<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION

                            Washington, D.C. 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 SEPTEMBER 30, 1999

                                      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 NO. 001-13609

                              SAGA SYSTEMS, INC.
            (Exact name of Registrant as specified in its charter)

             Delaware                                    54-1167173
             --------                                    ----------
  (State or other jurisdiction of           (I.R.S. employer identification no.)
  incorporation or organization)

                          11190 Sunrise Valley Drive
                            Reston, Virginia 20191
                            ----------------------
                   (Address of principal executive offices)

      Registrant's telephone number, including area code: (703) 860-5050

         SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT:


                                                      Name of each exchange
        Title of each class                            on which registered
        -------------------                            -------------------
    Common Stock, $0.01 par value                    New York Stock Exchange

        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 [_]

     As of October 22, 1999, 28,613,799 shares of the Registrant's common stock
were outstanding.
<PAGE>

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
Item                                                                     Page
----                                                                     ----
<S>                                                                      <C>
                                  P A R T   I

1.  Financial Statements:

      Condensed Consolidated Balance Sheets at September 30, 1999 and
       December 31, 1998.................................................  3
      Condensed Consolidated Statements of Operations for the three and
       nine months ended September 30, 1999 and 1998.....................  5
      Condensed Consolidated Statements of Cash Flows for the nine
       months ended September 30, 1999 and 1998..........................  6
      Notes to Condensed Consolidated Financial Statements...............  7

2.  Management's Discussion and Analysis of Financial Condition and
     Results of Operations............................................... 12

3.  Quantitative and Qualitative Disclosures about Market Risk........... 20


                                  P A R T  II

1.  Legal Proceedings.................................................... 21

5.  Other Information.................................................... 21

6.  Exhibits and Reports on Form 8-K..................................... 21
</TABLE>

                                       2
<PAGE>

Item 1.   Financial Statements


                      SAGA SYSTEMS, INC. AND SUBSIDIARIES

                     CONDENSED CONSOLIDATED BALANCE SHEETS

                                (in thousands)

<TABLE>
<CAPTION>
                                                                                        Sept. 30,          Dec. 31,
                                                                                          1999               1998
                                                                                      -------------      -------------
<S>                                                                                   <C>                <C>
Assets                                                                                 (Unaudited)
Current:
    Cash and cash equivalents                                                         $      32,311      $      60,298
    Short-term investments........................................................           15,000             10,600
    Accounts receivable:
      Invoiced and currently due..................................................           43,907             50,110
      Advanced billings on maintenance............................................            7,476             11,899
      Unbilled services...........................................................            2,504              8,771
      Installment.................................................................           34,209             32,016
      Other.......................................................................            1,970              1,231
      Less: allowance for doubtful accounts.......................................           (4,415)            (5,042)
                                                                                      -------------      -------------
          Total accounts receivable...............................................           85,651             98,985

    Current portion of deferred income taxes......................................            5,366              5,392
    Prepaid expenses..............................................................            3,928              2,265
    Other current assets..........................................................              681              1,855
                                                                                      -------------      -------------
          Total current assets....................................................          142,937            179,395

Installment accounts receivable, net of current portion...........................           35,977             30,248
Goodwill and other intangible assets, net of accumulated amortization.............           20,815              9,720
Cooperation agreement, net of accumulated amortization............................           17,624             19,387
Property, equipment and leasehold improvements, net of accumulated depreciation
   and amortization...............................................................            8,277             10,176
Deferred income taxes.............................................................            4,136              4,136
Other assets......................................................................              703                703
                                                                                      -------------      -------------
Total assets......................................................................    $     230,469      $     253,765
                                                                                      =============      =============
</TABLE>

    See accompanying notes to condensed consolidated financial statements.


                                       3

<PAGE>

                      SAGA SYSTEMS, INC. AND SUBSIDIARIES

              CONDENSED CONSOLIDATED BALANCE SHEETS - (continued)

                       (in thousands, except share data)

