<PAGE>
 
                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON DC 20549

                                   FORM 10-Q


[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934
     For the quarterly period ended 30 September 1998


                                       OR


[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934
     FOR THE TRANSITION PERIOD FROM ________ to ________

Commission file number 0-26376


                           ON TECHNOLOGY CORPORATION
             (Exact name of registrant as specified in its charter)


          Delaware                                       04-3162846
 (State of incorporation)                   (IRS Employer Identification Number)



                             One Cambridge Center
                        Cambridge Massachusetts  02142
                                (617) 374-1400

            (Address and telephone of principal executive offices)

                                  ___________


Indicate by check mark whether 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, and (2) has been subject to such filing requirements
for the past 90 days.


                    YES     X          NO
                         --------         -------


12,355,785 shares of the registrant's Common stock, $0.01 par value, were
outstanding as of November 4, 1998.


                     THIS DOCUMENT CONTAINS   23   PAGES.
                                            ------       
                       THE EXHIBIT INDEX IS ON PAGE 22.
<PAGE>
 
                  ON TECHNOLOGY CORPORATION AND SUBSIDIARIES



                         FORM 10-Q, September 30, 1998


                                   CONTENTS



Item Number                                                               Page
-----------                                                               ----



                        PART I:  FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements
 
              Balance sheets:
                September 30, 1998 and December 31, 1997                    3
              Statements of operations:
                Three and nine months ended September 30, 1998 and 1997     4
              Statements of cash flows:
                Nine months ended September 30, 1998 and 1997               5
              Notes to condensed consolidated financial statements        6-7
 
Item 2. Management's Discussion and Analysis of Financial
          Condition and Results of Operations                            8-19



                          PART II:  OTHER INFORMATION


Item 1.  Legal Proceedings                                                 20

Item 2.  Changes in Securities                                             20

Item 3.  Defaults Upon Senior Securities                                   20

Item 4.  Submission of Matters to a Vote of Security Holders               20

Item 5.  Other Information                                                 20

Item 6.  Exhibits and Reports on Form 8-K                                  20

SIGNATURES                                                                 21

EXHIBIT INDEX                                                              22

2
<PAGE>
 
                  ON TECHNOLOGY CORPORATION AND SUBSIDIARIES

                     CONDENSED CONSOLIDATED BALANCE SHEETS
                            (dollars in thousands)
                                  (unaudited)

<TABLE>
<CAPTION>
 
                                                                       SEPTEMBER 30,     DECEMBER  31,
                                                                           1998              1997   
                                                                       -------------     -------------
<S>                                                                   <C>               <C> 
ASSETS                                                                               
Current Assets:                                                                      
Cash and cash equivalents                                               $     9,601       $     6,679
Accounts receivable, net of allowance for doubtful accounts and                      
 sales returns of $1,563  and $2,975, respectively                            3,506             2,970
Inventories                                                                     127               267
Prepaid expenses and other current assets                                       952             2,508
Assets held for sale                                                            ---             1,755
                                                                       -------------     -------------
     Total current assets                                                    14,186            14,179
                                                                       -------------     -------------
Property and equipment, at cost:                                                     
Computers and equipment                                                       3,222             2,892
Equipment acquired under capital leases                                       1,392             2,443
Furniture and fixtures                                                          239               292
                                                                       -------------     -------------
Less--Accumulated depreciation                                                3,303             3,477
                                                                       -------------     -------------
                                                                              1,550             2,150
                                                                       -------------     -------------
Other assets and deposits                                                        85                81
Purchased intangibles, net of $1,426  and $1,106 of accumulated                      
   amortization, respectively                                                   652               972
                                                                       -------------     -------------
                                                                        $    16,473       $    17,382
                                                                       =============     ============= 
LIABILITIES AND STOCKHOLDERS' EQUITY                                                 
Current Liabilities:                                                                 
Current portion of capital lease obligations                            $        36       $       356
Accounts payable                                                              3,920             5,072
Accrued expenses                                                              1,839             3,719
Reserve for distributor inventories                                             120               216
Deferred revenue                                                              1,862             1,013
                                                                       -------------     -------------
    Total current liabilities                                                 7,777            10,376
                                                                       -------------     -------------
Capital lease obligations, net of current portion                               ---                10
                                                                       -------------     -------------
Stockholders' Equity:                                                                
Common stock, $.01 par value  Authorized - 20,000,000 shares                         
   Issued and outstanding - 12,366,810 shares and 12,223,213                         
   shares, respectively                                                         124               122
Additional paid in capital                                                   62,793            62,665
Deferred compensation                                                           ---              (229)
Accumulated deficit                                                         (54,128)          (55,480)
Cumulative translation adjustment                                               (46)              (35)
Treasury stock (15,000 and 15,000 shares at cost, respectively)                 (47)              (47)
                                                                       -------------     -------------
          Total stockholders' equity                                          8,696             6,996
                                                                       -------------     -------------
                                                                        $    16,473       $    17,382
                                                                       =============     ============== 
</TABLE>
  The accompanying notes are an integral part of these condensed consolidated
                             financial statements.

3
<PAGE>
 
                  ON TECHNOLOGY CORPORATION AND SUBSIDIARIES

                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
               (dollars in thousands, except per share amounts)
                                  (unaudited)



<TABLE> 
<CAPTION>
                                                    THREE MONTHS                     NINE MONTHS
                                                ENDED SEPTEMBER 30,               ENDED SEPTEMBER 30,
                                                -------------------               -------------------
                                               1998             1997             1998             1997 
                                           ------------     ------------     ------------     ------------   
<S>                                        <C>              <C>              <C>              <C>  
Revenue:
-------
Net product revenue                        $      4,031     $      9,051     $     10,922     $     33,648
Other revenue                                     1,219            1,363            3,513            3,474
                                           ------------     ------------     ------------     ------------   
       Total revenue                              5,250           10,414           14,435           37,122
                                           ------------     ------------     ------------     ------------   

Operating expenses:
------------------
Cost of product revenue                             980            3,214            2,910            7,650
Sales and marketing                               2,603            5,502            7,594           18,995
Research and development                          2,143            3,275            6,729            9,956
General and administrative                          873            1,716            2,567            3,975
Charge for purchased incomplete
  research and development                          ---              ---              ---           15,898
Charge for restructure                              ---            4,530              ---            4,530
Gain on sale of assets                              ---              ---           (6,518)             ---
                                           ------------     ------------     ------------     ------------   
     Income (loss) from operations               (1,349)          (7,823)           1,153          (23,882)
                                           ------------     ------------     ------------     ------------   
Interest income, net                                 92               59              213              234
Other Income                                         12              ---               12              ---
                                           ------------     ------------     ------------     ------------   
Income (loss) before provision
         for income taxes                        (1,245)          (7,764)           1,378          (23,648)
                                           ------------     ------------     ------------     ------------   
Benefit (provision) for income taxes                 (5)             642              (27)            (133)
                                           ============     ============     ============     ============ 
     Net Income (loss)                     $     (1,250)    $     (7,122)    $      1,351     $    (23,781)
                                           ============     ============     ============     ============ 

Basic earnings (loss) per share            $      (0.10)    $      (0.59)    $       0.11     $      (1.98)
                                           ============     ============     ============     ============ 

Diluted earnings (loss) per share          $      (0.10)    $      (0.59)    $       0.11     $      (1.98)
                                           ============     ============     ============     ============ 

