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

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934

   For the Fiscal Year Ended December 31, 1996 Commission File Number 0-21041

                               OBJECT DESIGN, INC.
             (Exact name of registrant as specified in its charter)

             DELAWARE                                          02-0424252
             --------                                          -----------
    (State or other jurisdiction of                         (I.R.S. Employer
    incorporation or organization)                          Identification No.)

    25 MALL ROAD, BURLINGTON, MA                                 01803
    ----------------------------                                 -----
    (Address of principal executive offices)                   (Zip Code)


       Registrant's telephone number, including area code: (617) 674-5000

            Securities registed pursuant to Section 12(b) of the Act:
                         Common Stock, par value $.001
                         -----------------------------

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

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

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

The aggregate market value of voting stock held by non-affiliates of the
Registrant, based on the closing price of the Common Stock on February 28, 1997
as reported by the Nasdaq National Market, was approximately $77,530,285. For
purposes of the foregoing calculation, the Company has assumed that each
director, executive officer and holder of 10% or more of the voting stock of the
Company is an affiliate. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.

As of February 28, 1997 the Registrant had outstanding 26,790,476 shares of
Common Stock.

                       DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Company's Definitive Proxy Statement for its 1997 Annual
Meeting of Stockholders are incorporated by reference into Part III of this
Annual Report on Form 10-K. Exhibit index is located on page 37


<PAGE>

                                     PART I

Item 1.  BUSINESS

OVERVIEW

         Object Design develops, markets, and supports the ObjectStore database
management system and related tools, used to build and deploy Internet, Intranet
and other distributed computing applications. The Company's database products
are designed to meet the performance, scalability, and rapid time to market
requirements of this new generation of applications. ObjectStore supports
extended data types such as image, text, time series, spatial, video, audio,
HTML and Java software objects, as well as the extended relationships among data
exemplified by the non-tabular, unstructured data found on the Internet.

PRODUCTS

    The Company's ObjectStore database management system, multimedia Object
Managers, DBconnect, and related development and database administration tools
provide a powerful data management solution for customers building Internet and
Intranet applications and other high-performance distributed computing
applications requiring the management of extended data types and extended data
relationships. Prices of development licenses for the Company's products range
from approximately $400 to approximately $30,000, based on hardware platform,
configuration, machine class, quantity ordered and other factors. Run-time
licenses for the Company's products are generally priced separately.

The following comprise the Company's product family:

    OBJECTSTORE. ObjectStore is an object oriented database management system
that provides native support for both extended data types and extended data
relationships. Since its introduction in 1990, ObjectStore has been successfully
deployed in telecommunications, finance and engineering design and analysis
applications where high performance, reliability, concurrency, and scalability
are core requirements. The ObjectStore database delivers the following key
benefits:

[BULLET]  Provides native storage and management of extended data types such as
          multimedia data and software objects without requiring the programmer
          to write application code to map extended data types into relational
          tables. Storage and handling of extended data types with the related
          behavior logic as a single object permits rapid access and processing
          and eliminates the requirement to separately provide that behavior
          logic in the application. Native storage of extended data types and
          encapsulation of behavior logic make possible functions such as
          content searching on image data -- for example, to locate an image by
          shape, color or texture -- that would be difficult or impossible to
          implement with a relational database.

[BULLET]  Is easily extensible to permit the Company or customers to add support
          for new data types or add more powerful functions to manipulate
          existing data types. Through creation or modification of the class
          libraries that describe the data structure and behavior of extended
          data types, ObjectStore enables the rapid incorporation of new data
          types and additional functions.

[BULLET]  Provides for direct modeling of extended relationships among sets of
          data, allowing customers to create applications optimized to navigate
          and manipulate complex data structures. Because extended relationships
          are stored as direct links in the database, ObjectStore enables an
          Internet application to dynamically construct a Web page on demand in
          response to user input by rapidly locating and assembling content from
          a variety of disparate data sources.

[BULLET]  Provides full support for object oriented programming methodologies.
          Because data is stored in the same object oriented format in which it
          will be used by the application code, ObjectStore accelerates the
          development process and improves application performance by
          eliminating the need to map to relational tables. ObjectStore offers
          customers several programming language interfaces to the database,
          including Java, C++, HTML, SQL, and ActiveX.


                                       2
<PAGE>

        OBJECT MANAGERS. ObjectStore Object Managers are modules that enable
    extended data types to be stored and manipulated as objects by the
    ObjectStore database. Used individually or in combination with each other,
    Object Managers provide storage management and built-in functions to operate
    on extended data types. The Company intends to continue to introduce new
    Object Managers and increase the capabilities of existing Object Managers
    through its own development projects and through partnerships. Object
    Managers currently available from Object Design include:

        Image Object Manager. The Image Object Manager is designed to help
    customers build image-rich Internet and multimedia applications. The
    Company's Image Object Manager includes visual search engine technology
    licensed from Virage.

        Text Object Manager. The Text Object Manager allows users to store and
    retrieve unstructured text in native text formats such as word processor
    formats and also includes a built-in capability to perform free text
    indexing, search and retrieval. The Text Object Manager includes text search
    engine technology licensed from Verity.

        Video Object Manager. The Video Object Manager allows users to manage,
    back up, archive and index video clips in common file formats such as MPEG
    or QuickTime directly in the database.

        Audio Object Manager. The Audio Object Manager allows users to manage,
    back up, archive and index audio clips in common file formats such as MIDI
    or .AU format directly in the database.

        Spatial Object Manager. The Spatial Object Manager allows users to
    store, index, and analyze spatial data with any number of dimensions and
    representations.

        Time Series Object Manager. The Time Series Object Manager allows users
    to store, index, and analyze time series data that repeats over regular or
    irregular time periods.

        HTML Object Manager. The HTML Object Manager allows users to store and
    retrieve HTML text, including words, phrases, paragraphs or entire HTML
    pages, as HTML objects.

        Java Object Manager. The Java Object Manager allows users to store Java
    applets directly as objects in the ObjectStore database. The Java Object
    Manager permits users to index, store, retrieve, back up, and archive Java
    software objects natively.

        Additional Object Managers have been developed and are sold by third
    party vendors which have joined Object Design's Alliance Program.

    DEVELOPMENT AND END-USER TOOLS. Object Design provides customers with tools
designed to enhance the ability of developers and end users to build and deploy
applications with the Company's products and to easily access information stored
within the ObjectStore database. The tools currently offered by Company are:

        ObjectForms. ObjectForms provides a comprehensive templating facility
    and point-and-click development tool which facilitate development of
    HTML-based applications for ObjectStore. ObjectForms provides connectivity
    between the ObjectStore database and standard Web server software through
    its Webconnect module. Webconnect allows customers to connect directly
    through higher-speed proprietary vendor interfaces such as Netscape's NSAPI
    or Microsoft's ISAPI, as well as through the standard Common Gateway
    Interface ("CGI"). Webconnect also provides automated dispatching
    capabilities that permit customers to build and deploy high-volume Web sites
    using the ObjectStore database.

        ObjectStore Inspector is a graphical browser, editor and query tool for
the ObjectStore database.

        ObjectStore Performance Expert, a graphical, interactive analysis and
    monitoring tool, is designed to provide developers and database
    administrators with information necessary to optimize the scalability and
    concurrency and tune the performance of ObjectStore-based applications.

                                       3
<PAGE>

        ObjectStore OpenAccess, a query and reporting interface tool for the
    ObjectStore database, is implemented through the Microsoft Open Database
    Connectivity ("ODBC") protocol.

    DBCONNECT. DBconnect is a powerful connectivity tool that allows
applications built with the ObjectStore database to access data stored in
existing relational databases.

    OBJECTSTORE PSE AND OBJECTSTORE PSE PRO. In the fall of 1996, Object Design
introduced single-user versions of the ObjectStore database for C++ and Java
which provide local storage for desktop and browser applications. These products
share a consistent application programming interface with the full ObjectStore
database, enabling developers to scale applications from desktop to server.
ObjectStore PSE Pro is sold and distributed over the Internet; ObjectStore PSE
is distributed free of charge from Object Design's Web site. Selected
ObjectStore PSE products are also distributed and/or bundled by Microsoft,
Netscape, Borland, Asymetrix and other vendors.

SERVICES

    The Company supplements its product offerings with training, consulting, and
technical support services. The Company has implemented a key account management
program in which technical support personnel are assigned to provide customers
with assistance in project and deployment planning with the objective of more
successful implementation of applications and greater customer satisfaction. The
Company also offers fee-based training, consulting and maintenance and support
services. Training courses are held at various Company locations around the
world or at customers' sites. The Company currently offers a schedule of eleven
different training courses covering subjects ranging from introductory object
oriented programming techniques to advanced topics such as database performance
tuning and Internet application design concepts. The Company also provides
fee-based consulting services to its customers in the form of on-site services
designed to provide high-leverage assistance at key points in the customers'
product development cycle. Maintenance and support contracts are offered with
the initial software license and typically are renewable annually. Maintenance
and support fees are set at a fixed percentage, generally 15%, of the current
list price of the product. Support services include the maintenance of the
Company's software products in accordance with specifications contained in the
user's guide for such products and access to technical support personnel.
Customers who are under an active software support contract are entitled to
product upgrades and enhancements when released by the Company. Certain of the
Company's distributors and channel partners also provide telephone and initial
support to end users.

RESEARCH, DEVELOPMENT, AND QUALITY ASSURANCE

    The Company believes that its future success will depend in large part on
its ability to maintain and enhance its leadership in object oriented database
technology and develop new products that meet an expanding range of customer
requirements, particularly those customer requirements associated with the
Company's focus on Internet and Intranet applications. The Company's research
and development organization is divided into teams consisting of development
engineers, quality assurance, testing, and porting engineers, and technical
writers. Product definition is based on a consolidation of requirements from
existing and prospective customers and from the Company's technical support,
product management, and engineering groups.

The Company's research and development is focused on development of new products
and enhancement of the functionality of the Company's existing products. The
Company currently plans to release enhancements of its existing products and
several new products, including a programming language interface for Java,
currently in beta testing, to be introduced during the first half of 1997. The
Company's scheduled release dates for products and product enhancements are
forward-looking statements, and the actual release dates for such products and
enhancements could differ materially from those stated as a result of a variety
of factors, including the ability of the Company's engineers to solve technical
problems and test products as well as other factors, including factors outside
the Company's control. As of December 31, 1996, there were 55 employees on the
Company's research and development staff. The Company's research and development
expenditures during 1996, 1995, and 1994 were $7.5 million, $8.3 million, and
$9.5 million, respectively, and represented 19.5%, 25.4%, and 37.3%, of the
Company's total revenues, respectively.

SALES AND MARKETING

                                       4
<PAGE>

    The Company employs a multi-channel sales and marketing strategy, using
direct sales, systems integrators, independent software vendors, distributors
and other channel partners to address its global market.

    DIRECT SALES. The Company has historically relied principally on direct
sales of its products. The Company has structured its direct sales force in
teams consisting of a field sales representative and a technical sales support
representative. As of December 31, 1996, the Company's direct sales force
consisted of 76 employees. In addition to its Burlington, Massachusetts
headquarters, the Company has domestic sales locations in Atlanta, Chicago,
Cincinnati, Dallas, Los Angeles, Melbourne, FL, New York, San Mateo, CA and
Washington, DC, and international direct sales locations in Brussels, London,
Paris, Tokyo and Weisbaden. The Company intends to hire additional sales and
support personnel to broaden its direct selling effort and distribution
capabilities.

    CHANNEL PARTNER PROGRAMS. The Company conducts programs aimed at attracting
systems integrators, independent software vendors and resellers to complement
its direct sales force and broaden the worldwide penetration of the Company's
products. The Company's systems integration partners include Alta Software,
Andersen Consulting, USWeb, Indus, SAIC and TASC. The Company intends to
continue to expand its channel partner programs to attract additional channel
partners that have specifically targeted Internet and Intranet applications.

    INTERNATIONAL DISTRIBUTORS. In certain international markets, the Company
uses third party distributors and resellers that are supported by the Company's
sales organization. Approximately 12.7%, 12.9%, and 8.5% of the Company's total
revenues were derived from sales to international distributors in 1996, 1995 and
1994, respectively. The Company intends to increase the number of its
international distributors.

    In support of its sales efforts, the Company conducts sales training
courses, targeted marketing programs including direct mail, trade shows, public
relations, advertising, seminars, and ongoing customer and third party
communications programs. The Company also seeks to stimulate interest in its
products and services through speaking engagements, white papers, technical
notes and other publications. The Company has also established a home page on
the World Wide Web where potential customers can obtain information about the
Company's products.