<TABLE>
<CAPTION>
                                                                                            Sept. 30,         Dec. 31,
                                                                                              1999              1998
                                                                                          -------------     -------------
                                                                                           (Unaudited)
<S>                                                                                       <C>               <C>
Liabilities and Stockholders' Equity
Current:
    Current portion of long-term obligations...........................................   $         417     $         478
    Accounts payable...................................................................           5,637             9,675
    Accrued payroll and employee benefits..............................................           7,553            12,181
    Payable to Software AG.............................................................           6,283            10,884
    Income taxes payable...............................................................           3,232             3,991
    Other current liabilities..........................................................           6,162             7,912
    Current portion of deferred revenues, net of deferred royalties....................          49,199            48,328
                                                                                          -------------     -------------
          Total current liabilities....................................................          78,483            93,449
Long-term obligations, net of current portion..........................................             328               635
Deferred revenues, net of deferred royalties...........................................          28,894            31,773
                                                                                          -------------     -------------
          Total liabilities............................................................         107,705           125,857
Stockholders' equity
    Common stock ($0.01 par value, 75,000,000 shares authorized;
     30,792,530 shares issued at September 30, 1999; and 30,516,946 shares
     issued and outstanding at December 31, 1998) .....................................             308               305
    Additional paid-in capital.........................................................          98,043            95,474
    Retained earnings..................................................................          47,531            33,048
    Accumulated other comprehensive loss...............................................            (722)             (919)
                                                                                          -------------     -------------
                                                                                                145,160           127,908
    Less treasury stock, at cost (1,865,500 shares at September 30, 1999 and no
          shares at December 31, 1998).................................................         (22,396)               --
                                                                                          -------------     -------------
          Total stockholders' equity...................................................         122,764           127,908
                                                                                          -------------     -------------
          Total liabilities and stockholders' equity...................................   $     230,469     $     253,765
                                                                                          =============     =============
</TABLE>

    See accompanying notes to condensed consolidated financial statements.

                                       4
<PAGE>

                      SAGA SYSTEMS, INC. AND SUBSIDIARIES

                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

        For the three and nine months ended September 30, 1999 and 1998

                (in thousands, except per share dollar amounts)

<TABLE>
<CAPTION>
                                                                  Three months ended Sept. 30,     Nine months ended Sept. 30,
                                                                 -----------------------------    ----------------------------
                                                                    1999              1998           1999             1998
                                                                 ------------      -----------    ------------     -----------
<S>                                                              <C>               <C>            <C>              <C>
Revenues:
  Software license fees......................................    $     15,569      $    21,810    $     45,921     $    68,037
  Maintenance fees...........................................          20,754           22,049          62,216          62,345
  Professional services fees.................................          15,445           19,064          53,175          48,756
                                                                 ------------      -----------    ------------     -----------
    Total revenues...........................................          51,768           62,923         161,312         179,138
                                                                 ------------      -----------    ------------     -----------
Cost of revenues:
  Software license...........................................           3,479            5,531          10,631          16,256
  Maintenance................................................           6,692            7,773          20,647          21,869
  Professional services......................................          11,921           14,578          40,928          38,126
                                                                 ------------      -----------    ------------     -----------
    Total cost of revenues...................................          22,092           27,882          72,206          76,251
                                                                 ------------      -----------    ------------     -----------
Gross profit.................................................          29,676           35,041          89,106         102,887
                                                                 ------------      -----------    ------------     -----------
Operating expenses:
  Software product development...............................           2,592            1,572           7,316           3,473
  Sales and marketing........................................          11,894           10,731          31,945          35,728
  Administrative and general.................................          10,039           12,368          30,091          35,694
                                                                 ------------      -----------    ------------     -----------
    Total operating expenses.................................          24,525           24,671          69,352          74,895
                                                                 ------------      -----------    ------------     -----------
Income from operations.......................................           5,151           10,370          19,754          27,992
  Other income and expense, net..............................           1,343              966           3,990           2,825
                                                                 ------------      -----------    ------------     -----------
Income before income taxes...................................           6,494           11,336          23,744          30,817
  Income tax provision.......................................           2,533            4,513           9,261          12,459
                                                                 ------------      -----------    ------------     -----------
Net income...................................................           3,961            6,823          14,483          18,358
Other comprehensive income (loss):
  Foreign currency translation adjustments...................             (61)            (498)            197            (562)
                                                                 ------------      -----------    ------------     -----------
Comprehensive income.........................................    $      3,900      $     6,325    $     14,680     $    17,796
                                                                 ============      ===========    ============     ===========

Net income per common share:
  Basic......................................................    $       0.13      $      0.23    $       0.48     $      0.62
  Diluted....................................................    $       0.13      $      0.21    $       0.46     $      0.58


Shares used in computing net income per common share:
  Basic......................................................          29,714           30,111          30,304          29,800
  Diluted....................................................          30,893           32,074          31,459          31,849
</TABLE>

     See accompanying notes to condensed consolidated financial statements.