Basic shares used in
  per share calculation                      12,312,326       12,160,000       12,256,211       12,036,309
                                           ============     ============     ============     ============ 

Diluted shares used in
  per share calculation                      12,312,326       12,160,000       12,604,164       12,036,309
                                           ============     ============     ============     ============ 
</TABLE>

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

4
<PAGE>
 
                  ON TECHNOLOGY CORPORATION AND SUBSIDIARIES

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (dollars in thousands)
                                  (unaudited)

<TABLE> 
<CAPTION>
                                                              NINE MONTHS              
                                                          ENDED SEPTEMBER 30,          
                                                          -------------------          
                                                         1998             1997            
                                                     ------------     ------------ 
<S>                                                  <C>              <C>              
Cash Flows from Operating Activities
   Net income (loss)                                 $      1,351     $    (23,781)
Adjustments to reconcile net income (loss)
to net cash used in operating activities
   Charge for purchased research and development              ---           15,898
   Asset write-down related to restructure charge             ---            1,328
   Gain on sale of assets                                  (6,518)             ---
   Amortization of deferred compensation                      229               69
   Depreciation and amortization                            1,218            3,438
   Change in direct marketing costs                           ---              (50)
   Change in deferred tax asset                               ---            1,062
   Changes in assets and liabilities:
     Accounts receivable                                     (567)           1,363
     Inventories                                              138              959
     Prepaid expenses and other current assets              1,548             (912)
     Accounts payable                                        (803)             197
     Accrued expenses                                      (1,877)              17
     Reserve for distributor inventory                        (96)            (104)
     Deferred revenue                                         854           (2,692)
                                                     ------------     ------------ 
        Net cash used in operating activities              (4,523)          (3,208)
                                                     ------------     ------------ 
Cash Flows From Investing Activities
   (Increase) decrease in other assets and deposits            (4)              15
   Purchase of property and equipment, net                   (293)          (1,549)
   Purchase of Purview Technologies, Inc.,
      net of cash acquired                                    ---           (1,121)
   Purchase of csd Software GmbH, net of 
      cash acquired                                           (34)          (5,791)
   Net proceeds from assets held for sale,
      net of deal costs                                     8,273              ---
        Net cash provided by (used in)               ------------     ------------
           investing activities                             7,942           (8,446)
                                                     ------------     ------------ 
Cash Flows From Financing Activities
   Exercise of stock options                                   65               29
   Stock purchase through ESPP                                 66               73
   Purchase of treasury stock                                 ---              (47)
   Principal repayments on obligation under 
      capital lease                                          (328)            (818)
                                                     ------------     ------------ 
        Net cash used in financing activities                (197)            (763)
                                                     ------------     ------------ 
Net effect of exchange rates on cash & 
   cash equivalents                                          (300)              37
Net increase (decrease) in cash and cash equivalents        2,922          (12,380)
Cash and cash equivalents, beginning of period              6,679           20,774
                                                     ------------     ------------ 
Cash and cash equivalents, end of period             $      9,601     $      8,394
                                                     ============     ============ 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Cash paid for -
         Interest paid                               $         58     $        131
                                                     ============     ============ 
         Income taxes paid                           $         27     $        487
                                                     ============     ============ 
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:

Return of property and equipment under 
   capital leases -                                  $      1,049     $        ---
                                                     ============     ============ 
</TABLE>

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

5
<PAGE>
 
                  ON TECHNOLOGY CORPORATION AND SUBSIDIARIES

             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                         FORM 10-Q, September 30, 1998
                (dollars in thousands, except per share amount)
                                  (unaudited)


1.  Interim Financial Statements
    ----------------------------

          The accompanying consolidated financial statements have been presented
by ON Technology Corporation (together with its consolidated subsidiaries, the
"Company") without audit (except for the balance sheet information as of
December 31, 1997) in accordance with generally accepted accounting principles
for interim financial statements and with the instructions to Form-10Q and
Regulation S-X pertaining to interim financial statements.  Accordingly, these
interim financial statements do not include all information and footnotes
required by generally accepted accounting principles for complete financial
statements.  The financial statements reflect all adjustments and accruals which
management considers necessary for a fair presentation of financial position as
of September 30, 1998 and December 31, 1997, and results of operations for the
three and nine months ended September 30, 1998 and September 30, 1997.  The
results for the interim periods presented are not necessarily indicative of
results to be expected for any future period.  The financial statements should
be read in conjunction with the audited financial statements and the notes
thereto included in the Company's Annual Report on Form 10-K.

2.  Earnings (loss) per Share
    -------------------------

          The Company calculates earnings (loss) per share in accordance with
Statement of Financial Accounting Standards No. 128  "SFAS 128", Earnings Per
Share.  Basic earnings per share is calculated by dividing net income (loss) by
the weighted average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution of stock options that
could share in the earnings of the Company.


Basic and diluted EPS as required by SFAS 128, are as follows:
                                        
<TABLE> 
<CAPTION>
(dollars in thousands, except per share data)            THREE MONTHS                     NINE MONTHS
                                                     ENDED SEPTEMBER 30,               ENDED SEPTEMBER 30,
                                                     -------------------               -------------------
                                                    1998             1997             1998             1997 
                                                ------------     ------------     ------------     ------------   
<S>                                             <C>              <C>              <C>              <C>  
Net Income (loss)                               $     (1,250)    $     (7,122)    $     (1,351)    $    (23,781)

Basic weighted average shares outstanding             12,312           12,160           12,256           12,036
Weighted average common equivalent shares                ---              ---              348              ---
                                                ------------     ------------     ------------     ------------   

Diluted weighted average shares outstanding           12,312           12,160           12,604           12,036
                                                ============     ============     ============     ============ 


 Basic earnings per share                       $      (0.10)    $      (0.59)            0.11     $      (1.98)
                                                ============     ============     ============     ============ 

 Diluted earnings per share                     $      (0.10)    $      (0.59)            0.11     $      (1.98)
                                                ============     ============     ============     ============ 

Anti-dilutive securities, that were not 
  included in the above table are as follows:
              Stock Options:                       1,369,523          750,956          891,015          895,386
                                                ============     ============     ============     ============ 
</TABLE> 

6
<PAGE>
 
3.  New Accounting Pronouncements
    -----------------------------

          The Company adopted SFAS 130, "Reporting Comprehensive Income",
effective January 1, 1998.  SFAS 130 establishes standards for reporting and
display of comprehensive income and its financial statements.  The Company's
only item of other comprehensive income relates to foreign currency translation
adjustments, and is presented separately on the balance sheet as required.  If
presented on the statement of operations for the three and nine months ended
September 30, 1998, comprehensive income would be $26 higher and $11 lower,
respectively than reported net income (loss), due to foreign currency
translation adjustments.  If presented on the statement of operations for the
three and nine months ended September 30, 1997, comprehensive income would be
$71 higher and $41 higher, respectively than reported net income (loss), due to
foreign currency translation adjustments.

          In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS 131, "Disclosures about Segments of an Enterprise and Related Information".
In February 1998 FASB issued SFAS 132, "Employer's Disclosures about Pensions
and other Post-Retirement Benefits".  Both SFAS 131 and SFAS 132 are effective
fiscal years beginning after December 15, 1997.  The Company believes that the
adoption of these accounting standards will not have a material impact on the
Company's consolidated financial position or results of operations.