CUSTOMERS

         During 1996, the Company changed its product development and marketing
strategy to focus on the Internet and Intranet computing markets. In March 1996,
the Company introduced its ObjectForms and Object Manager products, specifically
designed to address this market. Customers who are developing and deploying
advanced applications for the Internet and corporate Intranets using these new
products represent a varied group of industries and company profiles. Examples
of customers of these products range from large airlines, banks, media
companies, car manufacturers to small systems integrators implementing Web-based
applications for their customers and small entrepreneurial customers setting up
electronic commerce sites on the Internet. All these customers' applications
have in common the requirements for speed of data access, use of extended data
types and extended relationships and the desire to program in an object oriented
environment.

         In 1996 most of the Company's revenue was derived from sales of its
products and services into its traditional markets of telecommunications,
network management, finance and engineeing design and analysis, where rigorous
requirements for high performance, reliability, concurrency and scalability must
be met and where conventional relational database systems have been unable to
meet the challenge of managing extended data types and extended data
relationships while providing acceptable performance. No customer accounted for
10% or more of revenue during the years of 1996, 1995 and 1994.


                                       5
<PAGE>

BACKLOG

The Company maintains no material backlog because business typically is booked
and shipped in the same quarter.

COMPETITION

    The market in which the Company competes is intensely competitive, highly
fragmented, and characterized by rapidly changing technology and standards. The
Company's current and prospective competitors offer a variety of database
solutions, including: object databases available from Computer Associates,
GemStone, Objectivity, O2, Poet and Versant; relational databases available from
Computer Associates, IBM, Informix, Microsoft, Oracle and Sybase;
extended-relational and object-relational databases available from IBM,
Informix, Oracle and UniSQL; and other specialized databases such as on-line
analytical processing databases. The Company has experienced and expects to
continue to experience increased competition from current and potential
competitors, many of which have significantly greater financial, technical,
marketing, and other resources than the Company, and many of which have well
established relationships with current and potential customers of the Company.
In the future, the Company expects to experience increased competition from
established vendors of relational database systems that may seek to offer
extended-relational, object-relational or object oriented database management
systems. It is also possible that alliances among competitors may emerge and
rapidly acquire significant market share. The Company also believes that
competition will increase as a result of software industry consolidation.
Increased competition may result in price reductions, reduced gross margins, and
loss of market share, any of which would materially adversely affect the
Company's business, results of operations and financial condition. There can be
no assurance the Company will be able to compete effectively against current and
future competitors.

    The Company believes that the principal competitive factors affecting its
market include product features and functionality, ease of use, quality,
performance, price, customer service and support, effectiveness of sales and
marketing efforts and company reputation and financial viability. Although the
Company believes that it currently competes effectively with respect to such
factors, there can be no assurance that the Company will be able to maintain its
competitive position with respect to these and other important competitive
factors.

PROPRIETARY TECHNOLOGY AND  LICENSED TECHNOLOGY

    The Company relies on a combination of trademark, copyright, trade secret
laws, employee and third-party non-disclosure agreements, confidentiality
procedures and contractual provisions to protect its proprietary technology. The
Company seeks to protect its software, documentation, and other written
materials under trade secret and copyright laws, which offer limited protection.
The Company currently has one United States patent, covering certain virtual
memory mapping architecture used in its ObjectStore database management system.
There can be no assurance that the Company's patent will not be invalidated,
circumvented, or challenged, that the rights granted thereunder will provide
competitive advantage to the Company or that any future patent applications will
be issued with the scope of the claims sought by the Company. There can be no
assurance that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technologies. There can also be no assurance that the measures taken by the
Company to protect its proprietary rights will be adequate to prevent
misappropriation of the technology or independent development of similar
technology by others. Certain of the Company's software products are licensed to
customers under "shrink wrap" licenses included as part of the product
packaging. Although in larger sales the Company's shrink wrap licenses are
generally accompanied by specifically negotiated agreements signed by the
licensee, in many cases its shrink wrap licenses are not negotiated with or
signed by individual licensees. Certain provisions of the Company's shrink wrap
licenses, including provisions protecting against unauthorized use, copying,
transfer and disclosure of the licensed program, may be unenforceable under the
laws of certain jurisdictions. In addition, the laws of various countries in
which the Company's products may be sold may not protect the Company's products
and intellectual property rights to the same degree as the laws of the United
States. There can be no assurance that third parties will not assert
intellectual property infringement claims against the Company or that any such
claims will not require the Company to enter into royalty arrangements or result
in costly litigation. If infringement is alleged, the Company could be required
to discontinue the use of certain software or to cease the use and sale of
infringing products, to incur significant litigation costs and expenses and to
develop non-infringing technology or to obtain licenses to the alleged
infringing technology. There can be no assurance that the Company would be able
to develop alternative technologies or to obtain such licenses or, if a license
were obtainable, that the terms would be commercially


                                       6
<PAGE>

acceptable to the Company. The Company is not aware of any patent infringement
charge or any violation of other proprietary rights claimed by any third party
relating to the Company or to the Company's products. However, the computer
software market is characterized by frequent and substantial intellectual
property litigation. Intellectual property litigation is complex and expensive,
and the outcome of such litigation is difficult to predict. The Company believes
that, due to the rapid pace of technological innovation for database software
products, the Company's ability to establish and maintain a position of
technology leadership in the industry is dependent more upon the skills of its
development personnel than upon the legal protections afforded its existing
technology.

    The Company relies upon certain software that it licenses from third
parties, including software that is integrated with the Company's internally
developed software and used to perform key functions such as the relational
database engine licensed from Dharma Systems and incorporated in the Company's
DBconnect and OpenAccess products, visual and text search engine technology
licensed from Virage and Verity and HTML development tools licensed from
net.Genesis. In addition, the Company has licensed technology from IBM for use
in its ObjectStore Performance Expert product and technology from ViVi Software,
for use in its ObjectStore Inspector product. As of January 16, 1997, the
Company acquired all assets of ViVi Software including the ObjectStore Inspector
product. The agreement with net.Genesis conveys a fully paid license to use the
net.Genesis technology in the Company's products. The other licensing agreements
require the Company to pay royalties to the licensors upon sale of the Company's
products containing the licensed technology. The Company believes that it will
be able to renew non-perpetual licenses or that it will be able to obtain
substitute product if needed.

EMPLOYEES

As of December 31, 1996 the Company employed 233 full-time employees, including
55 in research and development, 88 in sales and marketing, 62 in customer
support, and 28 in finance and administration. None of the Company's employees
is represented by a labor union and the Company considers its employee relations
to be good.

Item 2.  PROPERTIES

Facilities

The Company's corporate headquarters are located in Burlington, Massachusetts,
in a leased facility consisting of approximately 34,000 square feet of office
space occupied under a lease expiring in November 2001 at an annual lease rate
of $677,000. The Company also leases space for sales offices in Atlanta,
Chicago, Cincinnati, Dallas, Los Angeles, Melbourne, FL, New York, San Mateo, CA
and Washington, DC, and internationally in Brussels, London, Paris, Tokyo and
Weisbaden.

Item 3.  LEGAL PROCEEDINGS

As of the date of this Annual Report on Form 10-K, the Company is not a party to
any legal proceedings the outcome of which, in the opinion of management, would
have a material adverse effect on the Company's results of operations or
financial condition.

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

No matters were submitted to a vote of the Company's stockholders during the
quarter ended December 31, 1996.



                                       7
<PAGE>

                                     PART II

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

The Company's Common Stock is traded on the over-the-counter market under the
Nasdaq symbol ODIS. The following table sets forth the high and low sale prices
for the Company's Common Stock reported on the Nasdaq National Market for each
quarter during 1996, commencing on July 23, 1996, the date when Company's stock
began publicly trading.

                                            High               Low
                                            ----               ---
Third Quarter
(commencing July 23, 1996)                  $17.00            $ 6.62

Fourth Quarter                              $17.12            $10.25

The approximate number of holders of record of the Company's Common Stock as of
February 28, 1997 is 218. The Company has never paid cash dividends on its
Common Stock. The current policy of its Board of Directors is to retain all
earnings for the continued growth of the Company.

RECENT SALES OF UNREGISTERED SECURITIES

The following information is furnished with regard to all securities sold by the
Company during 1996 which were not registered under the Securities Act.

         (a) From January 1, 1996 through June 30, 1996 the Company issued an
aggregate of 3,154,167 shares of Common Stock to 77 directors, officers,
employees and consultants of the Company upon the exercise of options granted
pursuant to the Company's Stock Option Plans at prices ranging from $.01 to
$3.50 per share for an aggregate consideration of $858,916.

         (b) On February 15, 1996, the Company issued 1,655,000 shares of Series
J Convertible Preferred Stock for an aggregate consideration of $4,965,000 to
eleven investors.

The issuances described in this Item 5 were made in reliance upon the exemption
from registration set forth in Section 4(2) of the Securities Act relating to
sales by an issuer not involving any public offering, and, in the case of shares
of Common Stock issued pursuant to the exercise of options granted under the
Stock Option Plans, in further reliance upon the exemption from registration set
forth in Rule 701 under the Securities Act. The foregoing transactions did not
involve a distribution or public offering. No underwriters were engaged in
connection with the foregoing issuances of securities, and no commissions or
discounts were paid.


                                       8
<PAGE>

Item 6.  SELECTED FINANCIAL DATA

The following table summarizes certain selected historical consolidated
financial data, which should be read in conjunction with the Company's financial
statements and related notes included elsewhere herein.

                             SELECTED FINANCIAL DATA
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>

                                   1996         1995        1994        1993         1992
                                   ----         ----        ----        ----         ----
<S>                             <C>         <C>         <C>         <C>           <C>
Statement of Operations Data:
  Revenues:
      Software                  $ 25,640    $ 18,700    $ 15,706    $  8,688      $  8,607
      Services                    10,028      10,928       6,731       4,155         1,989
      Related party software
        and services               2,671       3,078       3,052      11,807            --
                                --------    --------    --------    --------      --------
        Total revenues            38,339      32,706      25,489      24,650        10,596
   Gross profit                   29,593      23,786      18,513      19,333         8,511
   Operating income (loss)         1,240     (10,406)    (12,387)        565        (2,262)

   Net income (loss)               1,693     (10,282)    (12,021)        627        (2,342)
   Supplementary Net income
     (loss) available
    to common stockholders (Note B) $.06     $ (0.40)         --
    Supplementary weighted
      average number of
      Common and common
      equivalent shares
      outstanding (Note B)       29,237       25,837          --
      Historical net income (loss)
        per common and common
        equivalent share         $   .02    $  (1.07)    $ (1.28)
      Historical weighted average
        common and common
        equivalent shares
        outstanding               29,237       9,601       9,418

 Balance Sheet Data:
 Cash and cash equivalents        10,952       2,465       3,225       2,643       3,422
 Working Capital                  24,225        (990)        790       8,503       2,868
 Total Assets                     38,461      17,154      25,629      25,484       8,248
 Long-term obligations               120         476         858         708         549
 Total stockholders' equity
 (deficit)                        28,233     (32,756)    (24,314)    (11,698)    (12,371)

</TABLE>


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

    OVERVIEW

    The Company was founded in 1988, and first shipped its ObjectStore database
management system in 1990. Initially, the Company concentrated on marketing its
products for use in computer assisted design and other engineering design and
analysis applications. The Company subsequently expanded its customer base to
include customers in telecommunications, finance and other industries that
required specialized database management capabilities not readily available from
conventional relational database management systems.


    In late 1995, the Company commenced a fundamental reappraisal of its
business strategy of concentrating on a limited number of vertical industry
markets, and in early 1996 shifted its strategy to focus on providing database
management solutions for the emerging Internet and Intranet computing market. In
March 1996, the Company released its first group of products designed
specifically to address the Internet and Intranet computing market.

    In connection with its strategic realignment, the Company also embarked upon
a Company-wide restructuring program, which included layoffs and other expense
reduction measures. Restructuring charges in the aggregate amount of
approximately $2.7 million, consisting principally of severance costs and
expenses related to consolidation of the Company's facilities, were recorded in
the second and third quarters of 1995.



                                       9
<PAGE>


    As a result of the Company's strategic realignment and reallocation of its
research and development, sales and marketing and technical support resources to
focus on the Internet market, it is likely that the Company's revenues from its
historical business base will experience a lower rate of growth, or will
decline. Also, the Company historically derived a substantial portion of its
revenue from fee-based consulting services. In connection with its strategic
realignment, the Company reduced its emphasis on consulting services as a source
of revenue in favor of concentrating the efforts of its technical support staff
on a key account management program and other non-billable activities designed
to ensure customer satisfaction and success in deployment of Internet and
Intranet applications based on ObjectStore.

    In April 1993, the Company entered into a relationship with IBM. At that
time IBM purchased shares of the Company's Preferred Stock convertible into an
aggregate of 3,750,695 shares of Common Stock. The Company and IBM also signed
certain business agreements (the "IBM Agreements") under which IBM would be
entitled to develop and market products in which the Company's ObjectStore
database management system would be embedded, and the parties would undertake
certain joint product development and marketing activities. Under the IBM
Agreements, either party had the option (the "Break-Up Option") of terminating
certain of the IBM Agreements and modifying the terms of certain others, upon
nine months' advance notice. In March 1996, the Company exercised the Break-Up
Option by giving written notice to IBM, effective in January 1997. As a result
of its exercise of the Break-Up Option, the Company's revenues from IBM are
likely to decline. During 1994, 1995 and 1996 revenues attributable to IBM were
$1.7 million, $3.1 million and $2.7 million, and constituted 6.9%, 9.4% and 7.0%
of the Company's total revenues for such periods, respectively.