                                       5
<PAGE>

                      SAGA SYSTEMS, INC. AND SUBSIDIARIES

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

             For the nine months ended September 30, 1999 and 1998

                                (in thousands)

<TABLE>
<CAPTION>
                                                                                         1999              1998
                                                                                      ----------        -----------
                                                                                               (Unaudited)
<S>                                                                                   <C>               <C>
Cash flows from operating activities:
  Net income................................................................          $   14,483        $    18,358

  Adjustments to reconcile net income to net cash provided by operating
    activities:
     Depreciation and amortization..........................................               6,434              5,937
     Loss on sales of property and equipment................................                  33                479
     Net proceeds from sales of accounts receivable.........................                 ---             18,119
     Write off of investment................................................                 ---                848
     Compensation expenses on options granted...............................                 452                582
     Deferred income taxes..................................................                  26
     Changes in operating accounts..........................................             (10,431)           (28,909)
                                                                                      ----------        -----------
             Net cash provided by operating activities......................              10,997             15,414
                                                                                      ----------        -----------

Cash flows from investing activities:
  Additions to property, equipment and leasehold improvements...............              (1,000)            (2,472)
  Proceeds from sales of property and equipment.............................                 ---                 38
  Purchase of short-term investments........................................             (13,000)               ---
  Sale of short-term investments............................................               8,600                ---
  Acquisition, net of cash received.........................................             (12,088)               ---
                                                                                      ----------        -----------
             Net cash used in investing activities..........................             (17,488)            (2,434)
                                                                                      ----------        -----------

Cash flows from financing activities:
  Proceeds from stock options exercised.....................................                 267              1,596
  Expenses relating to initial public offering..............................                 ---               (373)
  Proceeds from Employee Stock Purchase Plan................................               1,071                ---
  Payments made on capital leases...........................................                (368)               ---
  Repurchase of common stock................................................             (22,396)               ---
                                                                                      ----------        -----------
             Net cash provided by / (used) in financing activities..........             (21,426)             1,223
                                                                                      ----------        -----------

Effect of exchange rate changes on cash and cash equivalents................                 (70)               ---
Net increase (decrease) in cash and cash equivalents........................             (27,987)            14,203
Cash and cash equivalents, beginning........................................              60,298             50,429
                                                                                      ----------        -----------
Cash and cash equivalents, ending...........................................          $   32,311        $    64,632
                                                                                      ==========        ===========
</TABLE>

    See accompanying notes to condensed consolidated financial statements.

                                       6
<PAGE>

                      SAGA SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1)    Basis of Presentation

     The condensed consolidated financial statements included herein have been
prepared by management, pursuant to the rules and regulations of the Securities
and Exchange Commission.  Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations.  These condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes thereto
included in the SAGA SYSTEMS, Inc. (formerly known as Software AG Systems, Inc.)
Annual Report on Form 10-K for the year ended December 31, 1998.

     In the opinion of management, the accompanying balance sheets and related
statements of operations and cash flows include all adjustments (consisting only
of normal recurring items) necessary for their fair presentation in conformity
with generally accepted accounting principles.  The results for the three and
nine months ended September 30, 1999 are not necessarily indicative of the
results expected for the full year.

(2)  Accounting Policies

Revenue Recognition

     On January 1, 1998, SAGA SYSTEMS, Inc. and its subsidiaries (the "Company")
adopted Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"),
as amended by SOP 98-4 and SOP 98-9.  SOP 97-2 focuses on when and in what
amounts revenue should be recognized for licensing, selling, leasing, or
otherwise marketing computer software.  SOP 98-4 and SOP 98-9 defer certain
portions of SOP 97-2 until January 1, 2000.  Management of the Company is
currently evaluating what impact, if any, SOP 97-2 will have on the Company's
revenue recognition policies once the portions of SOP 97-2, which have been
deferred become effective.

     Software license revenues for an arrangement to deliver software that does
not require significant production, modification or customization of software
are recognized when there is an executed license agreement, the software and
authorization code, where applicable, have been delivered, the fee is fixed and
collectibility is probable.

     Maintenance revenues, which include unspecified when-and-if deliverable
software upgrades, user documentation, and technical support for software
products, are deferred and recognized on a straight-line basis over the term of
the maintenance agreement, generally one year.