          In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1, "Accounting for Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1").  SOP 98-1
requires computer software costs associated with internal use software to be
expensed as incurred until certain capitalization criteria are met.  The Company
will adopt SOP 98-1 prospectively beginning January 1, 1999.  Adoption of this
Statement will not have a material impact on the Company's consolidated
financial position or results of operations.

          In April 1998, the AICPA issued Statement of Position 98-5, "Reporting
on the Costs of Start-Up Activities" ("SOP 98-5").  SOP 98-5 requires all costs
associated with pre-opening, pre-operating and organization activities to be
expensed as incurred.  The Company will adopt SOP 98-5 beginning January 1,
1999.  Adoption of this Statement will not have a material impact on the
Company's consolidated financial position or results of operations.

          In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities".  SFAS 133 establishes accounting and
reporting standards for derivative instruments and for hedging instruments.  It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value.  This statement applies to all entities and is effective for all
fiscal quarters beginning after June 15, 1999.  Initial application of this
Statement should be as of the beginning of an entity's fiscal quarter.  As of
September 30, 1998 and during the quarter then ended, the Company did not hold
any derivative instruments or have any hedging activities.  The Company does not
expect adoption of this Statement to have a significant impact on its financial
position or results of operations.



4.  Gain on Sale of Assets
    ----------------------

     In connection with the Sale of Assets to Elron Software Inc., the Company
received net proceeds of $8,823 and incurred $550 of deal costs.  The Sale of
Assets that had a carrying value of $1,755, resulted in a net gain of $6,518,
which was recorded in the first quarter of 1998.

7
<PAGE>
 
                  ON TECHNOLOGY CORPORATION AND SUBSIDIARIES

   Management Discussion and Analysis of Financial Condition and 
                             Results of Operations

                         FORM 10-Q, September 30, 1998
                                  (unaudited)


OVERVIEW

    ON Technology Corporation and Subsidiaries (the "Company") is engaged in the
development, marketing, sales support, and distribution of Groupware and Desktop
Management software.

    The Company does not provide forecasts of the future financial performance
of the Company. From time to time, however, the information provided by the
Company or statements made by its employees may contain forward-looking
statements. In particular, statements contained in this Form 10-Q that are not
historical statements (including, but not limited to, statements concerning
estimates of future revenues, operating expense levels and such operating
expense levels relative to the Company's total revenues) constitute forward-
looking statements under the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. See "Certain Factors That May Affect Future
Results."


RESULTS OF OPERATIONS

  The following table sets forth, for the periods indicated, certain financial
data as percentages of the Company's total revenue:

<TABLE> 
<CAPTION>
                                                           THREE MONTHS ENDED                 NINE MONTHS ENDED
                                                     -----------------------------     -------------------------------
                                                     SEPTEMBER 30,    SEPTEMBER 30,    SEPTEMBER 30,      SEPTEMBER 30,
                                                         1998              1997             1998               1997 
                                                     -------------    -------------    -------------      -------------   
<S>                                                 <C>              <C>              <C>                <C>  
Revenue:
     Net product revenue                                 76.8%            86.9%            75.7%              90.6%
     Other revenue                                       23.2%            13.1%            24.3%               9.4%
                                                     -------------    -------------    -------------      -------------   
       Total revenue                                    100.0%           100.0%           100.0%             100.0%
                                                     -------------    -------------    -------------      -------------   
Operating expenses:
     Cost of product revenue                             18.7%            30.9%            20.2%              20.6%
     Sales and marketing                                 49.6%            52.8%            52.6%              51.2%
     Research and development                            40.8%            31.4%            46.6%              26.8%
     General and administrative                          16.6%            16.5%            17.8%              10.7%
     Charge for purchased R&D                             0.0%             0.0%             0.0%              42.8%
     Charge for Restructure                               0.0%            43.5%             0.0%              12.2%
     Gain on sale of assets                               0.0%             0.0%           (45.2)%              0.0%
                                                     -------------    -------------    -------------      -------------   
Income (loss) from operations                           (25.7)%          (75.1)%            8.0%             (64.3)%
                                                     -------------    -------------    -------------      -------------   
Interest income, net                                      1.8%             0.5%             1.5%               0.6%
Other income                                              0.2%             0.0%             0.1%               0.0%
                                                     -------------    -------------    -------------      -------------   
Net income (loss) before
   Provision for income taxes                           (23.7)%          (74.6)%            9.6%             (63.7)%
                                                     -------------    -------------    -------------      -------------   
Benefit (provision) for income taxes                     (0.1)%            6.2%            (0.2)%              (.4)%
                                                     -------------    -------------    -------------      -------------   
Net income (loss)                                       (23.8)%          (68.4)%            9.4%             (64.1)%
                                                     =============    =============    =============      ============= 
</TABLE>



    NET PRODUCT REVENUE.  The Company's net product revenue is derived primarily
from the licensing of software products.  Net product revenue, for the three and
nine months ended September 30, 1997, also includes revenue from catalog sales
of third party products and catalog advertising space of $908 thousand and $3.1
million, respectively.  For the three months ended September 30, net product
revenue decreased $5.0 million (55.5%) from 1997 to 1998.  For the nine months
ended September 30, net product revenue decreased $22.7 million (67.5%) from
1997 to 1998.  The decrease is due primarily to products de-emphasized as part
of the strategic reorganization and restructurings undertaken in 1997 and the
Company's sale of its Network Management and Network Security Business along
with the related marketing systems and organization to Elron Software Inc., in
February 1998 (the "Elron Transaction").

8
<PAGE>
 
    OTHER REVENUE. The Company's other revenue consists of rentals of portions
of the Company's customer lists, royalties received in connection with licensing
ON's software to third parties, maintenance revenue, training and consulting.
For the three months ended September 30, other revenue decreased $144 thousand
(10.6%) from 1997 to 1998. The decrease is attributed to the loss in revenue
from maintenance contracts from existing customers due to the Company's sale of
its Network Management and Network Security Business along with the related
marketing systems and organization to Elron Software Inc., in February 1998 (the
"Elron Transaction"). For the nine months ended September 30, other revenue
increased $39 thousand (1.1%) from 1997 to 1998 due to improved sales efforts.

    COST OF PRODUCT REVENUE.  Cost of product revenue primarily consists of
expenses associated with product documentation, production and fulfillment costs
and royalty fees associated with products that are licensed from third party
developers.  In addition, cost of product revenue includes the cost of third
party products resold through the Company's catalog, the cost of producing the
catalog and amortization of purchased intangibles.  For the three and nine
months ended September 30, cost of product revenue decreased $2.2 million
(69.5%) and $4.7 million (62.0%), respectively, from 1997 to 1998.  This
decrease was primarily the result of decreased product revenue.  As part of the
Company's announced reorganization of its operations, the Company has ceased to
market, sell, develop and support the anti-virus business and decreased cash
spent for new customer acquisitions for its groupware businesses.  The cost of
product revenue decreased in absolute dollars due to the Elron Transaction.

    SALES AND MARKETING EXPENSE.  Sales and marketing expense primarily consists
of compensation and benefits paid to sales and marketing personnel and the costs
of direct mail and telemarketing campaigns including the costs of product trials
requested by potential customers.  Sales and marketing expense also includes the
costs of administering the catalog operation, the costs of public relations,
trade shows and conferences, and the telephone and information technology costs
associated with sales activities.  For the three and nine months ended September
30, sales and marketing expenses decreased $2.9 million (52.7%) and $11.4
million (60.0%), respectively, from 1997 to 1998.  The decrease in absolute
dollars is due to the Elron Transaction.