    Revenues and accounts receivable from IBM are included in related party
software and services, revenue and accounts receivable -- related party in the
Company's consolidated financial statements for such periods. Related party
revenues and accounts receivable also include amounts attributable to AT&T,
Intel, Kodak, Olivetti and Zuken, each of which was also a stockholder of the
Company during such periods. However, no customer, including IBM, has accounted
for more than 10% of the Company's revenues in any of the foregoing periods.


RESULTS OF OPERATIONS

    The following table sets forth certain revenue and cost data as a percentage
of the Company's total revenues for each period presented:

<TABLE>
<CAPTION>
                                                            Year Ended December 31,
                                                            -----------------------
                                                      1996              1995              1994
                                                      ----              ----              ----
<S>                                                    <C>              <C>               <C>
Revenues:
  Software................................              66.9%            57.2%             61.6%
  Services................................              26.1             33.4              26.4
  Related party software and services.....               7.0              9.4              12.0
                                                     -------         --------           -------
     Total revenues.......................             100.0            100.0             100.0
                                                                       ------            ------
Cost of revenues:
  Cost of software........................               4.2              3.3               6.0
  Cost of services........................              17.4             21.2              16.8
  Cost of related party software and services            1.2              2.8               4.6
                                                     -------          -------           -------
     Total cost of revenues...............              22.8             27.3              27.4
                                                      ------           ------            ------
Gross profit..............................              77.2             72.7              72.6
Operating expenses:
  Selling and marketing...................              45.5             59.9              71.6
  Research and development................              19.5             25.4              37.3
  General and administrative..............               9.0             10.9              12.3
 Restructuring charges....................                --              8.3              ---
                                                    --------          -------           ------
     Total operating expenses.............              74.0            104.5             121.2
Operating income (loss)...................               3.2            (31.8)            (48.6)
Other income                                             1.3              0.4               1.5
                                                      -------             ---            ------


Income (loss) before provision (benefit) for             4.6            (31.4)            (47.1)
income taxes
Provision (benefit) for income taxes......               0.2             (0.0)              0.1
                                                                         ----            ------
Net income (loss).........................               4.4            (31.4)%           (47.2)%
                                                                         =====             =====
</TABLE>

                                       10
<PAGE>

1996 COMPARED TO 1995

    Software Revenue. Software revenue increased 37.1% to $25.6 million in 1996
compared with $18.7 million in 1995. The increase was due to growth in volume of
sales of ObjectStore which more than offset a decline in the product's average
selling price ("ASP"). The Company continued to expand its customer base from
its traditional customers in the telecommunications, networking, finance,
engineering and engineering design industries to a growing number of customers
in a broader group of industries as the result of the Company's new focus of
selling to customers that are developing and deploying applications on the
Internet and Intranet. The Company's sales to Internet and Intranet customers
have had a lower ASP than have sales to its traditional customer base, as the
result of a different pricing structure for the Internet and Intranet market. It
is expected for the future quarters that the Company's ASP will continue to
decline as Internet revenues make up a growing percentage of revenues.

    Services Revenue. Services revenue declined 8.2% to $10.0 million in 1996
compared with $10.9 million in 1995. The decrease was due primarily to a
decrease in consulting revenues consistent with the Company's strategy to
reassign certain of its consultants to be technical account managers to manage
deployments on a non-billable basis. This decrease was only partially offset by
an increase in maintenance revenues as a result of growth in the Company's
installed base.

    Related Party Software and Services Revenue. Related party software and
services revenue, primarily consisting of revenue from IBM, declined 13.2% to
$2.7 million from $3.1 million. This decline was the outcome of the cancellation
of a joint development and marketing agreement with IBM in March 1996.
    .
    Income from International Operations. Revenues from international operations
decreased as a percentage of the Company's total revenues to 30.7% in 1996
compared with 36.9% in 1995, primarily from a faster sales growth rate in North
America. As a result of revenue growth exceeding expense growth in the Company's
international subsidiaries, particularly in Asia, the Company recorded a reduced
loss of $128,000 from international operations in 1996, compared to a loss of
$1.5 million in 1995.

    Cost of Software. Cost of software increased 46.8%, to $1.6 million for 1996
compared with $1.1 million for 1995, and increased as a percentage of software
revenue to 4.2% from 3.3% for such periods, respectively. The increase in dollar
amount and as a percentage of total revenues was primarily attributable to the
broadening of the Company's product offerings and the associated costs of media,
manuals, packaging materials and duplication to support them and certain
associated third party software royalties. Cost of software as a percentage of
software revenues also increased in 1996 as compared to 1995 due to the effect
of declining average sales prices.

    Cost of Services. Cost of services decreased 3.7%, to $6.7 million in 1996
compared with $6.9 million in 1995, and represented 66.6% of services revenue in
1996, up from 63.4% in the prior year. The decrease in dollar amount was
attributable to a decline in average staffing levels in the consulting
organization in 1996 vs. 1995 as a result of the strategic re-alignment of that
organization. The increase in cost as a percent of service revenue is also the
result of the strategic realignment of the consulting business, shifting certain
consultants to non-billable roles as technical account managers to help ensure
successful customer deployments.

     Cost of Related Party Software and Services. Cost of related party software
and services decreased 47.5%, to $475,000 for 1996 compared with $904,000 for
1995, and represented 17.8% and 29.4% of related party software and services
revenue for such periods, respectively. The reduction as a percentage of revenue
was attributable to a shift in the mix of revenues toward higher margin software
revenue in 1996 from lower margin consulting revenue in 1995.

    Selling and Marketing Expense. Selling and marketing expense decreased
11.0%, to $17.4 million in 1996 compared with $19.6 million in 1995, and
decreased as a percentage of the Company's total revenues to 45.5% from 59.9%
for such periods, respectively. The decrease in each case reflects the effects
of the Company's restructuring in the second half of 1995 and related headcount
reductions. The Company intends to expand its direct sales force and
significantly increase its expenditures on marketing focused on the Internet
opportunity throughout 1997.


                                       11
<PAGE>

    Research and Development Expense. Research and development expense decreased
9.8%, to $7.5 million compared with $8.3 million in 1995, and represented 19.5%
and 25.4% of total revenues for such periods, respectively. The decreases
reflect the effects of the Company's restructuring and headcount reductions in
the second half of 1995. The Company expects that research and development
expense will increase in dollar amount in future periods as the Company
continues to enhance ObjectStore and its current related products and supports
the introduction of new products for the Internet.

    General and Administrative Expense. General and administrative expense
decreased 4.2%, to $3.4 million in 1996 compared with $3.6 million in 1995, and
decreased as a percentage of the Company's total revenues to 9% from 11.0% for
such periods, respectively. The decrease in both cases was due to the Company's
restructuring and related headcount reductions in the second half of 1995. This
decrease was partially offset by increases in consulting fees and some temporary
duplication in personnel cost associated with the Company's strategic
realignment and transition in senior management in late 1995 and early 1996 and
costs associated with becoming a public company in third quarter 1996.

    Restructuring Charges. Restructuring charges in 1995 consist primarily of
severance payments and costs related to consolidation of the Company's
facilities in connection with its restructuring and strategic realignment in the
second and third quarters of 1995. See Note M of Notes to Consolidated Financial
Statements.

    Other Income. Other income increased by 326.2% to $520,000 in 1996 compared
with $122,000 in 1995. This increase was largely the result of increased
interest income on increased cash balances resulting from the Company's initial
public offering in July 1996.

    Provision (Benefit) for Income Taxes. The Company's effective tax rate of
3.8% for the year 1996 reflects the federal alternative tax provision. The
effective tax rate in all periods presented is lower than the statutory rate,
principally due to the utilization of net operating loss carryforwards.

1995 COMPARED TO 1994

    Software Revenue. Software revenue increased 19.1% to $18.7 million in 1995
compared with $15.7 million in 1994. The increase was due to growth in volume of
sales of ObjectStore as the Company continued to expand its customer base from
the engineering industry to customers in the telecommunications, data
communications, finance and other industries.

    Services Revenue. Services revenue increased 62.4% to $10.9 million in 1995
compared with $6.7 million in 1994. The increase was due primarily to an
increase in consulting revenues and to an increase in maintenance revenues
attributable to growth of the Company's installed base.

    Related Party Software and Services Revenue. Related party software and
services revenue, primarily consisting of revenue from IBM, was $3.1 million in
each of 1995 and 1994.

    Income from International Operations. Revenues from international operations
increased as a percentage of the Company's total revenues to 36.9% in 1995
compared with 28.8% in 1994. The increase resulted primarily from a more
established direct sales presence in certain markets in Europe and Asia. As a
result of costs related to its continued investment in Europe and Asia Pacific
subsidiaries, the Company recorded a loss of $1,531,000 from international
operations in 1995, compared to a loss of $2,075,000 in 1994. The larger loss in
1994 was attributable to start-up costs associated with the Company's
establishment of a direct presence in Europe and the Asia Pacific region.

    Cost of Software. Cost of software decreased 29.0%, to $1.1 million for 1995
compared with $1.5 million for 1994, and decreased as a percentage of software
revenue to 5.8% from 9.8% for such periods, respectively. The decrease in dollar
amount and as a percentage of total revenues was primarily attributable to
successful efforts by management to reduce the costs of media, manuals,
packaging materials and duplication.


                                       12
<PAGE>

    Cost of Services. Cost of services increased 62.4%, to $6.9 million in 1995
compared with $4.3 million in 1994, and represented 63.4% of services revenue in
each period. The increase in dollar amount was attributable to growth in the
size of the Company's consulting staff in the first half of 1995.

    Cost of Related Party Software and Services. Cost of related party software
and services decreased 23.1%, to $904,000 for 1995 compared with $1.2 million
for 1994, and represented 29.4% and 38.5% of related party software and services
revenue for such periods, respectively. The reduction as a percentage of revenue
was attributable to a shift in the mix of revenues toward higher margin software
revenue in 1995 from lower margin consulting revenue in 1994.

    Selling and Marketing Expense. Selling and marketing expense increased 7.4%,
to $19.6 million in 1995 compared with $18.2 million in 1994, but decreased as a
percentage of the Company's total revenues to 59.9% from 71.6% for such periods,
respectively. The increase in dollar amount reflected expansion of the Company's
direct sales force during the first half of 1995 and higher commission expense
associated with increased software license revenues, which were partially offset
by the effects of the Company's restructuring and related reductions in
headcount and marketing expense in late 1995. The decrease as a percentage of
revenue was attributable to higher productivity of the Company's sales force in
1995.

    Research and Development Expense. Research and development expense decreased
12.8%, to $8.3 million in 1995 compared with $9.5 million in 1994, and
represented 25.4% and 37.3% of total revenues for such periods respectively. The
decrease in dollar amount and as a percentage of total revenues was due
primarily to the Company's restructuring in late 1995 and the related reduction
in research and development headcount, as well as to the Company's suspension of
certain non-strategic product development efforts.

    General and Administrative Expense. General and administrative expense
increased 14.2%, to $3.6 million in 1995 compared with $3.1 million in 1994, but
decreased as a percentage of the Company's total revenues to 10.9% from 12.3%
for such periods, respectively. The increase in dollar amount was attributable
primarily to increased headcount to support the Company's expanding domestic and
international operations.

    Restructuring Charges. Restructuring charges in 1995 consist primarily of
severance payments and costs related to consolidation of the Company's
facilities in connection with its restructuring and strategic realignment in the
second and third quarters of 1995. See Note M of Notes to Consolidated Financial
Statements.

     Other Income. Other income decreased by 68.2% to $122,000 in 1995 compared
with other income of $384,000 in 1994. This decrease was largely the result of
decreased interest income related to lower cash balances during 1995 as compared
to 1994.

Provision (Benefit) for Income Taxes. Differences between the Company's
effective tax rates in 1995 and 1994 are attributable to the effect of foreign
taxes.

LIQUIDITY AND CAPITAL RESOURCES

    Prior to its initial public offering in July 1996, the Company had financed
its operation through a combination of sales of Preferred Stock, bank lines of
credit and capital and operating leases. In July 1996, the Company completed its
initial public offering and sold an aggregate of 3,000,000 shares of common
stock at $7.00 per share resulting in net proceeds to the Company, after
underwriting commissions and other costs, of approximately $18.5 million.

    As of December 31, 1996, the Company had cash and cash equivalents of $11.0
million and working capital of $28.4 million.

