to $3,544,000 (44%) for the three months ended
September 30, 1995, and $3,163,000 (33%) for the nine months ended September 30,
1996, as compared to $9,904,000 (46%) for the nine months ended September 30,
1995. This decrease is attributable to the factors described above 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 decreased to $1,732,000 for the three months ended September
30, 1996 from $1,813,000 for the three months ended September 30, 1995, and
increased to $6,262,000

                                       7
<PAGE>

in the nine months ended September 30, 1996 from $4,962,000 in the nine months
ended September 30, 1995. Gross profits decreased to 40% for the three months
ended September 30, 1996 from 77% for the three months ended September 30, 1995,
and to 36% for the nine months ended September 30, 1996 from 78% for the nine
months ended September 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 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 $3,459,000 in the three months ended
September 30, 1996 from $3,241,000 in the three months ended September 30, 1995,
and to $12,033,000 in the nine months ended September 30, 1996 from $8,939,000
in the nine months ended September 30, 1995. These increases are the result of
the hiring of additional personnel as the Company continues to develop its
direct sales force, and expand its marketing channels. 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 nine months ended September
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 decreased to $880,000 in the three months
ended September 30, 1996 from $974,000 in the three months ended September 30,
1995, and increased to $2,782,000 in the nine months ended September 30, 1996
from $2,660,000 in the nine months ended September 30, 1995. The increase for
the nine months ended September 30, 1996 is a result of increased professional
fees related to a number of corporate matters surrounding the pending
transaction with Borland. 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.

Research and development expenses increased to $1,477,000 in the three months
ended September 30, 1996 from $1,104,000 in the three months ended September 30,
1995, and to $4,354,000 in the nine months ended September 30, 1996 from
$3,112,000 in the nine months ended September 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 nine months ended September 30, 1996, as compared to $403,000 in the
nine month period ended September 30, 1995, respectively. Amortization of
previously capitalized software, which is included in the cost of software,
amounted to $46,000 and $400,000 in the three and nine month periods ended
September 30, 1996, respectively, as compared to $77,000 and $212,000 in the
three and nine month periods ended September 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

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<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
nine month period ended September 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 Learning
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. The restructuring charge in the nine months ended September
30, 1995 reflected the acquisition costs related to the Jarrah acquisition.

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 $150,000 in the three months ended September 30, 1996
from $250,000 in the three months ended September 30, 1995, but increased to
$486,000 in the nine months ended September 30, 1996 from $447,000 in the nine
months ended September 30, 1995. The decrease for the three months ended
September 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 nine months ended
September 30, 1996 of $847,000. This provision, recorded in the quarter ended
June 30, 1996, 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. Those losses have put the ultimate realization of
the Company's deferred tax assets in doubt.

LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

As of September 30, 1996, the Company's cash and cash equivalents decreased to
$4,782,000 from $7,012,000 at December 31, 1995, and the Company also held
marketable securities amounting to $3,076,000 at September 30, 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 nine months of 1996.

The Company's credit facility consisting of a $2 million demand line of credit
and a $1 million equipment line of credit was allowed to lapse on September 26,
1996. The notes payable on the balance sheet at September 30, 1996 represent the
remaining balances on the Company's equipment term note portion of the line. The
balances are repayable quarterly through December 31, 1997 and carry an interest
rate of prime plus one quarter percent. 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 be required to make immediate,
significiant reductions in its expenditure levels and seek additional sources of
working capital by the beginning of 1997. 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 - Amendment No. 2 to the Merger Agreement dated as of October 8,
1996, by and among Borland International, Inc., Aspen Acquisition Corporation
and the Company.

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

  B. REPORTS ON FORM 8-K

  NONE
                                       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:  November  , 1996
                          
                          By: /s/ Adam Honig 
                             ---------------------------------------------------
                             Adam Honig, Acting President

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


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