    RESEARCH AND DEVELOPMENT EXPENSE.  Research and development expense includes
costs associated with the development of new products, the enhancement of
existing products, and the provision of technical support.  For the three and
nine months ended September 30, research and development expense decreased $1.1
million (34.6%) and $3.2 million (32.4%), respectively, from 1997 to 1998. The
decrease in absolute dollars is due to the Elron Transaction.  The Company plans
to continue to make significant investments in research and development related
to the Company's desktop management software business.

    GENERAL AND ADMINISTRATIVE EXPENSE.  General and administrative expense
includes executive compensation, executive support costs, accounting operations,
planning, and business development operations.  For the three and nine months
ended September 30, general and administrative expense decreased $843 thousand
(49.1%) and $1.4 million (35.4%), respectively, from 1997 to 1998.  The decrease
in absolute dollars is due to the Elron Transaction and restructurings.  The
percentage of general and administrative expense to total revenue increased due
to reduced sales resulting from the Elron Transaction.

    CHARGE FOR PURCHASED RESEARCH AND DEVELOPMENT.  In connection with the
acquisitions of Purview Technologies, Inc. and csd Software GmbH during the
three and nine months ended September 30, 1997, the Company allocated an
aggregate of $15.9 million of the aggregate purchase price for such acquisitions
to purchased incomplete research and development projects.  Accordingly, these
costs were expensed as of the acquisition dates.  These allocated costs
represent the estimated fair market value related to the incomplete projects as
determined by an appraisal.  The development of these projects had not reached
technological feasibility and the technology had no alternative future use.  The
technology acquired in these acquisitions has required, and will require,
substantial additional development by the Company.
 
    CHARGE FOR RESTRUCTURE AND REORGANIZATION.  On July 29, 1997, the Company
announced that it had implemented a reorganization of its operations and a
restructuring plan (the "Plan").  The Plan included write-offs and write-downs
of certain assets, including accruing the costs related to a significant
reduction in the workforce, primarily in the technical support and sales and
marketing departments.  In addition, the Company has exited from the anti-virus
business and de-emphasized its investment in new customer acquisitions for the
Company's groupware, network management and security businesses.  As a result of
the Plan the Company recorded a charge of $4.5 million.  Included in the Plan
was an additional inventory write-down of $849 thousand which is included in
cost of product revenue in accordance with Emerging Issues Task Force (EITF) 96-
9, Classification of Inventory Markdowns and Other Costs Associated with a
restructuring.

9
<PAGE>
 
    GAIN ON SALE OF ASSETS. In connection with the Elron Transaction, the
Company received net proceeds of $8.8 million and incurred $550 thousand of
direct transaction costs. Pursuant to the Elron Transaction, the Company sold
assets that had a carrying value of $1.8 million, and recorded a gain of $6.5
million in the nine months ended September 30, 1998.
 
    INTEREST INCOME, NET. Interest income consists primarily of interest expense
associated with equipment leases and interest income earned on cash and cash
equivalents. For the three months ended September 30, interest income increased
$33 thousand (55.9%) from 1997 to 1998. The increase is due to the improved cash
position of the Company resulting from the net proceeds received through the
Elron Transaction. For the nine months ended September 30, interest income
decreased $21 thousand (9.0%) from 1997 to 1998. The decrease is a result of the
change in cash available for investment during the first three months of 1998.

    OTHER INCOME.  Other income resulted from the gain on sale of equipment sold
during the three and nine months ended September 30, 1998.

    INCOME TAXES.  The Company recorded a book gain on the Sale of Assets to
Elron; however, for tax purposes the Company recognized an ordinary loss on this
transaction. The provision for 1998 represents additional minimum taxes owed.
The Company recorded a tax provision of $133 thousand for the nine months ended
September 30, 1997, which was a result of the csd Software GmbH acquisition that
was partially offset by a tax credit.

LIQUIDITY AND CAPITAL RESOURCES

    The Company has funded its operations to date primarily through cash flow
from operations, public and private placements of capital stock and net proceeds
received from the sale of certain assets to Elron Software. At September 30,
1998, the Company had available cash and cash equivalents of $9.6 million. The
Company has an unused and available line of credit of $10.0 million with a
commercial bank. The Company can borrow under this line of credit up to the
greater of $10.0 million or the sum of 80% of qualified domestic accounts
receivable and 40% of qualified foreign accounts receivable. Advances pursuant
to the line of credit are secured by liens granted on the Company's accounts
receivable. At September 30, 1998, the Company did not have an outstanding
balance under the line of credit agreement.

    Net cash used in operating activities for the nine months ended September
30, 1997 and September 30, 1998, was $3.2 million and $4.5 million,
respectively. For the nine months ended September 30, 1997, net cash used in
operating activities consisted primarily of a net loss of ($23.8 million) offset
by a charge for purchased research of ($15.9 million). Additional factors
contributing to net cash used in operating activities included depreciation and
amortization of $3.4 million, a decrease of accounts receivable of $1.4 million
and inventories of $959 thousand and an increase in accounts payable of $197
thousand. For the nine months ended September 30, 1998, net cash used in
operating activities consisted primarily of net income of $1.4 million which is
offset by a $6.5 million gain on sale of assets and net change in depreciation
and amortization, amortization of deferred compensation and operating assets and
liabilities of $644 thousand.

    Net cash provided by (used in) investing activities for the nine months
ended September 30, 1997 and September 30, 1998 was ($8.4) million and $7.9
million, respectively. For the nine months ended September 30, 1997, net cash
used in investing activities primarily reflects purchases of property and
equipment of $1.6 million, and direct costs of the acquisitions of Purview
Technologies, Inc. and csd Software GmbH of $1.2 million and $5.8 million,
respectively. For the nine months ended September 30, 1998 cash provided by
investing activities was primarily a result of net proceeds from assets held for
sale of $8.3 million.

    Net cash used in financing activities for the nine months ended September
30, 1997 and September 30, 1998 was $763 thousand and $197 thousand,
respectively. For the nine months ended September 30, 1997, net cash used in
financing activities consisted of principal repayment on obligations under
capital lease of $818 thousand, partially offset by exercises of stock options
and stock purchases through the ESPP of $73 thousand. For the nine months ended
September 30, 1998, net cash used in financing activities consisted of principal
repayment on obligations under capital lease of $328 thousand, partially offset
by the exercises of stock options and stock purchases through the ESPP of $131
thousand.

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CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS



SOME STATEMENTS CONTAINED IN THIS FORM 10-Q THAT ARE NOT HISTORICAL STATEMENTS
(INCLUDING BUT NOT LIMITED TO, STATEMENTS CONCERNING ESTIMATES OF FUTURE
REVENUES, OPERATING EXPENSE LEVELS AND SUCH OPERATING EXPENSE LEVELS RELATIVE TO
THE COMPANY'S TOTAL REVENUES) CONSTITUTE FORWARD-LOOKING STATEMENTS UNDER THE
SAFE HARBOUR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
THE FOLLOWING RISK FACTORS, AMONG OTHER FACTORS (INCLUDING THE ACCURACY OF THE
COMPANY'S INTERNAL ESTIMATES OF REVENUE AND OPERATING EXPENSE LEVEL AND OTHER
RISKS DETAILED FROM TIME TO TIME IN THE COMPANY'S FILINGS WITH THE SECURITIES
AND EXCHANGE COMMISSION), MAY CAUSE THE COMPANY'S ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THE RESULTS STATED IN SUCH FORWARD LOOKING STATEMENTS.