    The Company's operating activities used cash of $3.6 million, $6.2 million,
and $4.3 million, in 1996, 1995, and


                                       13
<PAGE>

1994, respectively. Cash used in operations during 1996 was primarily due to an
increase in accounts receivable as a result of increased sales and a decrease in
the amount of cash received in the form of prepaid license fees. The use of cash
in 1995 and 1994 was primarily the result of the Company's net losses.

    Investing activities used $10.2 million of cash in 1996 and provided $5.9
million in 1995 and $2.4 million in 1994 respectively. The use of cash in 1996
was primarily attributable to net purchases of marketable securities of $16.8
million in 1996. The cash provided by investment activities in 1995 was
primarily due to the proceeds from the sale of marketable securities. The use of
cash in 1994 was primarily the result of capital expenditures in that year.

    Cash provided by financing activities was $22.4 million in 1996. Cash used
by financing activities was $486,000 in 1995 and financing activities provided
$7.3 million in cash in 1994. The net cash provided in 1996 from financing
activities was primarily the result of the initial public offering and $4.9
million raised through the sale of preferred stock in February 1996. The use of
cash in 1995 was the result primarily of principal payments on long-term
borrowings. The source of cash in 1994 was primarily proceeds from the issuance
of preferred stock and the from long-term bank borrowings.

    Capital expenditures, including capital leases, were approximately $1.3
million, $1.2 million, $2.7 million in 1996, 1995, and 1994, respectively. These
expenditures consisted principally of purchases of property and equipment,
primarily computer hardware and software.

    The Company's revolving credit agreement with Fleet Bank expired in April
1995 and the Company entered into a line of credit with Bank of Boston in
December 1996 in the amount of $2,000,000. At December 31, 1996 ,no borrowings
were outstanding under the line of credit, but letters of credit in the amount
of $800,000 had been issued for the account of the Company under the line of
credit. The line of credit is collateralized by substantially all the assets of
the Company. The Company's agreements with the Bank contain various covenants,
including financial covenants tested on a quarterly basis, that require
maintenance of a specified quick ratio, leverage ratio and minimum capital base
and prohibit losses in excess of a specified maximum. Upon the occurrence of an
event of default under the Bank agreements that is not waived by the Bank or
cured, the Bank is entitled to, among other things, demand payment of all
outstanding amounts and terminate the letters of credit. At December 31, 1996,
the Company was in compliance with the Bank's covenants.

    The Company believes that its current cash, cash equivalents marketable
securities, capital leases, facilities and funds generated from operations, if
any, will provide adequate liquidity to meet the Company's capital and operating
requirements through at least 1997.

    CERTAIN FACTORS THAT  MAY AFFECT  FUTURE RESULTS

    From time to time, information provided by the Company, statements made by
its employees or information included in its filings with the Securities and
Exchange Commission may contain statements which are not historical facts but
which are "forward looking statements" which involve risks and uncertainties.
The words "expect", "anticipate", "internal", "plan", "believe," "seek",
"estimate" and similar statements are intended to identify such forward looking
statements. In particular, statements in "Management's Discussion and Analysis
of Financial Condition and Results of Operations" relating to the Company's
future shipments, revenue and expense levels and profitability, as well as the
sufficiency of capital to meet working capital and capital expenditure
requirements, may be forward-looking statements. This Report also contains other
forward-looking statements. Such statements are not guarantees of future
performance, and involve certain risks, uncertainties and assumptions that could
cause the Company's future results to differ materially from those expressed in
any forward-looking statements. The Company disclaims any intent or obligation
to update publicly any forward-looking statements whether in response to new
information, future events or otherwise. Important factors that may cause the
Company's actual results to differ from such forward-looking statements include,
but are not limited to, the factors discussed below.

    The Company's results of operations will depend to a substantial extent on
the acceptance of the Company's technology by future purchasers, specifically in
the newly targeted and competitive marketplace of the Internet. This is a new
and evolving market and there can be no assurance that the Internet will develop
as a viable medium for business communications and activity in the long term, or
that the Company's Internet-related products and


                                       14
<PAGE>

services will achieve or maintain market acceptance. The Company will need to
continue to expand its sales force rapidly in order to gain market share in the
short term. Sales personnel are difficult to recruit and retain and the Company
has limited experience in training and managing a large and growing sales force.
As the Company expands its sales and marketing efforts into the Internet
marketplace, the profile of customers is shifting from large telecommunications
and financial institutions to a broader group of small and large companies in
many industry segments. As a result, sales personnel now need to develop and
manage an increasing number of smaller dollar value transactions. The result
could be less accurate sales forecasting. The Company's marketing department
also needs to develop a stream of qualified leads at a more accelerated pace
than in the past in order to keep the sales force at optimum productivity or
sales productivity could be lower than planned. The credit profile of certain of
the Company's smaller Internet customers is weaker overall than that of the
Company's historical customer base. Failure of the Company to implement new
credit policies and reserves could result in write-offs that could adversely
affect the Company's results of operations. The Company is reliant on product
innovation and new product releases to keep it competitive. Any delay in the
release of products or failure of released products to meet the market
expectation of functionality and features could undermine the Company's
competitive position. Furthermore certain of the Company's competitors are
significantly larger and are expending greater amounts on research and
development and sales and marketing than is the Company. The result could be new
competitive product introductions that could limit the salability of the
Company's products, put pressure on sales prices, or diminish the reputation of
the Company as a leader in object oriented database technology. The Company
typically receives the majority of its revenue in any quarter in the last month
of the quarter. This pattern, common to many software companies, makes it
difficult to accurately forecast, increasing the possibility of missing a
quarterly revenue or profit target. As a result of the foregoing and other
factors, the Company may experience material fluctuations in future operating
results on a quarterly or annual basis which could materially and adversely
affect its business, financial condition, operating results and stock price.

                                       15
<PAGE>

Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following statements are filed as part of this Annual Report on Form 10K:

         Item                                                         Page No.
         ----                                                         --------
Report of Independent Accountants                                        17

Consolidated Balance Sheets as of December 31, 1996 and 1995             18

Consolidated Statements of Operations for the three
years ended December 31, 1996, 1995, 1994                                19

Consolidated Statements of Cash Flows for the three
years ended December 31, 1996, 1995, 1994                                20

Consolidated Statements of Stockholders' Equity for the three
years ended December 31, 1996, 1995, 1994                                21

Notes to Consolidated Financial Statements                               22

Schedule II - Valuation and Qualifying Accounts                          35




                                       16
<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and Stockholders of Object Design, Inc.:

We have audited the accompanying consolidated balance sheets of Object Design,
Inc. as of December 31, 1996 and 1995 and the related consolidated statements of
operations, cash flows and stockholders' equity for each of the three years in
the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Object Design,
Inc. as of December 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.





Boston, Massachusetts                                  COOPERS & LYBRAND L.L.P.
February 11, 1997






                                       17
<PAGE>

                              OBJECT DESIGN, INC.
                          CONSOLIDATED BALANCE SHEETS
                      (in thousands, except share amounts)

<TABLE>
<CAPTION>
                                                     December 31,     December 31,
                                                        1996              1995
                                                     -----------      -----------
<S>                                                     <C>            <C>
ASSETS
Current assets:
  Cash and cash equivalents                             $ 10,952       $  2,465
  Marketable securities (Note D)                          11,087          1,488
  Accounts receivable, less allowances of $823
    and $592 at December 31, 1996 and
    1995 respectively                                     11,694          7,631
  Accounts receivable - related parties                        2            433
  Prepaid expenses and other current assets                  598            445
                                                        --------       --------
    Total current assets                                  34,333         12,462
Marketable securities (Note D)                                --            748
Property and equipment, net (Notes C,F)                    3,218          3,569
Other assets                                                 910            375
                                                        --------       --------
       Total assets                                     $ 38,461       $ 17,154
                                                        ========       ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current portion of long-term obligations (Notes E,F)    $     55       $    733
Accounts payable                                           1,850          1,622
Accrued expenses                                           2,506          2,251
Accrued compensation                                       1,531          1,806
Deferred revenue                                           3,874          5,640
Deferred revenue - related parties                           292          1,400
                                                        --------       --------
        Total current liabilities                         10,108         13,452
Long-term obligations (Note E)                               120            476
Redeemable convertible preferred stock (Note G),
  $.01 par value; 16,837,521 shares authorized at
  December 31, 1995 and no shares
  authorized at December 31, 1996; 16,236,654 shares
  issued and outstanding at December 31, 1995                 --         35,982

Commitments and contingencies (Note F)

Stockholders' equity (deficit): (Note H)
  Preferred stock, $0.01 par value: no shares authorized at
    December 31, 1995 and 5,000,000 shares authorized
    at December 31, 1996; no shares issued and
    outstanding at December 31, 1995, or 1996                 --             --
  Common stock, $.001 par value; 22,500,000 shares
    authorized at December 31, 1995 and 200,000,000
    shares authorized at December 31, 1996; 2,373,786
    shares issued and outstanding at December 31, 1995
    and 26,602,830 shares issued and outstanding
    at December 31, 1996                                      27              2
Additional paid-in capital                                62,928          1,673
Accumulated deficit                                      (33,533)       (34,053)
Net unrealized holding gain (loss) on marketable
  securities                                                   7            (13)
Cumulative translation adjustment                           (218)           (43)
Advances to stockholders                                    (887)          (200)
Unearned compensation                                        (91)          (122)
                                                        --------       --------
        Total stockholders' equity (deficit)              28,233        (32,756)
             Total liabilities and stockholders'
             equity (deficit)                           $ 38,461       $ 17,154
                                                        ========       ========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.


                                       18

<PAGE>

                               OBJECT DESIGN, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                           Year Ended December 31,
                                                      --------------------------------
                                                       1996         1995         1994
                                                       ----         ----         ----
<S>                                                   <C>         <C>          <C>
Revenues:
  Software                                            $25,640     $18,700      $15,706
  Services                                             10,028      10,928        6,731
  Related party software and services                   2,671       3,078        3,052
                                                      -------    --------     --------
        Total revenues                                 38,339      32,706       25,489
Cost of revenues:
  Cost of software                                      1,597       1,088        1,533
  Cost of services                                      6,674       6,928        4,267
  Cost of related party software
    and services                                          475         904        1,176
                                                      -------    --------     --------
        Total cost of revenues                          8,746       8,920        6,976

Gross profit                                           29,593      23,786       18,513
Operating expenses:
  Selling and marketing                                17,435      19,596       18,245
  Research and development                              7,481       8,298        9,514
  General and administrative                            3,437       3,589        3,141
  Restructuring charges                                    --       2,709           --
                                                      -------    --------     --------
        Total operating expenses                       28,353      34,192       30,900
Operating income (loss)                                 1,240     (10,406)     (12,387)
Other income                                              520         122          384
Income (loss) before provision (benefit)
  for income taxes                                      1,760     (10,284)     (12,003)
Provision (benefit) for income taxes                       67          (2)          18
                                                      -------    --------     --------
Net income (loss)                                     $ 1,693    $(10,282)    $(12,021)
                                                      =======    ========     ========
Accretion of redeemable preferred stock               $(1,173)   $     --
                                                      -------    --------     --------
Net income (loss) available to common
  stockholders (Note B)                               $   520    $(10,282)    $(12,021)
                                                      =======    ========     ========
Supplementary Net income (loss) available to
 common shareholders - (Note B)                       $   .06    $ (0.40)           --
                                                      =======    ========     ========

Supplementary weighted average number of common
and common equivalent shares outstanding (Note B)      29,237     25,837            --
                                                      =======    ========     ========

Historical net income (loss) per common and
  common equivalent share (Note B)                    $  0.02    $  (1.07)    $  (1.28)
                                                      =======    ========     ========

Historical weighted average number of common and
  common equivalent shares outstanding (Note B)        29,237       9,601        9,418
                                                      =======    ========     ========
</TABLE>


The accompanying notes are an integral part of the consolidated financial
statements.