    Customer training revenues and revenues from time and material type
professional consulting and custom application contracts are recognized as the
services are provided and the work is performed. Revenues from long-term fixed
price professional consulting and custom application contracts are accounted for
under the percentage of completion method. When estimates of costs, on long-term
fixed price contracts, indicate a loss, such a loss is provided for currently.

     Sales of enterprise license agreements generally bundle a combination of
products, technical services and professional consulting services.  In
accordance with SOP 97-2, these elements are unbundled for revenue recognition
purposes, and are accounted for based on the fair value of their component parts
using the criteria described above.

                                       7
<PAGE>

                      SAGA SYSTEMS, INC. AND SUBSIDIARIES

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

Net Income per Common Share

     The Company reports earnings per share under Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128"). In
accordance with SFAS No. 128 requirements, the Company presents basic and
diluted earnings per share. Basic earnings per share is based on income
available to common stockholders divided by the weighted average number of
common shares outstanding. Diluted earnings per share is based on income
available to common stockholders divided by the sum of the weighted average
number of common shares outstanding and all potential common shares that are
dilutive. The following information is a reconciliation of the amounts used in
these calculations:

<TABLE>
<CAPTION>
                                                       Three months ended Sept. 30,        Nine months ended Sept. 30,
                                                       ---------------------------         --------------------------
                                                          1999            1998                1999            1998
                                                      ------------      ----------         -----------      ---------
                                                             (In thousands, except for per share dollar amounts)
                                                                                  (Unaudited)
<S>                                                   <C>               <C>                <C>              <C>
Numerator:
  Net income......................................    $      3,961      $    6,823         $    14,483      $  18,358
                                                      ============      ==========         ===========      =========
Denominator:
  Basic weighted average shares outstanding.......          29,714          30,111              30,304         29,800
  Effect of dilutive securities:
  Stock options...................................           1,179           1,963               1,155          2,049
                                                      ------------      ----------         -----------      ---------
  Diluted weighted average shares outstanding.....          30,893          32,074              31,459         31,849
                                                      ============      ==========         ===========      =========
Net income per common share:
  Basic...........................................    $       0.13      $     0.23         $      0.48      $    0.62
                                                      ============      ==========         ===========      =========
  Diluted.........................................    $       0.13      $     0.21         $      0.46      $    0.58
                                                      ============      ==========         ===========      =========
</TABLE>

(3)  Treasury Stock

     As previously disclosed in the Quarterly Report on Form 10-Q filed on
August 12, 1999, 200 shares of the Company's common stock, par value $0.01 per
share ("Common Stock"), were tendered at $8.00 per share pursuant to the issuer
tender offer which expired on May 25, 1999 (the "Offer").

     In June 1999, the Company began acquiring shares of its Common Stock in
connection with a stock repurchase program announced in a Current Report on Form
8-K filed on June 14, 1999 ("Stock Repurchase Program"). At this time, the Stock
Repurchase Program authorized the Company to repurchase up to 2,000,000 shares
of its Common Stock from time to time on the open market starting on June 14,
1999 and to continue over an indefinite period. In a Current Report on Form 8-K
filed on September 30, 1999 and a press release dated September 29, 1999, the
Company announced that it would repurchase up to an additional 2,000,000 shares
of its Common Stock for an indefinite period. The Company has repurchased
1,519,300 shares of Common Stock during the three month period ended September
30, 1999 at an aggregate cost of approximately $18.4 million. Cumulatively, the
Company has repurchased 1,865,300 shares of Common Stock as of September 30,
1999 at an aggregate cost of approximately $22.4 million.

(4)  Acquisition

     Effective June 9, 1999, the Company acquired 100% of the issued and
outstanding stock of a privately-owned enterprise software development company
based in San Jose, California, Blue Lobster Software, Inc. ("Blue Lobster"), for
$12.0 million. The acquisition was funded through cash on hand. Blue Lobster has
a development team located in Rochester, New York, which has already been
employed toward further enhancement of the Company's enterprise integration
product suite, Sagavista(TM).

                                       8
<PAGE>

                      SAGA SYSTEMS, INC. AND SUBSIDIARIES

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

     The acquisition was accounted for using the purchase method of accounting
and the operating results of the acquired business have been included in the
consolidated financial statements since the acquisition date. The purchase price
has been preliminarily allocated based on estimated fair values at the date of
acquisition, pending final determination of certain acquired balances. The
Company has allocated approximately $12.3 million to the fair value of certain
intellectual property rights, which is being amortized on a straight-line basis
over seven years.