CHANGE IN MARKETING STRATEGY

    Historically, the Company has marketed all of its products other than the
Comprehensive Client Management ("CCM") products through its Free Trial
Marketing system.  Pursuant to the Elron Transaction, the Company sold, among
other things, its Free Trial marketing system, subject to a limited license-back
to the Company.  This license will allow the Company to continue to use the Free
Trial Marketing system to market its current Groupware products, including
future versions and feature extensions of such products, to existing customers
and identified potential customers, for a period of three years from the closing
date of the Elron Transaction (the "Closing Date"), subject to termination in
the event of a sale of the Groupware products or a sale of all or substantially
all of the Company's business or assets.

    Although the Company retains limited rights to the Free Trial Marketing
system, the Company's ability to implement a marketing strategy based on the
Free Trail Marketing system has been severely curtailed because the Company no
longer has the personnel and infrastructure necessary to support such a
strategy.  Moreover, the Company has made the strategic decision to limit its
Groupware marketing efforts to exclusively selling new seats to its existing
customer base, while focusing the majority of its management, financial and
technical resources on its CCM products.


CCM PRODUCT MARKETING STRATEGY

    The target market for the CCM products is entirely different from the target
market for the products the Company has marketed and sold through its Free Trial
Marketing system.  The target market for CCM products consists primarily of
large corporations such as Deutsche Telekom and Munich Reinsurance (both
existing CCM customers).  In addition, CCM product sales per customer are
generally in the range of $20,000 to $500,000, as opposed to an average sale per
customer for the Company's Groupware products of approximately $2,500.  Sales of
CCM products pose significantly greater financial risks, and require greater up-
front investments in marketing, technical and financial resources, than sales of
the Company's historical products.  As a result, the Company is adopting a new
and untested marketing strategy using a direct sales force and in-field service
organization.  This marketing strategy requires significant investments in
additional marketing and technical personnel, retraining of existing personnel,
ongoing product development and creation of an in-field service organization.
To date, substantially all of the Company's marketing of CCM products has been
in Europe.  While the Company has developed valuable experience and expertise in
Europe, there can be no assurance that the Company will be able to transfer such
experience and expertise to the North American market.

    As a result of the Elron Transaction, the Company relies on fewer large
resellers and distributors for its revenue since the target market for CCM
products is primarily large corporations.  Currently, only one customer accounts
for more than 10% of the Company's net revenue.  For the twelve months ended
December 31, 1997, Deutsche Telekom accounted for $4.5 million, or 52% of net
revenue from the Company's current products.  For the three and nine months
ended September 30, 1998, Deutsche Telekom accounted for $797 thousand, or 15%
and $2.4 million, or 17%, respectively of net revenue.  It is possible that the
Company's change in marketing strategy will result in other customers accounting
for more than 10% of the Company's net revenues.

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<PAGE>
 
TECHNOLOGICAL REQUIREMENTS OF THE CCM PRODUCTS; PRODUCT DEVELOPMENT

    The technological demands of the CCM products require a commitment of
significant ongoing financial, technical and personnel resources to product
development, training of service technicians and customer training.  Because the
Company's historical products were not as technologically sophisticated as the
CCM products, the Company has not to date made the required investment and has
not proven that it can develop and maintain the organization required to support
such products.  The Company believes that its experience with the CCM products
in Europe will provide a valuable base on which to build the necessary
financial, technical and personnel resources to sell, market, develop and
support the CCM products in North America; however, there can be no assurance
that the Company will be able to expand and develop its resources to support CCM
products in North America.

    The CCM product is typically larger and more complex than the products that
the Company has previously developed.  The Company's ability to continue to
enhance the CCM  product to meet customer and market requirements will depend
substantially on its ability to effectively manage its development effort, to
attract and retain the required development personnel in Cambridge,
Massachusetts and Starnberg, Germany and to coordinate and manage geographically
remote development efforts.



FINANCIAL RESOURCES REQUIRED BY THE CCM PRODUCTS

    The Company has estimated that the product development, marketing and sales
costs of the CCM products are approximately $1.0 to $1.5 million per month.  The
Company believes that it has sufficient financial resources to fund these costs
through at least December 1998.  There can be no assurance that the Company's
estimate of the marketing, sales and product development costs of the CCM
products will prove correct, that such costs will not increase beyond the
Company's available financial resources, or that additional sources of capital,
if and when needed, will be sufficient or available.



RAPID TECHNOLOGICAL CHANGE

    The Groupware and Enterprise Desktop Management software markets are
characterized by rapid technological developments, changes in customer
requirements, evolving industry standards and frequent new product
introductions.  The Company's future success will depend, in part, upon its
ability to enhance its existing applications, develop and introduce new products
that take advantage of technological advances, and respond promptly to new
customer requirements and evolving industry standards.  As discussed above, the
Company has made a strategic decision to limit its Groupware marketing efforts
to exclusively selling new seats to its existing customer base.  The Company has
identified a number of enhancements to CCM which it believes are important to
its continued success in the Enterprise Desktop Management software market.
There can be no assurance that the Company will be successful in developing and
marketing, on a timely basis, enhancements to its existing products or new
products, or that its new products will adequately address the changing needs of
the marketplace.  Failure by the Company in any of these areas could materially
and adversely affect the Company's business, condition (financial and
otherwise), prospects and results of operations.  In addition, from time to time
the Company or its competitors may announce new products with capabilities or
technology that could have a potential to replace or shorten the life cycles of
the Company's existing products or render such products obsolete.  There can be
no assurance that announcements by the Company or its competitors of new
products will not cause customers to defer purchasing the Company's existing
products.  In addition, there can be no assurance that future changes in DOS,
Windows, Windows NT, UNIX, NetWare or other popular operating systems would not
result in incompatibility with the Company's products.  The Company's failure to
introduce new products on a timely basis that are compatible with operating
systems and environments preferred by desktop customer users would have a
material adverse effect on the Company's business, condition (financial or
otherwise), prospects and results of operations.

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<PAGE>
 
COMPETITION


    The market for the Company's products is highly competitive, and the
Company expects competition to increase in the future.  The Company believes
that the principal competitive factors affecting the market for its products
include performance, functionality, ease of use, ease of installation, quality,
customer support, breadth or product line, speed of product delivery, frequency
of upgrades and updates, brand name recognition, company reputation, adherence
to industry standards, integration with third-party solutions and price. Certain
of the criteria upon which the performance and quality of the Company's
Groupware software compete includes speed of response, ease of use, ease of
installation, interoperability with other messaging systems and simplicity of
administration.  The Company believes that it generally competes favorably with
respect to each of these factors; however, there can be no assurance that the
Company will be able to continue to compete successfully against current and
future competitors.  Certain of the Company's competitors have been in the
market longer than the Company, and other competitors are larger and may have
greater name recognition than the Company.  As is the case in many segments of
the software industry, the Company may encounter increasing price competition in
the future.  This could reduce average selling prices and, therefore, profit
margins.  Competitive pressures could result not only in sustained price
reductions but also in a decline in sales volume, which could have a material
adverse effect on the Company's business, condition (financial or otherwise),
prospects and results of operations.  There can be no assurance that the Company
will continue to compete effectively against existing and potential competitors
in these markets, many of whom have substantially greater financial, technical,
marketing and support resources and name recognition than the Company.