                                       19
<PAGE>

                              OBJECT DESIGN, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
<TABLE>
<CAPTION>
                                                                    Year Ended December 31,
                                                             ----------------------------------
                                                                1996        1995        1994
                                                                ----        ----        ----
<S>                                                          <C>          <C>         <C>
Cash flows from operating activities:
  Net income (loss)                                          $   1,693    $(10,282)   $(12,021)
  Adjustments to reconcile net income (loss)
    to net cash used for operating activities:
    Depreciation and amortization                                1,664       1,818       1,493
    Bad debt expense                                               715         572         434
    Restructuring charges                                           --       2,709          --
    Non-cash compensation for stock
      options to employee                                           --          37          --
    Other                                                            8          (1)        (20)
    Net realized loss on sale of marketable
      securities                                                    --          30           1
    Net changes in operating assets and
      liabilities:
      Accounts receivable                                       (4,347)       (454)        785
      Prepaids and other current assets                           (153)        (82)        (88)
      Other assets                                                (543)         (6)       (241)
      Accounts payable                                             228        (109)        586
      Accrued expenses                                             (20)     (2,069)      2,515
      Deferred revenue                                          (2,874)      1,666       2,290
                                                               -------      ------      ------
        Net cash used for operating activities                  (3,629)     (6,171)     (4,266)
                                                               -------      ------      ------
Investing activities:
  Capital expenditures                                          (1,313)     (1,195)     (2,712)
  Purchases of marketable securities                           (16,837)       (509)    (11,413)
  Proceeds from sale/maturity of available for sale
    marketable securities                                        8,045       7,649      11,836
  Purchase of minority interest                                    (53)         --        (113)
                                                               -------      ------      ------
        Net cash (used) provided by investing
          activities                                           (10,158)      5,945      (2,402)
                                                               -------      ------      ------
Financing activities:
  Proceeds from issuance of redeemable
    convertible preferred stock                                  4,917          --       6,941
  Proceeds from IPO, net                                        18,216          --          --
  Proceeds from exercise of stock options                          350         142          22
  Proceeds from long-term borrowings                                --         322       1,143
  Principal payments on long-term borrowings                      (678)       (864)       (633)
  Principal payments on capital lease obligations                 (356)        (86)       (210)
                                                               -------      ------      ------
         Net cash provided (used) by financing
           activities                                           22,449        (486)      7,263
Effect of exchange rate changes on cash                           (175)        (47)        (13)
                                                               -------      ------      ------
Net change in cash and cash equivalents                          8,487        (759)        582
Cash and cash equivalents, beginning of year                     2,465       3,224       2,643
                                                               -------      ------      ------
Cash and cash equivalents, end of year                         $10,952      $2,465      $3,225
                                                               =======      ======      ======

Supplemental disclosure of cash flow information:
  Interest paid                                                $    68      $  136      $  121
  Income taxes paid                                            $    67      $   --      $   --
Supplemental disclosure of noncash transactions:
  Equipment purchased under capital leases                     $    --      $  100      $   --
  Equipment purchases accrued                                  $    --      $   --      $  144
</TABLE>

The accompanying notes are an intregral part of the consolidated financial
statements.

                                       20

<PAGE>

                              OBJECT DESIGN, INC.
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (in thousands)
              For the years ended December 31, 1994, 1995 and 1996

<TABLE>
<CAPTION>
                                                                                          Net Unrealized
                                                        Additional                      Holding (loss) gain      Cumulative
                                           Common         Paid-In      Accumulated         on Marketable         Translation
                                            Stock         Capital         Deficit            Securities           Adjustment
                                           ------       ----------     -----------      -------------------      -----------
<S>                                            <C>          <C>         <C>                    <C>                   <C>
Balance at December 31, 1993                    2         $    34       $(11,750)                                    $  17
                                             ----         -------       --------                                     -----
  Exercise of stock options                    --              22
  Issuance of note to officer
  Net unrealized holding loss on
    securities available for sale                                                              $(404)
  Foreign currency translation adjustment                                                                              (13)
  Net loss                                                               (12,021)
                                             ----          ------       --------               -----                 -----
Balance at December 31, 1994                    2              56        (23,771)               (404)                    4
                                             ----          ------       --------               -----                 -----
  Exercise of stock options                    --             141
  Compensation on stock options for
    employees                                               1,354
  Stock options granted to employees
    below fair value                                          122
  Net unrealized holding gain on
   securities available for sale                                                                 391
  Foreign currency translation adjustment                                                                              (47)
  Net loss                                                               (10,282)
                                             ----          ------       --------               -----                 -----
Balance at December 31, 1995                    2           1,673        (34,053)                (13)                  (43)
                                             ----          ------       --------               -----                 -----
  Exercise of stock options                     4             353
  Amortization of unearned compensation
  Net unrealized holding loss/gain on
   securities available for sale                                                                  20
  Foreign currency translation adjustment                                                                             (175)
  Accretion of preferred stock to
   redemption value                                                       (1,173)
  Advances to stockholders
  Shares issued in the initial public
   offering                                    21          60,902
  Net income                                                               1,693
                                             ----          ------       --------               -----                 -----
Balance at December 31, 1996                   27          62,928        (33,533)                  7                  (218)
                                             ====          ======       ========               =====                 =====
</TABLE>

<TABLE>
<CAPTION>
                                             Advances to             Unearned        Stockholders'
                                             Stockholders          Compensation         Equity
                                             ------------          ------------      -------------
<S>                                              <C>                   <C>              <C>
Balance at December 31, 1993                                                            $(11,698)
                                                 -----                 -----            --------
  Exercise of stock options                                                                   22
  Issuance of note to officer                    $(200)                                     (200)
  Net unrealized holding loss on
    securities available for sale                                                           (404)
  Foreign currency translation adjustment                                                    (13)
  Net loss                                                                               (12,021)
                                                 -----                 -----            --------
 Balance at December 31, 1994                     (200)                   --             (24,314)
                                                 -----                 -----            --------

  Exercise of stock options                                                                  141
  Compensation on stock options for
    employees                                                                              1,354
  Stock options granted to employees
    below fair value                                                   $(122)                 --
  Net unrealized holding gain on
   securities available for sale                                                             391
  Foreign currency translation adjustment                                                    (47)
  Net loss                                                                               (10,282)
                                                 -----                 -----            --------
Balance at December 31, 1995                      (200)                 (122)            (32,757)
                                                 -----                 -----            --------
  Exercise of stock options                                                                  357
  Amortization of unearned compensation                                   31                  31
  Net unrealized holding loss/gain on
   securities available for sale                                                              20
  Foreign currency translation adjustment                                                   (175)
  Accretion of preferred stock to
   redemption value                                                                       (1,173)
  Advances to stockholders                         (687)                                     (687)
  Shares issued in the initial public
   offering                                                                               60,923
  Net income                                                                               1,693
                                                 -----                 -----            --------
Balance at December 31, 1996                      (887)                 (91)              28,233
                                                 =====                 =====            ========

</TABLE>

The accompanying notes are an integral part of the consolodiated financial
statements.


                                       21

<PAGE>

                               OBJECT DESIGN, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A. NATURE OF BUSINESS:

    Object Design, Inc. (the "Company") develops, produces, markets and provides
customer support services for an object-oriented database management system and
related development tools.

    Historically, the Company had marketed its ObjectStore database management
system primarily to customers in certain industries, such as telecommunications,
finance and engineering design and analysis, that required specialized database
management capabilities unavailable from conventional relational database
management systems. In early 1996, the Company shifted its strategy to focus on
providing database management solutions for the emerging Internet and Intranet
computing market.

B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

USE OF ESTIMATES

    The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

PRINCIPLES OF CONSOLIDATION

    The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Object Design Japan Co. Ltd., Object Design
Software GmbH, Object Design (UK) Ltd., Object Design Pty. Ltd., Object Design
S.A.R.L., and Object Design Securities Corp. In September 1995, the shares of
Object Design Pty. Ltd. were sold as part of the Company's restructuring (See
Note M). All intercompany accounts and transactions have been eliminated.

CASH EQUIVALENTS AND MARKETABLE SECURITIES

    The marketable securities of the Company have been classified as available
for sale. They are carried at their fair value, based on quoted market prices
with the unrealized gains and losses, net of tax, reported in a separate
component of stockholders' equity (deficit). Realized gains and losses on
disposition of securities are determined on the specific identification method
and are reflected in the consolidated statements of operations. The Company
considers all highly liquid investments having a maturity, at date of
acquisition, of three months or less to be cash equivalents. Those instruments
with original maturities greater than three months and remaining maturity of
less than twelve months from the balance sheet date are considered to be
short-term marketable securities. Instruments with scheduled maturities greater
than one year from the balance sheet date are considered to be long-term
marketable securities.

    The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization and interest
are included in interest income.




                                       22
<PAGE>

PROPERTY AND EQUIPMENT

    Property and equipment are stated at cost. The Company provides for
depreciation and amortization using the straight-line method over the shorter of
the estimated useful lives of the assets, or remaining terms of leases, which
range from three to five years.

    Repairs and maintenance are charged to expense as incurred. Significant
improvements are capitalized and depreciated. Upon retirement or sale, the cost
of the assets disposed of and the related accumulated depreciation are removed
from the accounts and any resulting gain or loss is included in the results of
operations.

REVENUE RECOGNITION

    Revenue from software license agreements is recognized upon execution of a
contract and shipment of the software, provided that no significant obligations
remain outstanding and collection of the related receivable is deemed probable
by management. Revenue from maintenance contracts is recognized ratably over the
life of the contract, generally one year. Revenue from training and consulting
is recognized as the services are provided. Revenues from contracts involving
nonrecurring engineering services are recorded using the
percentage-of-completion method of accounting based on contract milestones.
Estimates of costs to complete are reviewed periodically, and provisions for
anticipated losses are made in the period in which they first become
determinable. Amounts that have been billed before these criteria are met are
reflected as deferred revenues until such criteria are met.

PRODUCT WARRANTY

    The Company's software license agreements include a warranty period,
generally one year, that the Company does not consider to represent a
cancellation privilege. Anticipated costs associated with the warranty program
are accrued when revenue is recognized and are determined on the basis of
estimated future costs to fulfill the warranty commitment. Such costs in each
year during the three-year period ended December 31, 1996, respectively, have
been immaterial.

FOREIGN CURRENCY

    The financial statements of the Company's foreign subsidiaries, all of whose
functional currency is the local currency, are translated using exchange rates
in effect at the end of the year for assets and liabilities and average exchange
rates during the year for results of operations. Foreign currency translation
adjustments are recorded as a separate component of stockholders' equity
(deficit). The Company also engages in transactions denominated in a foreign
currency, and gains and losses from these transactions, which have been
immaterial, are included in results of operations.

CONCENTRATIONS OF CREDIT RISK

    The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash equivalents, marketable securities and
trade receivables. The Company invests its excess cash primarily in deposits
with commercial banks, U.S. Government or agency issues and municipal
obligations and any losses recognized to date have been insignificant.

    The Company sells to a broad base of customers representing various
geographic locations and industries. The Company performs ongoing credit
evaluations of its customers but does not require collateral or other security
to support customer receivables. The Company maintains reserves for potential
credit losses. Such losses have been within management's expectations.

    In addition, the Company has certain receivables, payables and other assets
denominated in foreign currencies, which are not hedged and therefore, are
subject to exchange rate fluctuations. To date, the Company has not incurred
significant losses as a result of currency fluctuations.


                                       23
<PAGE>

RESEARCH AND DEVELOPMENT AND SOFTWARE DEVELOPMENT COSTS

    Research and development expenditures are charged to operations as incurred.
The Company considers that technological feasibility has been established once a
working model of a product has been produced and tested. To date, the Company
has not capitalized software development costs after technological feasibility
has been established since costs incurred subsequent to the establishment of
technological feasibility have not been material.

INCOME TAXES

    The Company provides for income taxes under the liability method, which
requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Deferred tax liabilities and assets are determined
based on the difference between the financial statement basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Under this method a valuation allowance is
required against net deferred tax assets, if based upon the available evidence,
it is more likely than not that some or all of the deferred tax assets will not
be realized.

    Management evaluates on a quarterly basis the recoverability of the deferred
tax assets and the level of the valuation allowance. At such time as it is
determined that it is more likely than not that deferred tax assets are
realizable, the valuation allowance will be appropriately reduced.

INTANGIBLES

    The Company has classified as goodwill, and included in other assets, the
cost in excess of fair value of the net assets related to the 1994 purchase of
the remaining minority interest in Object Design Software GmbH as well as the
contingent payments made as defined in the purchase agreement (see Note F). The
Company provides for amortization of goodwill using the straight-line method
over a period of five years. The Company evaluates the possible impairment of
long-lived assets, including intangible assets, whenever events or circumstances
indicate the carrying value my not be recoverable.

    The Company has included in other assets the cost of licensing third party
software and is amortizing the cost over the terms of the agreements, generally
four years.

NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE

    Net income (loss) per common share is based upon the weighted average number
of common shares and common equivalent shares outstanding. Common equivalent
shares are included in the per share calculations where the effect of their
inclusion would be dilutive.

     Pursuant to the Securities and Exchange Commission Staff Accounting
Bulletin No. 83 ("SAB No. 83"), all common, and common equivalent shares issued
during the twelve month period prior to the date of the initial filing of the
Registration Statement for the Company's initial public offering ("IPO") have
been included in the calculations as if they were outstanding for all periods
prior to the Company's IPO. As permitted under SAB No. 83, equivalent shares
prior to the Company's IPO, which consist of stock options, were determined
using the treasury stock method and assumed an initial public offering price of
$10.00 per share. Dilutive common equivalent shares for the period after the
Company's initial public offering, consist of stock options calculated using the
treasury stock method.

      Supplemental net income (loss) per common share has been computed in the
same manner except that all outstanding shares of Preferred Stock that were
convertible into common stock upon the effectiveness of the IPO are treated as
having been converted into Common Stock at the date of the original issuance.
Net income (loss) per common share on a pro forma basis is the same as net
income (loss) per common share on a supplementary basis.