     The Blue Lobster acquisition was not determined to be significant to the
operations or financial position of the Company; accordingly, the pro forma
financial information has not been presented.

(5)  Research and Development Expenditures

     Research and development expenditures are charged to operations as
incurred. SFAS No. 86, "Accounting for the Costs of Computer Software to be
Sold, Leased or Otherwise Marketed" ("SFAS No. 86"), requires certain costs to
be capitalized once the product has reached technological feasibility and prior
to general availability. In connection with the Company's new enterprise
integration ("EI") product suite, Sagavista, the costs incurred between
technological feasibility, as defined by SFAS No. 86, and when it became
available for general release on September 29, 1999, were not material to the
Company's results of operations or financial condition. Therefore, these
expenditures were not capitalized but were expensed as incurred.

(6)  Cooperation Agreement

     On March 31, 1997, the Company entered into an exclusive, perpetual license
agreement (the "Original Cooperation Agreement") with its former German parent
company, Software AG ("SAG"). On September 30, 1999, the Company amended and
restated the Original Cooperation Agreement, the amended agreement being
referred to hereinafter as the "Cooperation Agreement." As amended, the
Cooperation Agreement will allow, among other things, the Company and SAG to
expand their respective distribution channels. The Cooperation Agreement removes
certain distribution exclusivity provisions, which were part of the Original
Cooperation Agreement, allowing both companies to sell new products in
geographic territories that were previously designated to the other.

     As previously disclosed in documents filed with the Securities and Exchange
Commission by the Company, including the Annual Report on Form 10-K filed on
March 30, 1999, the Original Cooperation Agreement, among other things (i)
provided the Company the exclusive and perpetual right to license and service in
North America, South America, Japan and Israel (collectively, the "Territory")
both existing and future products developed or acquired by SAG and (ii) provided
SAG the exclusive and perpetual right to license and service outside the
Territory both existing and future products developed or acquired by the
Company.

     Following the amendment of the Cooperation Agreement, the Company has
retained, with the exception of the Company's Construct product, the exclusive
right to license and service on a worldwide basis the products that it develops
or acquires. Additionally, the Company retained the exclusive and perpetual
right to license and service the core SAG product lines, including Adabas,
Natural and the existing, core Entire family products, but exclusive of EntireX,
to current Company customers in the United States, Canada and Mexico ("North
America"). The Company also retained the exclusive right to license and service
EntireX in North America, except under certain circumstances, to current Company
customers through June 2000, and a non-exclusive right to license and service
EntireX in North America after June 2000. In addition, excluding North America,
the Company retained the exclusive and perpetual right to license and service
all current and future SAG products within the Territory.

     The Company has non-exclusive and perpetual rights under the Cooperation
Agreement, as amended, to license and service the SAG products Bolero and Tamino
as well as SAG's future database and software development tools, if any, to
current Company customers in North America. The Company also has non-exclusive

                                       9
<PAGE>

                      SAGA SYSTEMS, INC. AND SUBSIDIARIES

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

rights to license and service certain new SAG products other than the core SAG
products, the EntireX, Bolero and Tamino products and future database and
software development tools to current Company customers in North America,
however, this right terminates on December 31, 2005 although it may continue
thereafter if certain circumstances exist.  In addition, the Company has the
non-exclusive and perpetual right to license and service the core SAG product
lines, including Adabas, Natural and the existing, core products in the Entire
family, including EntireX, to new Company customers in North America.

     The Company shall have no rights, however, to license or service new SAG
products to new SAGA customers in North America.

     As noted above, under the Cooperation Agreement, as amended, SAG has the
non-exclusive, perpetual right to license the Company's Construct products
outside of the Territory. SAG has no right to license any other Company product
anywhere else in the world.

     Each of the Company and SAG had to pay the other 24% of the net revenues
derived from licenses granted under the Original Cooperation Agreement. This 24%
royalty rate was fixed for 20 years. Except under certain circumstances, the
Company's minimum annual royalty payment to SAG under the Original Cooperation
Agreement through the year 2000 was required to equal at least $21 million.

     Under the Cooperation Agreement, as amended, each of the Company and SAG
must pay the other 24% of the net revenues derived from the distribution of the
other party's products and the provision of maintenance within the Territory, in
the case of the Company, and outside of the Territory, in the case of SAG. This
royalty rate shall be effective through the year 2017 and thereafter unless the
parties agree otherwise. Additional payments may be made by the Company if the
Company grants certain discounts.