    The Groupware and Enterprise Desktop Management software markets are highly
fragmented, with products offered by many vendors.  In the e-mail market, the
Company competes with offerings from software, shareware and freeware
developers.  Shareware is software that is made available electronically on
bulletin boards systems.  Shareware users are encouraged to evaluate the
software for a short period of time and then either cease using it or pay a
license fee.  In the group scheduling market, the Company also competes with
personal information manager products ("PIMs") that have been enhanced to
include some group scheduling features.  In addition, the trend toward
enterprise-wide communications software solutions may result in a consolidation
of the communications software market around a smaller number of vendors who are
able to provide all of the necessary software and support capabilities.

    In the Enterprise Desktop Management market, the Company faces competition
from large and established companies, such as Microsoft, Intel and IBM/Tivoli,
which offer client management capabilities as part of their systems, network
and/or desktop management systems.  Moreover, Microsoft has announced the Zero
Administration Initiative for Windows ("ZAW"), which includes a set of
technologies that address some of the same client management issues as CCM.
Microsoft has described components of ZAW as being available for future versions
of the Windows NT and Windows 95 operating systems, as well as the Microsoft
Systems Management Server product.  There can be no assurance that the Company
can continue to compete effectively against Client Management software which is
included free with operating system software.



PRODUCT DEVELOPMENT


    The Company has in the past experienced delays in software development, and
there can be no assurance that it will not experience further delays in
connection with its current or future product development activities.  The
Company puts all of its products through alpha and beta test cycles and makes
significant efforts to debug all products before commercial release.  The
Company makes well-marked alpha and beta versions of its software available for
evaluation and testing and solicits and responds to input from evaluators.
However, there can be no assurance that the Company's products will not contain
undetected errors or version compatibility issues, particularly when first
introduced or when new versions are released, resulting in loss of or delay in
market acceptance.  Delays and difficulties associated with new product
introductions or product enhancements could have a material adverse effect on
the Company's business, condition (financial or otherwise), prospects and
results of operations.

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<PAGE>
 
     In addition to developing new products, the Company's internal development
staff is focused on developing upgrades and updates to existing products and
modifying, enhancing and completing any acquired products and incomplete
projects.  Future enhancements may, among other things, include additional
functionality, respond to user problems or address issues of compatibility with
changing operating systems and environments.  Failure to release such
enhancements on a timely basis could have a material adverse effect on the
Company's business, condition (financial or otherwise), prospects and results of
operations.  There can be no assurance that the Company will be successful in
these efforts.


    If the Company believes that a licensed product continues to be valuable
after the expiration of the initial license term, it will seek to extend the
term of the license. There can be no assurance that the Company will be able to
extend the term of expiring licenses, or that the economic arrangements for such
extensions would be comparable to the arrangements in effect during the initial
license term.



INCLUSION OF CCM AND GROUPWARE IN SYSTEM SOFTWARE AND APPLICATION SUITES


    In the future, vendors of operating system software and applications sold
for a single price (generally referred to as application suites) may continue to
enhance their products to include certain functions that are currently provided
most often by CCM and Groupware software or may bundle these products in their
application suites at no additional charge. The widespread inclusion of the
functions provided by the Company's products as standard features of operating
system software could, particularly if the quality of such functions were
comparable to that of the Company's products, render the Company's products
obsolete and unmarketable. Furthermore, even if the CCM and Groupware software
functions provided as standard features by operating systems are more limited
than those of the Company's products, there is no assurance that a significant
number of customers would not elect to accept such functions in lieu of
purchasing additional software. If the Company were unable to develop new CCM
and Groupware software products to further enhance operating systems and to
replace successfully any obsolete products, the Company's business, condition
(financial or otherwise), prospects and results of operations would be
materially and adversely affected.



POTENTIAL ACQUISITIONS


    The Company may in the future undertake additional acquisitions that could
present challenges to the Company's management, such as integrating and
incorporating new operations, product lines, technologies and personnel. If the
Company's management is unable to manage these challenges, the Company's
business, financial condition or results of operations could be materially
adversely affected. Any acquisition, depending on its size, could result in
significant dilution to the Company's stockholders. Furthermore, there can be no
assurance that any acquired products will gain acceptance in the Company's
markets.



PAST ACQUISITIONS


    The Company has in the past made a number of acquisitions that have been
and are being integrated and incorporated into the Company's operations, along
with the acquired product lines, technologies and personnel. If the Company's
management is unable to continue to manage these challenges, the Company's
business, financial condition or results of operations could be materially
adversely affected. There can be no assurance that any acquired products will
gain acceptance in the Company's markets.



INDIRECT CHANNELS OF DISTRIBUTION


    The Company markets its products (other than ON Command CCM) through
distributors and resellers in addition to its direct sales force.  These
distributors and resellers also sell other products that are complementary to,
or compete with, those of ON.  There can be no assurance that these distributors
and resellers will not give greater priority to products of other suppliers.
They have no long-term obligation to purchase products from the Company.  Since
the Company's agreements with its distributors provide for a right of return,
revenue recognized upon sales to distributors is subject to a reserve for
returns.  Management believes that the current reserve balance is adequate.  In

14
<PAGE>
 
addition, the Company may be unaware of the nature and scope of the
representations made to customers by these distributors and resellers. For
example, they could make representations to customers about the Company's
current and future products that are inaccurate or incomplete. This could result
in the products not meeting the customers' expectations or requirements.
Although the Company's agreements with its distributors generally provide the
Company with recourse against unauthorized action taken by the distributors,
there can be no assurance that the Company could recover adequate compensation
to cover the damage caused by an inaccurate representation.



PROPRIETARY TECHNOLOGY


    The Company's success is heavily dependent upon its proprietary software
technology.  The Company relies on a combination of contractual rights,
trademarks, trade secrets and copyrights to establish and protect its
proprietary rights in its software.

    The Company uses a printed "shrink-wrap" license for users of its Groupware
products distributed through traditional distribution channels in order to
protect its copyrights and trade secrets in those products.  Since these shrink-
wrap licenses are not signed by the licensee, many authorities believe that they
may not be enforceable under many state laws and the laws of many foreign
jurisdictions.  If such licenses are not enforceable, the user would not be
bound by the terms thereof, including the terms which seek to protect the
Company's proprietary technology.  If the printed shrink-wrap licenses prove to
be unenforceable, this may have a material adverse effect on the Company's
business, condition (financial or otherwise), prospects and results of
operations.

    The Company has signed license agreements from users of its CCM products to
protect its copyrights and trade secrets in those products.  The licenses may
not be enforceable under some state laws and the laws of many foreign
jurisdictions.  If such licenses are not enforceable, the user would not be
bound by the terms thereof, including the terms which seek to protect the
Company's proprietary technology.  If the signed license agreements prove to be
unenforceable, this may have a material adverse effect on the Company's
business, condition (financial or otherwise), prospects and results of
operations.

    The laws of some foreign countries either do not protect the Company's
proprietary rights or offer only limited protection for those rights.
Furthermore, in countries with a high incidence of software piracy, the Company
may experience a higher rate of piracy of its products.