                                       24
<PAGE>

    Net income (loss) per common share on a supplementary basis is as follows:

                                     Year Ended December 31,
                            ( in thousands, except per share data)
                                1996          1995           1994
                            ------------- -------------  ---------


Net income (loss)            $   1,693    $  (10,282)    $  (12,021))
                             =========    ===========    ===========
Net income (loss) per
  common share               $    0.06    $    (1.07)    $    (1.28)
                             ==========   ===========    ===========

Weighted average number
  of common and common
  equivalent shares

  outstanding                   29,237         9,601          9,418
                             =========         =====          =====

    Fully diluted net income (loss) per share is not presented as it is the same
as the amounts disclosed in supplementary net income (loss) per share for the
years ended December 31, 1994, 1995 and 1996.

FAIR VALUE FINANCIAL INSTRUMENTS

     The Company's financial instruments consists primarily of cash and cash
equivalents, investments, trade receivable and trade payables. The carrying
amounts of cash and cash equivalents, investments, trade receivables and trade
payables approximates fair value due to the short maturity of these instruments.

ACCOUNTING STANDARDS
     In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128) and
No. 129, "Disclosure of Information About Capital Structure" (SFAS 129), which
are effective for fiscal years ending after December 15, 1997, including interim
periods. Earlier application is not permitted. However, SFAS 128 permits an
entity to disclose pro forma earnings per share amounts computed using SFAS 128
in the notes to financial statements in periods prior to adoption. The Statement
requires restatement of all prior-period earnings per share data presented after
the effective date. SFAS 128 specifies the computation, presentation, and
disclosure requirements for earnings per share and is substantially similar to
the standard recently issued by the International Accounting Standards Committee
entitled International Accounting Standards, Earnings Per Share (IAS 33). SFAS
129 requires the disclosure of certain information about an entity's capital
structure, which would include a brief discussion of rights and privileges of
securities outstanding. It replaces the presentation of primary earnings per
share with a presentation of basic earnings per share and requires dual
presentation on the income statement for entities with complex capital
structures. The Company plans to adopt SFAS 128 and 129 in 1997 and has not yet
determined the impact.

C. PROPERTY AND EQUIPMENT:

    Property and equipment consisted of the following, in thousands:

<TABLE>
<CAPTION>

                                                                      December 31,
                                                            1996          1995           1994
                                                         ----------    ----------     ----------
<S>                                                      <C>           <C>            <C>
Computer and computer-related equipment                  $    6,469    $    5,502     $    4,774
Office equipment, furniture and purchased
  computer software                                           2,271         2,096          1,815
Leasehold improvements                                          360           120            218
Automobiles                                                     341           226            107
                                                         ----------    ----------     ----------
                                                              9,441         7,944          6,914
Less accumulated depreciation and  amortization

                                                             (6,223)       (4,375)        (2,693)
                                                         ----------    ----------     ----------
                                                         $    3,218    $    3,569     $    4,221
                                                         ==========    ==========     ==========

</TABLE>

                                       25

<PAGE>

    The equipment under capital leases consisted of the following, in thousands:

                                                     December 31,
                                            1996         1995         1994
                                            ----         ----         ----
Computer and computer-related equipment           0           0     $     369
                                           --------    --------     ---------
Automobiles                                $    342    $    226           107
                                           --------    --------     ---------
                                                342         226           476
Less accumulated amortization                  (165)        (96)         (359)
                                           --------    --------     ---------
                                           $    177    $    130     $     117
                                           ========    ========     =========

    Depreciation expense was $1,444,711, $1,763,121 and $1,663,840 for the years
ended December 31, 1994, 1995 and 1996 respectively.

D. MARKETABLE SECURITIES:

    At December 31, 1995, marketable securities can be summarized as follows, in
thousands:

<TABLE>
<CAPTION>
                                                                     Unrealized   Unrealized
                                              Amortized               Holding      Holding
                                                Cost     Fair Value    Gains       Losses
                                             ----------  ----------  ----------   ---------
<S>                                          <C>         <C>              <C>      <C>
Marketable securities, current:
   U.S. Government and its agencies          $    1,500  $    1,488                $   (11)
Marketable securities, non-current:
  U.S. Government and its agencies                  750         748       --            (2)
                                             ----------  ----------                --------
                                             $    2,250  $    2,236       --       $   (13)
                                             ==========  ==========                =======
</TABLE>


    At December 31, 1996, marketable securities can be summarized as follows, in
thousands:
<TABLE>
<CAPTION>

                                                                          Unrealized  Unrealized
                                                    Amortized               Holding     Holding
                                                      Cost     Fair Value    Gains      Losses
                                                   ----------  ----------  ----------   ---------
<S>                                               <C>         <C>         <C>           <C>
Marketable securities, current:
  U.S. Government and its agencies                $   11,094  $   11,087  $      7          (11)
                                                                                            ---
Marketable securities, non-current:
  U.S. Government and its agencies                       ---         ---         ---        ---
                                                  ----------  ----------  ----------   ---------
                                                  $   11,094  $   11,087  $        7    $     0
                                                  ==========  ==========  ==========   =========

</TABLE>

    At December 31, 1996, the contractual maturities of the current marketable
securities available for sale range from over 3 months to 12 months.

E. CREDIT AGREEMENT:

CREDIT AGREEMENT

    The Company entered into a line of credit with Bank of Boston in December
1996 in the amount of $2,000,000. At December 31, 1996 ,no borrowings were
outstanding under the line of credit, but letters of credit in the amount of
$800,000 had been issued for the account of the Company under the line of
credit. The line of credit is collateralized by substantially all the assets of
the Company. The Company's agreements with the Bank contain various covenants,
including financial covenants tested on a quarterly basis, that require
maintenance of a specified quick ratio, leverage ratio and minimum capital base
and prohibit losses in excess of a specified maximum. Upon the occurrence of an
event of default under the Bank agreements that is not waived by the Bank or
cured, the Bank

                                       26
<PAGE>


    is entitled to, among other things, demand payment of all outstanding
amounts and terminate the letters of credit. At December 31, 1996, the Company
was in compliance with the Bank's covenants.

LONG-TERM OBLIGATIONS

    The Company's long-term obligations consist of the following, in thousands:

<TABLE>
<CAPTION>
                                                                         December 31,
                                                                1996          1995          1994
                                                            ------------  ------------  --------
<S>                                                           <C>           <C>         <C>
Installment notes payable were paid in full in September      $      --     $   1,076   $    1,618
1996 with IPO proceeds.
Capital lease obligations (Note F)                                  175           134          119
                                                              ---------     ---------     --------
                                                                    175         1,210        1,737

Amounts due within one year                                          55           733          879
                                                              ---------     ---------     --------
Long-term portion                                             $     120     $     477     $    858
                                                              =========     =========     ========
</TABLE>

F. COMMITMENTS:

CAPITAL AND OPERATING LEASES

    The Company leases certain equipment and automobiles under noncancelable
capital leases that mature at various dates through 1998.

    In addition, the Company leases its primary office facility and several
sales offices under various noncancelable leases with terms that expire through
2004, with certain renewal terms. Total rent expense under operating leases was
approximately $1,797,000, $2,063,000 and $1,365,742 for the years ended December
31, 1994, 1995 and 1996, respectively.

    Future minimum lease payments under capital and operating leases are as
follows, in thousands:

<TABLE>
<CAPTION>
                                                                  Capital    Operating
                                                                  Leases      Leases
                                                                --------     ---------
<S>                                                             <C>          <C>
1997                                                            $     55     $  1,167
1998                                                                  60        1,065
1999                                                                  60          944
2000                                                                   0          861
2001 to 2004                                                           0        1,099
                                                                --------     --------
Total future minimum lease payments                                  175   $    5,136
                                                                           ==========
Less amount representing interest                                     20
                                                                --------
Present value of net future minimum lease payments                   155
Less current portion of capital lease obligations                     55
                                                                --------
Long-term portion of capital lease obligation                   $    100
                                                                ========
</TABLE>

PURCHASE OF MINORITY INTEREST

    In 1994, the Company purchased the remaining 24,000 shares in Object Design
Software GmbH from the minority shareholder. The purchase price, as defined by
the purchase agreement, is subject to adjustment based upon the financial
results of the subsidiary through December 31, 1997. The excess of the adjusted
purchase price over the fair value of the shares has remained at $112,526, for
each of the three years ended December 31, 1996 and has been recorded as
goodwill. Accumulated amortization totaled $9,376, $31,876 and $56,251 at
December 31, 1994, 1995 and 1996, respectively. All future contingent payments,
to a maximum additional purchase price of DM 139,058 (approximately $97,000),
will be recorded as an increase to goodwill.

                                       27
<PAGE>

G. REDEEMABLE CONVERTIBLE PREFERRED STOCK:

    The authorized preferred stock of the Company at December 31, 1995 and March
31, 1996 consists of Redeemable Convertible Preferred Stock (Series A through J)
(collectively the "Preferred Stock"). The following table presents Preferred
Stock activity for the three years ended December 31, 1996. As of July 23, 1996
17,891,654 shares converted to common stock at par value.

<TABLE>
<CAPTION>
(In thousands)                                                               Shares        Amount
                                                                          -----------   ---------
<S>                                                                       <C>              <C>
Balance at December 31, 1992 (Series A through D)                               11,236     $  16,377
  Issuance of 2,601,877 and 1,148,818 shares of Series E and F,
     respectively, on April 12, 1993 and 250,000 shares of Series G
     Preferred Stock on May 14, 1993, net of issuance costs of
     $162,623                                                                    4,001        12,664
                                                                          ------------     ---------
Balance at December 31, 1993                                                    15,237        29,041
  Issuance of Series I Preferred Stock on March 31, 1994 net of
     issuance costs of $57,729                                                   1,000         6,941
                                                                          ------------     ---------
Balance at December 31, 1994                                                    16,237        35,982
                                                                          ------------     ---------
                                                                                16,237        35,982
Balance at December 31, 1995
  Issuance of Series J Preferred Stock on February 15, 1996 net
     of issuance of costs of $48,002                                             1,655         4,917
  Accretion of Series J Preferred Stock to redemption value                                    1,173
                                                                                           ---------

   Conversion to common stock on July 23, 1996 upon Company's

IPO                                                                            (17,892)      (42,072)
                                                                          ============     =========
Balance at December 31, 1996                                              $          0     $       0
                                                                          ============     =========

</TABLE>

PREFERRED STOCK WARRANT

    In 1990, the Company issued a warrant to purchase 57,858 shares of Series B
Preferred Stock at an exercise price of $1.40 per share to a leasing company.
The warrant expires upon the earlier of October 1, 2000 or the closing of an
initial public offering. On July 23, 1996, 46,286 shares of common stock was
issued upon the exercise in full, on a "net exercise" basis of the warrant.

H. STOCKHOLDERS' EQUITY (DEFICIT):

    COMMON STOCK

    Each share of common stock has full voting rights. The terms of the
    Company's 1996 line of credit prohibit the payment of cash dividends on the
    common stock.

STOCK OPTION PLANS

The Company's has adopted the disclosure requirements of the Statement Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock Based Compensation."
The Company continues to recognize compensation costs using the intrinsic value
based method described in Accounting Principles Board Opinion No. 25,
"Accounting for stock issued to employees." No compensation costs were
recognized in 1996, 1995 and 1994.

The Company has three stock option plans currently in effect under which future
grants may be issued. A total of 11,342,000 shares has been authorized by the
Company for grants of options or shares. Stock Options granted during 1996 and
1995 generally have a maximum term of ten years and vest over four to five
years.


<PAGE>

A summary of the Company's stock option activity for the years ended December 31
follows:

                                                            Weighted
                                        Number                Average
                                      of Options          Exercise Price
                                      ----------          --------------
Outstanding at
   December 31, 1993                   2,100,828              $1.42
Granted, 1994                            526,475               3.32
Exercised, 1994                          (67,788)              0.38
Cancelled, 1994                         (113,425)              2.31
Outstanding at
   December 31, 1994                   2,446,090               1.83
Granted,  1995                         5,615,400               0.57
Exercised, 1995                         (276,062)              0.52
Cancelled, 1995                       (2,187,350)              2.53
Outstanding at
   December 31, 1995                   5,598,078               0.36
Granted, 1996                          1,494,950               3.91
Exercised, 1996                       (3,334,524)              0.29
Cancelled, 1996                         (491,513)              1.33
                                      ----------              -----
Outstanding at
   December 31, 1996                   3,266,991               1.90
                                      ==========              =====

         At December 31, 1996, 1995 and 1994, respectively, options to purchase
1,024,589, 887,575 and 903,894 shares of common stock were exercisable with a
weighted average exercise price of $0.69, $0.56 and $0.53, respectively.
Exercise prices for options outstanding as of December 31, 1996 ranged from $.01
to $16.50. The weighted average remaining contractual life of those options is
8.1 years.