     Except under certain circumstances, the Company's minimum annual royalty
payment to SAG under the Cooperation Agreement, as amended, must equal at least
$21.0 million for year 1999, $23.0 million for each of years 2000, 2001 and
2002, $21.0 million for year 2003, $20.0 million for year 2004 and $17.0 million
for year 2005.

     At September 30, 1999, the carrying value of the Cooperation Agreement, net
of accumulated amortization, was $17.6 million. Management does not believe the
amendments to the Original Cooperation Agreement impaired the carrying value of
the Cooperation Agreement.

(7)  Class Action Lawsuit

     The Company, certain of its directors and executive officers and the
Company's principal stockholder have been named as defendants in purported class
action lawsuits, which have been consolidated, and an amended complaint was
filed on July 19, 1999. In general, the lawsuits claim, among other things, that
the Company's accounting policies artificially inflated revenues and earnings
and that defendants caused or permitted the Company to issue a series of
materially false and misleading public statements about the Company's operations
and financial results while, at the same time, selling the Company's Common
Stock at artificially inflated prices while in possession of material non-public
information. On August 18, 1999, the Company filed a motion to dismiss the
shareholders class action lawsuits. The motion to dismiss was denied on October
1, 1999. This shareholder class action is in the discovery process. As of
November 11, 1999, the class has not been certified. It is not possible at this
time to predict the outcome of the litigation or the amount or nature of any
loss. The Company believes that the allegations in the lawsuits are without
merit and intends to vigorously defend the charges. However, there are no
assurances that the resolution of the lawsuits may not materially adversely
affect the Company's financial condition or results of operations.

                                       10
<PAGE>

                      SAGA SYSTEMS, INC. AND SUBSIDIARIES

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(8)  Subsequent Event

     On October 15, 1999, the Company entered into a three-year revolving credit
loan agreement ("Revolving Credit Agreement"), which provides an unsecured
revolving credit loan for borrowing in the aggregate principal amount of up to
$25.0 million. The funds available under the Revolving Credit Agreement may be
used for general corporate purposes including future potential acquisitions, if
any, but excluding stock repurchase programs. The commitments made under the
Revolving Credit Agreement expire November 1, 2002. The Company has agreed to
pay commitment fees of 0.125% per annum on the unused commitment amount on a
quarterly basis.

     Under the Revolving Credit Agreement, financial covenants include minimum
current ratio, maximum cash flow leverage ratio and no net losses for any two
consecutive quarters, or at any fiscal year end. The Revolving Credit Agreement
also contains other customary limitations and events of defaults, and the
failure to comply with such limitations, or occurrence of any events of default,
would prevent any further borrowings and would generally require the repayment
of any outstanding borrowings under the Revolving Credit Agreement.

     Interest on borrowings under the Revolving Credit Agreement would be
determined, at the Company's option, by either (a) a Eurodollar rate option or
(b) a base rate option. The Eurodollar rate option is a LIBO rate plus an
applicable margin. The base rate option is lender's prime rate plus an
applicable margin. Applicable margin can vary according to the Company's cash
flow leverage ratio. The Company had no outstanding balance under the Revolving
Credit Agreement as of November 11, 1999.

                                       11
<PAGE>

ITEM 2.  Management's Discussion and Analysis of Financial Condition and
         Results of Operations.

Results of Operations

  On September 29, 1999, the Company launched its new EI product suite,
Sagavista. Sagavista is a business-centric EI solution that integrates operating
systems and hardware platforms within an enterprise.  Sagavista solves complex
integration problems with an architecture that links ERP, packaged, custom, and
legacy enterprise applications with little or no custom coding.

  As previously discussed in Note (6) of the Notes to the Condensed Consolidated
Financial Statements, the Company amended the Original Cooperation Agreement
that it had with SAG since the recapitalization of the Company in March 1997.
The Cooperation Agreement, as amended, removes certain distribution exclusivity
provisions, allowing both companies to sell new products in key geographic
territories that were previously designated to the other.  As a result, the
Company plans to market and distribute Sagavista worldwide.  In addition, the
minimum annual royalty guarantee of $21.0 million to SAG until year 2000, which
was required under the Original Cooperation Agreement, has been amended and
extended through year 2005.  Under the Cooperation Agreement, as amended, except
under certain circumstances, the Company's minimum annual royalty payment to SAG
must equal $21.0 million for calendar year 1999, $23.0 million for each of the
calendar years 2000, 2001 and 2002, $21.0 million for calendar year 2003, $20.0
million for calendar year 2004 and $17.0 million for calendar year 2005. For the
nine months ended September 30, 1999, the Company paid approximately $23.9
million in royalties to SAG. At September 30, 1999, the carrying value of the
Cooperation Agreement, net of accumulated amortization, was $17.6 million.
Management does not believe the amendments to the Original Cooperation Agreement
impaired the carrying value of the Cooperation Agreement.