    The Company has obtained registrations in the United States for the
following trademarks: ON Technology, Notework, Meeting Maker, ON Technology &
Design, ON Location, Instant Update and DaVinci Systems.  The Company has filed
for the trademark "ON Command CCM" in the United States, the European Community,
Canada and Australia.  The Company has obtained only four foreign registrations
of its Notework mark and two foreign registrations of its Meeting Maker mark,
due to significant costs involved in obtaining foreign registrations.  As a
result, the Company may not be able to prevent a third party from using its
trademarks in many foreign jurisdictions.  The Company has not to date
registered any of its copyrights.

    There can be no assurance that the steps taken by the Company to protect
its proprietary software technology will be adequate to deter misappropriation
of this technology.  Lesser sensitivity by corporate, government or
institutional users to avoiding copyright infringement could have a material
adverse effect on the Company's business, condition (financial or otherwise),
prospects and results of operation.

     There has been substantial litigation in the software industry involving
intellectual property rights of technology companies, although, to date, the
Company has not been subject to any such litigation.  Although the Company does
not believe that it is infringing the intellectual property rights of others,
there can be no assurance that such claims, if asserted, would not have a
material adverse effect on the Company's business, condition (financial or
otherwise) prospects and results of operations.  In addition, as the Company may
acquire or license a portion of the software included in its future products
from third parties, its exposure to infringement actions may increase because
the Company must rely upon such third parties for information as to the origin
and ownership of any software being acquired.  The Company generally obtains
representations as to the origin and ownership of such acquired or licensed
software and generally obtains indemnification to cover any breach of such
representations.  However, there can be no assurance that such representations
are accurate or that such indemnification will provide adequate compensation for
a breach of such representations.  In the future, litigation

15
<PAGE>
 
may be necessary to enforce and protect trade secrets and other intellectual
property rights owned by the Company. The Company may also be subject to
litigation to defend against claimed infringement of the rights of others or to
determine the scope and validity of the proprietary rights of others. Any such
litigation could be costly and cause diversion of management's attention, either
of which could have a material adverse effect on the Company's business,
condition (financial or otherwise) prospects or results of operations. Adverse
determinations in such litigation could result in the loss of the Company's
proprietary rights, subject the Company to significant liabilities, require the
Company to seek licenses from third parties or prevent the Company from
manufacturing or selling its products, any one of which could have a material
adverse effect on the Company's business, condition (financial or otherwise),
prospects and results of operations. Furthermore, there can be no assurance that
any necessary licenses will be available on reasonable terms, or at all.

    The Company could be subjected to lawsuits by customers, past, present or
future, and others due to possible errors in the Company's software.  The
Company is not aware of any material errors in its software or any pending or
threatened litigation.  The Company maintains insurance covering such
liabilities in the amounts of $12 million domestically and $4 million
internationally.  The Company believes that its insurance coverages are
sufficient to cover any such losses.


INTERNATIONAL REVENUE


    For the years ended December 31, 1996 and 1997 and the three and nine months
ended September 30, 1998, total revenue from international licenses (license
revenue from outside the United States) represented approximately 17%, 37%, 55%
and 51%, respectively, of the Company's total revenue.  The Company expects that
international revenue will constitute a significantly greater portion of the
Company's total revenue in the last two fiscal quarters of 1998.  Accordingly, a
greater percentage of the Company's total revenue will be subject to the risks
inherent in international sales, including the impact of fluctuating exchange
rates on demand for its products, longer payment cycles, greater difficulty in
protecting intellectual property, greater difficulty in accounts receivable
collection, unexpected changes in legal and regulatory requirements, seasonality
due to the slowdown of European business activity in the third quarter and
tariffs and other trade barriers.  There can be no assurance that these factors
will not have a material adverse effect on the Company's future international
license revenue.


LOSS OF KEY MANAGEMENT PERSONNEL

    The Company's success depends to a significant extent upon a number of key
technical and management employees.  While the Company's employees are required
to sign standard agreements concerning confidentiality and ownership of
inventions, the employees, with the exception of Messrs. Herman DeLatte, Loren
Platzman, John Bogdan and Edward Green, are generally not otherwise subject to
employment agreements or noncompetition covenants.  The loss of the services of
any of the Company's key employees could have a material adverse effect on the
Company's business, condition (financial or otherwise), prospects and results of
operation.  The Company does not maintain life insurance policies on key
employees.  The Company's success also depends in large part upon its ability to
attract and retain highly skilled technical, managerial, sales and marketing
personnel.

    Competition in the software industry for such personnel is intense. There
can be no assurance that the Company will be successful in retaining its
existing key personnel and in attracting and retaining the personnel it
requires.

GROUPWARE BUSINESS

    The Company has made the strategic decision to limit its Groupware marketing
efforts to exclusively selling new seats to its existing customer base, while
focusing the majority of its management, financial and technical resources on
the CCM products.  The Company believes that in the short-term the Company can
significantly reduce the costs associated with the Groupware products while
continuing to generate cash flow from the sale of these products.  However,
there can be no assurance that cash flow from the sale of the Groupware products
will not decrease faster than expected.  In addition, over the longer term, the
Company's strategic decision to cease marketing the Groupware products to new
customers will lead to an erosion of the customer base and a reduction of
revenue from such products.

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<PAGE>
 
    The Company's ability to attract and retain the employees needed to service
the Groupware products may be materially adversely affected by the Company's
strategic decision to de-emphasize the Groupware products.  Any loss of revenue
from the Groupware products may have a material adverse effect on the Company's
business, condition (financial or otherwise), prospects and results of
operation.


STRATEGIC REORGANIZATION

    On July 29, 1997, the Company reorganized and restructured its operations.
On October 29, 1997, additional restructuring actions were implemented. These
actions were designed to focus the Company on the CCM business. To date, the
implementation of this new corporate strategy has included hiring a new Chief
Executive Officer, electing a new Chairman of the Board of Directors, de-
emphasizing the acquisition of new customers in the Company's Groupware and
Network Management and Security business, discontinuing sales of the Company's
virus protection software, closing or reducing the Company's offices in Sydney,
Australia; Paris, France; London, United Kingdom; and Munich, Germany while
building up the Company's office in Starnberg, Germany and laying off
approximately 118 employees. There can be no assurance that the Company's new
corporate strategy will be successfully implemented. Furthermore, there can be
no assurance that the Company will not engage in further reorganizations or
restructurings in the future.


VARIABILITY OF QUARTERLY OPERATING RESULTS


    The Company's licensing activity and results of operations can fluctuate
significantly on a quarterly basis.  Causes of such fluctuations may include,
among other factors the volume and timing of new and repeat orders, the
introduction or announcement of new products or product enhancements by ON or
third parties, failure to ship trials, changes in response rates to the
Company's mailings and telemarketing programs, interruption in the Company's
overnight delivery, telephone or internal networks and databases, work
stoppages, changes in product prices, changes in operating expenses, changes in
product mix, increase in international sales as a percentage of total revenue,
seasonality, trends in the computer industry, unavailability of product,
potential software viruses and perceived threats thereof, customer order
deferrals, general economic conditions, extraordinary events such as
acquisitions or litigation and the occurrence of unexpected events.  While to
date, the Company has not experienced any work stoppages or unavailability of
products, there can be no assurance any of such events will not occur in the
future.  The occurrence of any such event could have a material adverse effect
on the Company's business, condition (financial or otherwise), prospects and
results of operations.  Because of the nature of its distribution methods for
its Groupware, the Company has virtually no backlog with respect to such
products and generally cannot predict when users will license such products.  As
a result of the longer enterprise sales and product roll-out cycle for CCM, the
Company will be better able to assess anticipated customer orders for CCM.
Historically, repeat orders have accounted for a significant portion of the
Company's total revenue; however, there can be no assurance that the Company
will be able to sustain current repeat order rates in the future, in light of
the de-emphasis in marketing efforts for the Groupware products.  Furthermore,
since the Company's cost of total revenue is relatively low and its operating
expenses are relatively fixed, any revenue shortfall in a quarter will result in
a substantially similar shortfall in net income.  In addition, significant
quarterly fluctuations in licensing activity will cause significant fluctuations
in the Company's cash flows and cash equivalents, accounts receivable and
deferred revenue accounts on the Company's balance sheet.