          The weighted average fair value of the common stock at date of grant
for options granted during 1996 and 1995 was $0.29 and $0.06 per option,
respectively. The fair value of these options at date of grant was estimated
using the Black-Scholes model with the following weighted average assumptions
for 1996 and 1995, respectively: risk free interest rates of 6.2% and 5.6%
dividend yields of 0 % and 0%; volatility factors of the expected market price
of the Company's common stock of 60% and 60% and a weighted average expected
life of the options of 5 years.

       Had compensation cost of the Company's stock option plans been determined
based on the fair value at the grant date for awards in 1996 and 1995 consistent
with the provisions of SFAS No. 123, using the method described above, the
Company's net income and net income per share would have been reduced to the pro
forma amounts indicated below:

                                                   1996            1995
                                                   ----            ----
Net income (loss) - historical                      $520         ($10,282)
Net income (loss) - pro forma                       $395         ($10,338)
Net income (loss) per share - historical           $0.02           ($0.40)
Net income (loss) per share - pro forma            $0.01           ($0.40)

       The pro forma effect on net income for 1996 and 1995 is not
representative of the pro forma effect on net income in future years because it
does not take into consideration pro forma compensation expense related to
grants made prior to 1995.

                                       29

<PAGE>

    At December 31, 1995 and December 31, 1996, options to purchase 881,226 and
488,394 shares of common stock respectively, had vested under the Plans and
options to purchase 2,400,136 and 1,415,611 shares of common stock,
respectively, were available for grant.

    The following table summarizes information about stock options outstanding
at December 31, 1996.

<TABLE>
<CAPTION>
                                Options Outstanding                               Options Exercisable
--------------------------------------------------------------------------------------------------------------
Range of Exercise    Number of Shares   Weighted Avg.       Weighted       Number           Weighted Avg.
Prices               Outstanding        Remaining           Avg.           Exercisable      Exercise Price
                                        Contract Life       Exercise
                                                            Price
--------------------------------------------------------------------------------------------------------------
<S>                      <C>                <C>              <C>             <C>                 <C>
    $.01 - $.75          1,882,507          7.4              $.30            845,482              $.29
   $1.75 - $6.0          1,025,084          8.9              2.11            179,107             $2.57
  $6.75 - $16.5            359,400          9.7               9.7                 --                --
  -------------            -------          ---               ---            -------             -----
Total                    3,266,991          8.1              $1.9         1,024,0589              $.69
</TABLE>


    On April 1, 1996, options to purchase 2,760,000 shares of common stock
issued to two officers of the Company during December 1995 were accelerated, and
the officers exercised these options in exchange for cash of $2,760 and full
recourse promissory notes in the amount of $687,240. The promissory notes bear
interest at 7.0% and are due on the earlier of April 1, 2001 or upon termination
of employment. Pursuant to these agreements, the shares may be repurchased by
the Company at the amounts paid by the officers for the shares under certain
conditions such that, economically, the original vesting schedule for these
options remains in effect.

    Except as set forth below, the exercise price for each of the above grants
was determined by the Board of Directors of the Company to be equal to the fair
value of the common stock on the date of grant. In reaching this determination,
at the time of each such grant, the Board considered a broad range of factors
including the illiquid nature of an investment in the Company's common stock,
the Company's historical financial performance, the preferences (including
liquidation) of the Company's outstanding convertible preferred stock, and the
Company's future prospects. Subsequent to the IPO, all options are issued at the
market value of the common stock at date of grant.

    In connection with the severance of certain key employees pursuant to the
Company's restructuring plan (see Note M), during 1995 the Company converted
465,311 incentive stock options to nonqualified stock options. Simultaneously,
the exercise period for these options was extended and consequently,
approximately $1,317,000 was charged to operations and included in restructuring
charges. This charge represented the differences between the aggregate fair
value of those options and the aggregate exercise amounts on the remeasurement
date.

    In December 1995 and pursuant to the 1995 Nonqualified Stock Option Plan,
the Company, as authorized by the Board of the Directors, granted certain
employees non-qualified stock options to purchase 507,775 shares at an exercise
price of $0.01 per share, which was less than fair value at the date of grant.
Unearned compensation related to these options amounting to approximately
$122,000 has been recorded in the Company's stockholders' equity (deficit) and
will be recognized as expense ratably over the vesting period of five years.

    The Board of Directors adopted on May 23, 1996, and the stockholders of the
Company approved by written consent in July 1996, the 1996 Incentive and
Nonqualified Stock Option Plan of the Company (the "1996 Stock Option Plan").

    The 1996 Stock Option Plan authorizes (i) the grant of options to purchase
Common Stock intended to qualify as incentive stock options ("Incentive
Options"), as defined in Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code") and (ii) the grant of options that do not so qualify
("Nonqualified Options"). Options to purchase up to 2,700,000 shares of Common
Stock may be granted under the 1996 Stock Option Plan, provided that prior to
May 23, 1997, options to purchase no more than 1,200,000 shares of Common Stock
may be issued under the Plan, with such number increasing by 300,000 on each of
the first five anniversaries of the adoption of the Plan by the Board of
Directors, up to a maximum of 2,700,000 shares.

    The terms of the options to be issued under the 1996 Stock Option Plan,
including exercise price, vesting and term, will be similar to the terms of the
1989 and 1995 Plans; however, the 1996 Stock Option Plan also provides for
certain automatic grants of nonqualified options to non-employee directors of
the Company.

                                       30

<PAGE>

EMPLOYEE STOCK PURCHASE PLAN

    On May 23, 1996, the Board of Directors adopted, and the stockholders of the
Company approved by written consent in July 1996, an Employee Stock Purchase
Plan (the "Stock Purchase Plan"), under which options to purchase up to 300,000
shares of Common Stock may be granted to employees of the Company.

    The maximum number of shares which may be purchased by an employee under the
Stock Purchase Plan will be determined on the first day of the offering period
pursuant to a formula under which the employee's projected payroll deductions
over the Offering Period are divided by 85% of the market value of one share of
Common Stock on the first day of the Offering Period, and the quotient is
multiplied by two. During each Offering Period, the price at which the employee
will be able to purchase the Common Stock will be 85% of the last reported sale
price of the Common Stock on the Nasdaq National Market on the first or last day
of the Offering Period, whichever is lower.

    The Stock Purchase Plan is administered by the Compensation Committee of the
Board of Directors. All employees who meet certain minimum criteria based on
hours worked per week and length of tenure with the Company are eligible to
participate in the Stock Purchase Plan and no employee will be able to purchase
shares pursuant to the Stock Purchase Plan if after such purchase such employee
would own more than a specific percentage of the total combined voting power or
value of the stock of the Company.

    The authorized capital stock of the Company consists of 200,000,000 shares
of Common Stock, par value $0.001 per share and 5,000,000 shares of undesignated
preferred stock, par value $0.01 per share. The Board of Directors is
authorized, subject to any limitations prescribed by Delaware law, to issue
shares of preferred stock in one or more series, to establish from time to time
the number of shares to be included in each such series, to establish or alter
the voting powers, designations, preferences and relative, participating,
optional or other rights, or the qualifications, limitations or restrictions
thereof, and to increase (but not above the total number of authorized shares of
the class) or decrease (but not below the number of shares of such series then
outstanding) the number of shares of any such series without any further vote or
action by the stockholders. The Board of Directors is authorized to issue
preferred stock with voting, conversion and other rights and preferences that
could adversely affect the voting power or other rights of the holders of Common
Stock.

    On May 23, 1996 the Board of Directors voted to retire the 18,900 treasury
shares.

I. INCOME TAXES:

    Income (loss) before income taxes for domestic and foreign operations is as
follows, in thousands:


                                      Year Ended December 31,
                                  1996         1995          1994
                                --------   -----------   ----------
      Domestic                  $  1,887   $    (8,716)  $  (11,182)
      Foreign                       (127)       (1,568)        (821)
                                --------   -----------   ----------

                                $  1,760   $   (10,284)  $  (12,003)
                                ========   ===========   ==========


    The provision (benefit) for income taxes consists of the following, in
thousands:


                                     Year Ended December 31,
                                  1996          1995         1994
                              ----------    ----------   --------
   Currently payable
   (refundable):
     Foreign                  $       1       $    (2)     $    18
     Federal                         56            --           --
     State                           10            --           --
                                -------       -------      -------
                                $    67       $    (2)     $    18
                                =======       ========     =======

                                       31

<PAGE>

    The following is a reconciliation between the U.S. federal statutory rate
and the effective tax rate:


                                               Year Ended December 31,
                                             1996      1995        1994
                                             ----      ----        ----
        U.S. federal statutory rate          34.0%     34.0%       34.0%
        Disallowed meal & entertainment       4.5
        State taxes, net of federal
        benefit                               0.4
        Foreign tax difference from
        U.S. rate                             2.5
        Federal and state tax credits       (26.9)
        Alternative minimum tax               2.5
        Change in valuation allowance
        and other                           (13.1)    (34.0)      (34.0)
                                            -----     -----       -----
                                              3.8%       --          --
                                            =====     =====       =====

    The approximate tax effect of each type of temporary difference and
carryforward before allocation of the valuation allowance is as follows, in
thousands:

                                                       December 31,
                                                    1996          1995
                                                    ----          ----
   Deferred tax assets:
     Net operating loss carryforwards
        (domestic)                               $ 10,158      $ 11,211
     Net operating loss carryforward
        (foreign)                                   1,029           848
     Tax credit carryforwards                       2,060         1,819
     Accounts receivable reserves                     274           173
     Vacation and benefits reserves                   228           241
     Restructuring reserves                            --           132
     Stock option compensation                         --           530
     Other                                            530            --
      Depreciation and amortization                   109
   Deferred tax liabilities:
     Depreciation and amortization                     --          (123)
                                                 --------      --------
                                                   14,396        14,831
   Valuation allowance                            (14,396)      (14,831)
                                                 --------      --------
   Net deferred tax assets                       $      0      $      0
                                                 ========      ========

       Due to the uncertainty surrounding the realization of these favorable tax
attributes in future tax returns, the net deferred tax assets have been fully
offset by a valuation allowance.

    As of December 31, 1996, the Company had federal net operating loss ("NOL")
and research and experimentation credit carryforwards of approximately
$26,100,000 and $1,358,000, respectively, available to offset future federal
income tax liabilities, which expire at various dates through 2011. The
utilization of a portion of the NOL and research and experimentation credit
carryforwards is subject to Section 382 of the Internal Revenue Code. This
section established an annual limitation, based on changes in the Company's
ownership, on the amount of income which may be offset by these tax attributes.

    As of December 31, 1996, the Company's foreign subsidiaries had NOL
carryforwards of approximately $2,500,000.

J. 401(K) PLAN:

    The Company sponsors a defined contribution employees' investment and
savings plan under Section 401(k) of the Internal Revenue Code. This plan covers
all eligible (as defined) employees of the Company. The Company made no matching
contributions to the plan during 1994, 1995 and 1996.


                                       32


<PAGE>

K. AGREEMENTS WITH RELATED PARTIES:

    During 1994, 1995 and 1996, the Company sold a total of  $3,052,000,
$3,078,000 and $2,671,000 respectively, in software and services, to
stockholders of the Company.

    During 1993, the Company entered into a series of agreements with IBM (a
related party) encompassing product licenses, customized development, consulting
and maintenance. The agreements cover a three-year period. During 1993, 1994,
1995 and 1996, the Company recognized approximately $9,900,000, $1,745,000,
$3,078,000, $2,671,000, respectively, of revenue under the terms of these
agreements comprising 40.2%, 6.9%, 9.4% , 7.0%, respectively, of the total
revenues of the Company for the respective periods. At December 31, 1994, 1995
and 1996, the Company had approximately $742,000, $359,000 and $2,000,
respectively, in accounts receivable due from IBM. During 1993 and concurrent
with the aforementioned agreements, IBM purchased 3,750,695 shares of the
Company's Series E and F Preferred Stock for approximately $11,800,000. IBM did
not participate in the purchase of preferred shares of the Series J offering on
February 15, 1996.

    Under the terms of the IBM agreements, either party had the option (the
"Break-Up Option") of terminating certain of the IBM agreements and modifying
the terms of certain others upon nine months' advance notice. On March 5, 1996,
the Company exercised the Break-Up Option by giving written notice to IBM. Upon
the effectiveness of the Break-Up Option, the rate of royalties paid to the
Company by IBM for ObjectStore-based products was substantially increased, IBM
is no longer be entitled to a discount on training and consulting services
provided by the Company and the Company's joint development and marketing
efforts with IBM may be curtailed or eliminated.

    Deferred revenue at December 31, 1995 and 1996 includes $1,400,000 and
$292,000, respectively, collected from IBM pursuant to a $1,800,000 development
contract. IBM directed the Company to suspend development efforts on this
contract during the quarter ended March 31, 1996 and, accordingly, the Company
recognized $650,000 in revenues related to certain contract milestones. On April
2, 1996, this contract was terminated and, in accordance with the terms of the
contract, the Company recognized the remaining $750,000 of revenues. The Company
has no further obligations under this contract.