Nine months ended September 30, 1999 and 1998

Revenues

  Total Revenues. The Company's revenues are primarily derived from license fees
for the use of software products, fees for maintenance related to those products
and fees for professional services. The Company's total revenues were $161.3
million and $179.1 million for the nine months ended September 30, 1999 and
1998, respectively, representing a decrease of 10%.  This decrease in total
revenues was primarily due to a decrease in software license fees as described
below.

  Software License Fees. The Company's software license fees are derived
primarily from the licensing of the Company's enterprise systems and enterprise
integration products.  Enterprise systems products include Adabas, a high-
performance data management system, and Natural, a 4GL programming language.
Enterprise integration products include EntireX, a family of integration
products; iXpress, a web enablement and deployment platform; and Sagavista, a
business-centric solution product suite.  Software license fees decreased 33% to
$45.9 million for the nine months ended September 30, 1999 compared to $68.0
million from the same period in 1998.  The decline in the software license fees
in the first nine months of 1999 compared to the same period in 1998 was
attributable to two large orders aggregating approximately $12.3 million during
the first nine months of 1998.  There were no comparably large orders for the
first nine months of 1999. Excluding these large orders from 1998, the software
license fees would have decreased $9.8 million or 18% compared to 1998.
Management believes that the decrease in software license fees is attributable
to customers' decisions to postpone new orders until such customers address
their own internal year 2000 concerns.  Management expects this trend to
continue in the fourth quarter of 1999.  This decrease in software license fees
was somewhat offset by three Sagavista sales totaling approximately $468,000 in
the third quarter of 1999.

  Maintenance Fees. The Company's maintenance fees are derived primarily from
providing technical support services to customers who have licensed the
Company's enterprise systems and enterprise integration products.  Maintenance
is available in various levels of support and priced as a percentage of the
software license fees.  The

                                       12
<PAGE>

most commonly contracted level is priced at 18% of the applicable license fee at
the time of renewal. Software customers are not required to renew their
maintenance agreements and renewals may occur only if the customer continues to
use the licensed products. Maintenance fees decreased slightly to $62.2 million
for the nine months ended September 30, 1999 compared to $62.3 million for the
same period in 1998.

  Professional Services Fees. The Company's professional services fees are
derived primarily from services provided with the implementation and deployment
of the Company's enterprise systems and enterprise integration products and
through educational services.  The Company's professional services offerings
include consulting, software integration, system implementation, large project
management and year 2000 analysis and remediation.  The services are delivered
on either a time and material basis or a fixed price basis.  Professional
services fees were $53.2 million and $48.8 million for the nine months ended
September 30, 1999 and 1998, respectively, representing an increase of 9%.  This
increase was primarily attributable to an increase in revenues from the
traditional core professional services offerings, such as application
development and engineering consulting services.  This increase in traditional
core professional services offerings was negatively affected by a decrease in
revenue from the year 2000 professional services area. For the nine months ended
September 30, 1999, year 2000 professional services revenues decreased to $15.9
million from $17.9 million for the same period in 1998.  Management anticipates
this decreasing trend in the year 2000 professional services business to
continue for the remainder of 1999 and that year 2000 professional service
revenues will be non-existent thereafter.

Cost of Revenues

  Software License. Software license costs consist primarily of royalties paid
to third parties.  Software license costs were $10.6 million and $16.3 million
for the nine months ended September 30, 1999 and 1998, respectively,
representing 23% and 24% of software license fees for each respective period.
The decrease in dollar amount was primarily due to a decrease in license
revenue.  The decrease in the percentage was primarily due to a shift in the mix
of products sold from the third party owned products to the company owned
products. Third party products have royalty rates that generally vary from 24%
to 40% of gross software license fees and there are no royalty expenses on sales
of company owned products.