    The Company's business has experienced and is expected to continue to
experience seasonality, due in part to customer buying patterns.  In recent
years, the Company generally has had greater demand for its products in the
fourth quarter and has had weaker demand for its products during the first
quarter.  These fluctuations are caused primarily by customer budgeting and
purchasing patterns.  The Company believes this pattern will continue.

    The Company believes that period-to-period comparisons of its financial
results should not be relied upon as an indication of future performance.

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YEAR 2000 ISSUE

     As explained below, the Company has, and will continue to address Year 2000
issues. However, because no single standard for Year 2000 compliance has been
agreed upon by any industry group or promulgated by any government body, there
can be no assurance that the Company's efforts to address Year 2000 issues will
result in its products and internal computerized information systems being Year
2000 compliant in accordance with the various standards that have developed and
will continue to develop in the industry.

     The Company is currently working to evaluate the potential impact of the
year 2000 on the processing of date-sensitive information by the Company's
internal computerized information systems and the Company's software products
being sold.  The year 2000 problem is the result of computer programs being
written using two digits (rather than four) to define the applicable year.  Any
of the Company's products that have time-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000, which could result in
miscalculation or system failures.  Based on preliminary information, costs of
addressing potential problems are not currently expected to have a material
impact on the Company's business, condition (financial or otherwise), prospects
and results of operations.  However, failure of the Company, its customers or
vendors to resolve such processing issues in a timely manner, could have a
material adverse effect on the Company's business, condition (financial or
otherwise), prospects and results of operations.

     Over the past year, the Company has made substantial modifications and
improvements to its operational software.  An integral part of this process has
been to review all newly purchased and internally developed software for Year
2000 compliance.  The Company has completed a preliminary evaluation of all of
the existing software used in its internal systems and operations and expects
that such software will be Year 2000 compliant by the end of the third quarter
of 1999, at a cost not to exceed $250 thousand.  The Company is still evaluating
various hardware and equipment components used in its operations and also
expects to be Year 2000 compliant in this area by the end of the third quarter
of 1999, at cost not to exceed $50 thousand.  The Company believes that
although these costs are not material to its business, if these efforts are not
completed on time, or if the cost of updating or replacing the Company's
information systems greatly exceeds the Company's current estimates, the Year
2000 issue could have a material adverse impact on the Company's business,
condition (financial or otherwise), prospects and results of operations.

     The Company also intends to determine the extent to which the Company may
be vulnerable to any failures by its major suppliers, customers and service
providers to remedy their own Year 2000 issues, and is in the process of
initiating formal communications with these parties. At this time the Company is
unable to estimate the nature or extent of any potential adverse impact
resulting from the failure of third party suppliers, customers and service
providers to achieve Year 2000 compliance, although the Company does not
currently anticipate that it will experience any material shipment delays from
its major product suppliers or any material payment delays from its major
customers due to Year 2000 issues. However, there can be no assurance that these
third parties will not experience Year 2000 problems or that any problems would
not have a material adverse effect on the Company's results of operations.
Because the cost and timing of Year 2000 compliance by third parties such as
suppliers, customers and service providers is not within the Company's control,
no assurance can be given with respect to the cost or timing of such efforts or
any potential adverse effects on the Company of any failure by these third
parties to achieve Year 2000 compliance.

     The Company is in the process of establishing contingency plans to manage
the impact of a failure by any of its third party suppliers, customers or
service providers to be Year 2000 compliant. The Company believes that its
relationships with multiple third party suppliers and service providers and the
diversity of its customer base should reduce to some extent the impact of any
such failures. There can be no assurance that the contingency plans implemented
by the Company will successfully mitigate issues resulting from Year 2000 non-
compliance, and in the event that such plans do not successfully, in whole or in
part, mitigate such issues, there could be a material adverse affect on the
Company's business, condition (financial or otherwise), prospects and results of
operations.



18
<PAGE>
 
VOLATILITY OF STOCK PRICE


     The trading price of the Company's Common Stock has been, and in the future
may be, subject to wide fluctuations in response to actual or anticipated
quarterly operating results of the Company, announcements of technological
innovations or new applications by the Company or its competitors and general
market conditions in the software industry, as well as other events or factors.
In addition, stock markets have experienced extreme price and volume trading
volatility in recent years.  This volatility has had a substantial effect on the
market price of many technology companies and has often been unrelated to the
operating performance of those companies.  This volatility may adversely effect
the market price of the Company's Common Stock.

19

<PAGE>
 
                  ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
                         FORM 10-Q, September 30, 1998



                          PART II:  OTHER INFORMATION


Item 1.  Legal Proceedings
         Not Applicable

Item 2.  Changes in Securities
         Not Applicable

Item 3.  Defaults Upon Senior Securities
         Not Applicable

Item 4.  Submission of Matters to a Vote of Security Holders
         Not Applicable

Item 5.  Other Information
         If a stockholder intends to present a proposal at the Annual Meeting of
Stockholders of the Company in 1999 (the "1999 Annual Meeting") and does not
submit such proposal on or before December 31, 1998, such proposal will not be
included in the proxy statement and proxy card related to the 1999 Annual
Meeting.  Nonetheless, such stockholder may raise such proposal at the 1999
Annual Meeting; however, as a result of the adoption by the SEC on May 21, 1998
of new rule 14a-4(c)(1) under the Securities and Exchange Act of 1934, as
amended, if such stockholder fails to notify the Company at least 45 days prior
to March 31, 1999 (i.e., the month and day of the mailing of the Company's proxy
statement and proxy card related to the Annual Meeting of Stockholders of the
Company in 1998) of its intent to raise such proposal at the 1999 Annual
Meeting, then management proxies would be allowed to use their discretionary
voting authority in the event such proposal is raised at the 1999 Annual
Meeting, without any discussion of the matter in the proxy statement related to
the 1999 Annual Meeting.


Item 6.  Exhibits and Reports on Form 8-K


          (a) Exhibits


          The exhibits listed in the accompanying Exhibit Index on page 22 are 
filed or incorporated by reference as part of this Report.

          (b) Reports on Form 8-K
          None

20
<PAGE>
 
                  ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
                         FORM 10-Q, September 30, 1998

                                  SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



                              ON TECHNOLOGY CORPORATION



                              /s/ Herman DeLatte
                              ------------------
Date: November 13, 1998       Name:  Herman DeLatte
                              Title: Chief Executive Officer



                              /s/ John M. Bogdan
                              ------------------
Date: November 13, 1998       Name:  John M. Bogdan
                              Title: Vice President of Finance
                                     and Chief Financial Officer

21
<PAGE>
 
                  ON TECHNOLOGY CORPORATION AND SUBSIDIARIES
                         FORM 10-Q, September 30, 1998



                                 EXHIBIT INDEX


Exhibit No.        Description
-----------        -----------

27.0               Financial Data Schedule