    During 1993, the Company entered into a cooperative marketing agreement with
IBM pursuant to which the Company pays fees to IBM for marketing the Company's
products and services. In addition IBM charges the Company for certain equipment
rentals, maintenance and other expenses. Total charges from IBM during the years
ended December 31, 1993, 1994, 1995 and 1996 amounted to approximately $19,000,
$166,000, $1,289,000, and $674,431, respectively.

L. GEOGRAPHIC DATA:

    The Company's operations consist of a single line of business comprised of
developing and marketing computer software and providing related maintenance and
consulting services.

    The Company has sales and marketing operations located outside the United
States in the United Kingdom, France, Germany, Japan, and, until September 1995,
in Australia. Revenues are reflected in the geographic areas from which the
sales are made. Financial information for the Asia Pacific region for the
quarter ended


                                       33

<PAGE>

    December 31, 1996 reflects solely the Company's operations located in Japan.
Financial information, summarized by geographic area, is as follows, in
thousands:

<TABLE>
<CAPTION>
                                            North        United       Rest Of      Asia
                                           America       Kingdom      Europe      Pacific     Eliminations    Consolidated
                                         ------------   -----------  ----------  -----------  -------------   ------------
<S>                                      <C>            <C>          <C>         <C>           <C>            <C>
Year ended December 31, 1994
Revenues:
    From unaffiliated customers          $     20,319   $     2,247  $    2,085  $       838             --   $     25,489
    Intercompany transfers                      1,738            --          --           --   $     (1,738)            --
                                         ------------   -----------  ----------  -----------   ------------

        Total revenues                   $     22,057   $     2,247  $    2,085  $       838   $     (1,738)  $     25,489
                                         ============   ===========  ==========  ===========   ============
  Income (loss) from operations          $    (10,312)  $        69  $     (803) $    (1,341)  $         --   $    (12,387)
                                         ============   ===========  ==========  ===========   ============
  Identifiable assets                    $     39,563   $     1,528  $    1,482  $     2,263   $    (19,407)  $     25,429
                                         ============   ===========  ==========  ===========   ============

Year ended December 31, 1995
Revenues:
    From unaffiliated customers          $     24,867   $     2,681  $    3,178  $     1,980             --   $     32,706
    Intercompany transfers                      2,644            --          --           --   $     (2,644)            --
                                         --------------------------  ----------  -----------   ------------
        Total revenues                   $     27,511   $     2,681  $    3,178  $     1,980   $     (2,644)  $     32,706
                                         ============   ===========  ==========  ===========   ============
  Loss from operations                   $     (8,876)  $       (54) $     (816) $      (660)  $         --   $    (10,406)
                                         ============   ===========  ==========  ===========   ============
  Identifiable assets                    $     18,666   $     2,354  $    1,936  $     1,049   $     (6,851)  $     17,154
                                         ============   ===========  ==========  ===========   ============

Year ended December 1, 1996
Revenues:
    From unaffiliated customers          $     26,570   $     3,542  $    4,287  $     3,940             --   $     38,339
    Intercompany transfers                      5,694            --          --           --   $     (5,694)            --
                                         ------------   -----------  ----------  -----------   ------------
        Total                            $     32,264   $     3,542  $    4,287  $     3,940   $     (5,694)  $     38,339
                                         ============   ===========  ==========  ===========   ============
Income (loss) from operations            $      1,317   $      (701) $       50  $       523             --   $      1,693
                                         ============   ===========  ==========  ===========   ============
Identifiable assets                      $     56,600   $     3,266  $    2,366  $     3,172   $    (26,945)  $     38,461
                                         ============   ===========  ==========  ===========   ============
</TABLE>

    Intercompany transfers primarily represent shipments of software to foreign
subsidiaries and are charged at fixed percentages of the net selling prices to
the ultimate customers. These transfers have been eliminated from consolidated
revenues.

<PAGE>

M. RESTRUCTURING CHARGES:

    During fiscal 1995, the Company recorded restructuring charges aggregating
approximately $2,709,000. The restructuring plan was developed to re-focus the
Company's product strategies and reduce the Company's cost structure and
included severance payments to 36 terminated employees (including the Company's
President and four Vice Presidents, all telesales personnel and certain
marketing personnel) totaling approximately $2,100,000 (including the extension
of exercise periods of certain stock options totaling approximately $1,317,000),
loss on the sale of the Company's Australian subsidiary amounting to
approximately $76,000 and losses on vacated office leases approximately
$533,000. The revenues and net operating losses of the Company's Australian
operation were not material. As of December 31, 1996, the restructuring plan was
complete.

Activity related to the restructuring change and the related accrued
restructuring reserve (included in accrued expenses) is summarized as follows,
in thousands:

<TABLE>
<CAPTION>
                                                                   Reserve At               Reserve At
                                          Provision               December 31,              December
                                          During 1995  Payments        1995      Payments       1996
                                         ------------ ----------  ------------- ----------   -------
<S>                                      <C>         <C>            <C>        <C>           <C>
Employee severance                       $      783  $     (691)    $     92   $      (92)         --
Vacated office leases and related
  costs                                         408        (173)         235         (235)   $     --
                                         ----------  ----------     --------   ----------    --------
      Total restructuring
        reserve                               1,191  $     (864)    $    327   $     (327)   $    ---

                                                     ==========     ========   ==========    ========
Stock option remeasurement                    1,317

Abandoned leaseholds                            125
Loss on sale of subsidiary                       76
                                         ----------
          Total restructuring
            charges                      $    2,709
                                         ==========
</TABLE>

                                       34
<PAGE>

                               OBJECT DESIGN, INC.

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                                                Additions
                                                        -----------------------------
                                     Balance at         Charged to         Charged to                            Balance
                                      Beginning         Costs and            Other                               End of
                                      of Period          Expenses           Accounts          Deductions         Period
                                     ----------         ----------          ---------         ----------         -------
<S>                                   <C>                <C>               <C>                 <C>               <C>
Year ended December 31, 1996
  Allowance for doubtful accounts     $591,123           $715,000                              $483,013          $823,110

Year ended December 31, 1995
  Allowance for doubtful accounts     $399,842           $571,644                              $380,363          $591,123

Year ended December 31, 1994          $394,360           $433,957                              $428,475          $399,842
  Allowance for doubtful accounts
</TABLE>

                                       35
<PAGE>


Item 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURE

Not Applicable

PART III

Item 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information set forth under the captions "Directors and Executive Officers"
and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's
Definitive Proxy Statement for the Annual Meeting of Stockholders to be held on
May 28, 1997, which will be filed with the Securities and Exchange Commission
not later than 120 days after the end of the Company's fiscal year ended
December 31, 1996 (the "Definitive Proxy Statement"), is incorporated herein by
reference.

Item 11.  EXECUTIVE COMPENSATION

The information set forth under the caption "Remuneration of Executive Officers
and Directors" in the Definitive Proxy Statement is incorporated herein by
reference.

Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Definitive Proxy Statement is
incorporated herein by reference.

Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information set forth under the caption "Certain Transactions" in the
Definitive Proxy Statement is incorporated herein by reference.

                                     PART IV

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

(a)  THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:

     (1)  FINANCIAL STATEMENTS

Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Operations for the years ended December 31, 1996,
1995, 1994 Consolidated Statements of Cash Flows for the years ended December
31, 1996, 1995, 1994 Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1996, 1995, 1994 Notes to Consolidated Financial
Statements

     (2)  FINANCIAL STATEMENT SCHEDULES

Schedule II - Valuation and Qualifying Accounts

All other schedules are omitted because the required information is either
inapplicable or presented in the Consolidated Financial Statements.

                                       36

<PAGE>

     (3)  EXHIBITS

     EXHIBITS
<TABLE>
<CAPTION>
Number                              Description
------                              -----------
<S>            <C>
*3.3           Restated Certificate of Incorporation, as amended
*3.5           By-laws of the Company
*4.1           Specimen certificate for Common Stock of the Company
*10.1*         1989 Incentive and Nonqualified Stock Option Plan
*10.2*         1995 Nonqualified Stock Option Plan
*10.3*         1996 Incentive and Nonqualified Stock Option Plan
*10.4*         1996 Employee Stock Purchase Plan
*10.12         Lease dated September 15, 1993 between the Company and 25 Mall Road Trust.
*10.13         First Amendment to Lease dated June 28, 1994 between the Company and 25 Mall Road Trust
*10.14         Second Amendment to Lease dated March 1, 1996 between the Company and 25 Mall Road Trust
*10.15*        Employment Agreement dated December 21, 1995 between the Company and Robert N. Goldman as
               amended by Amendment to Employment Agreement dated May , 1996
*10.16*        Employment Agreement dated December 21, 1995 between the Company and Justin J. Perreault, as
               amended by Employment Agreement dated May, 1996
*10.17*        Severance Agreement dated March 1, 1996 between the Company and Thomas M. Atwood
*10.20         Sixth Amended and Restated Stockholders' Agreement dated February 13, 1996 among the Company
               and certain of its stockholders
*10.21         Amended and Restated IBM Stockholders' Agreement dated May 14,
               1993 among the Company, International Business Machines
               Corporation ("IBM") and certain other stockholders of the
               Company, as amended by a Second Amendment dated March 31, 1994,
               as further amended by a Third Amendment dated June 10, 1994 and
               as further amended by a Fourth Amendment dated February 14, 1996
*10.22         Amended and Restated Registration Rights Agreement dated June 29, 1990 between the Company and
               certain of its stockholders, as amended by Amendment No. 1 dated October 1, 1990, as further
               amended by Amendment No. 2 dated July 29, 1991, as further amended by Amendment No. 3 dated
               March 12, 1992, as further amended by Amendment No. 4 dated April 12, 1993, as further amended
               by Amendment No. 5 dated May 14, 1993, as further amended by Amendment No. 6 dated March 31,
               1994 and as further amended by Amendment No. 7 dated February 13, 1996
*10.23         Master Lease and Warrant Agreement dated October 1, 1990 between the Company and PacifiCorp
               Credit, Inc. d/b/a Pacific Venture Finance, Inc. ("PacifiCorp")
*10.24         Preferred Stock Purchase Warrant dated October 1, 1990 between the Company and PacifiCorp.
*10.25         Internal Use and Substrate Agreement dated April 10, 1993 between the Company and IBM
*10.26         Break-Up Agreement dated April 10, 1993 between the Company and IBM
*10.27         Escrow Agreement dated April 10, 1993 between the Company and IBM
*10.28         Master Agreement dated April 10, 1993 between the Company and IBM
*10.29         First Amended and Restated Agreement Regarding Confidential Information dated February 11, 1993
               between Company and IBM
 10.30         Loan and Security Agreement dated December 17, 1996 between the Company and The First National
               Bank of Boston
 10.31         $2,000,000 Revolving Note dated December 17, 1996 by the Company payable to The First National
               Bank of Boston
 11.1          Computation of Earnings per Share
*21.1          List of Subsidiaries of the Company
 23.1          Consent of Coopers & Lybrand L.L.P.
 27.1          Financial Data Schedule

</TABLE>

* before an exhibit number:  This exhibit is incorporated by reference to the
similarly-numbered exhibit filed as part of the Company's Registration Statement
on Form S-1, Registration No. 333-05241.

* after an exhibit number:  Management contracts and compensatory arrangements.

                                       37

<PAGE>

(B)    REPORTS ON FORM 8-K

The Company did not file any Report on Form 8-K during the quarter ended
December 31, 1996.

                                   SIGNATURES

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


                               OBJECT DESIGN, INC.

Date:  March 31, 1997                   /s/  ROBERT N. GOLDMAN
                                       -------------------------------
                                           Robert N. Goldman
                                           President and Chief Executive Officer

Date:  March 31, 1997                  /s/  LACEY BRANDT
                                       -------------------------------
                                           Lacey Brandt
                                           Chief Financial Officer

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

<TABLE>
<CAPTION>
       Signature                                    Title                        Date
       ---------                                    -----                        ----
<S>                                         <C>                              <C>
/s/ Robert N. Goldman                       President and Chief
____________________________                Executive Officer
Robert N. Goldman                           (Principal Executive
                                            Officer and Director)            March 31, 1997

/s/ Lacey Brandt                            Chief Financial
____________________________                Officer (Principal
Lacey Brandt                                Financial and Accounting
                                            Officer)                         March 31, 1997


/s/Gerald Bay                               Director                         March 31, 1997
----------------------------
Gerald Bay


/s/Arthur Marks                             Director                         March 31, 1997
----------------------------
Arthur Marks


/s/Tim Palmer                               Director                         March 31, 1997
----------------------------
Tim Palmer


                                       38


<PAGE>

/s/Scott Sperling                           Director                         March 31, 1997
----------------------------
Scott Sperling


/s/Steven Walske                            Director                         March 31, 1997
----------------------------
Steven Walske
</TABLE>

                                       39