  Maintenance. Maintenance costs consist of royalties paid to third parties, the
costs of providing customer support and the distribution costs of new releases.
Maintenance costs were $20.6 million and $21.9 million for the nine months ended
September 30, 1999 and 1998, respectively, representing 33% and 35% of
maintenance fees for each respective period.  Decreases in both the dollar
amount and the percentage were primarily attributable to improved utilization
and efficiency of existing support personnel.

  Professional Services. Professional services costs consist of labor and
related overhead costs for the people performing the services.  Such costs
include costs for project management, quality control and project review.
Professional services costs were $40.9 million and $38.1 million for the nine
months ended September 30, 1999 and 1998, respectively, representing 77% and 78%
of professional services fees for each respective period.  The increase in
dollar amount was primarily due to an increase in professional services revenue.
The improvement in margin was primarily attributable to improved utilization of
resources.  As the year 2000 professional services business is expected to
decrease for the remainder of the year, the transitioning of year 2000 resources
is expected to continue through the end of this year and continue into the year
2000.

Operating Expenses

  Software Product Development. Software product development expenses include
all labor and overhead costs related to the development of software products
owned by the Company. Software product development costs were $7.3 million and
$3.5 million for the nine months ended September 30, 1999 and 1998,
respectively.  This increase was primarily due to expenses incurred in the
development of Sagavista, the Company's new EI product suite.  Sagavista became
available for general release on September 29, 1999.  The production costs
related to Sagavista incurred between technological feasibility, as defined by
SFAS No. 86, and general release were not material to the Company's results of
operations and financial condition.  Therefore, these expenditures were expensed
as incurred.

                                       13
<PAGE>

  Sales and Marketing. Sales and marketing expenses consist primarily of
employee salaries, benefits, commissions, marketing programs, public relations,
trade shows, seminars, advertising and related communications and associated
overhead costs.  Sales and marketing expenses were $31.9 million and $35.7
million for the nine months ended September 30, 1999 and 1998, respectively,
each representing 20% of total revenues for each respective reporting period.
The decrease in dollar amount was attributable to a decrease in sales
commissions as a result of a decrease in the software license fees revenue in
1999 compared to 1998. The decrease in sales and marketing expenses was also
attributable to the fact that the sales and marketing expenses in 1998 included
costs relating to several new marketing programs and events, including a major
trade show and symposiums.  Similar costs were incurred in 1999 but not to the
magnitude of those incurred in 1998.  The Company anticipates that sales and
marketing expenses will increase in the fourth quarter of 1999 in connection
with ongoing marketing support for Sagavista.

  Administrative and General. Administrative and general expenses include
employee salaries and benefits for administration, executive, finance, legal,
human resources, data center, distribution and internal systems personnel and
associated overhead costs, as well as bad debt, accounting and legal expenses.
Administrative and general expenses were $30.1 million and $35.7 million for the
nine months ended September 30, 1999 and 1998, respectively, representing 19%
and 20% of total revenues for each respective nine month period.  This decrease
was attributable, in part, to a reduction in company-wide bonus expenses, which
was based on the Company's financial performance.  The decrease in
administrative and general expenses was also attributable, in part, to a
reduction in bad debt reserve as a result of a lower accounts receivable balance
as of September 30, 1999.

Other

  Other Income and Expense, Net. Other income and expense, net, consists
primarily of interest earned on cash, cash equivalents, short-term investments,
long-term customer contracts carried by the Company and miscellaneous income,
offset by miscellaneous expenses.  Other income and expense, net, was $4.0
million and $2.8 million for the nine months ended September 30, 1999 and 1998,
respectively.  This increase was primarily attributable to the increase in
interest income as average cash, cash equivalents and short-term investments
balances increased to $64.2 million in 1999 from $55.1 million in 1998.

  Income Tax Provision. The income tax provision was $9.3 million and $12.5
million for the nine months ended September 30, 1999 and 1998, respectively,
resulting in effective tax rates of 39.0% and 40.4%, respectively.

Three months ended September 30, 1999 and 1998

Revenues

  Total Revenues. The Company's total revenues were $51.8 million and $62.9
million for the three months ended September 30, 1999 and 1998, respectively,
representing a decrease of 18%.  This decrease in total revenues was primarily
due to decreases in software license fees and professional services fees as
described below.

  Software License Fees. Software license fees decreased 29% to $15.6 million
for the three months ended September 30, 1999 compared to $21.8 million from the
comparable period in 1998.  This decrease is attributable to a decrease in the
average software license fees per contract of approximately 21% in this quarter
compared to the same period in 1998.  Management believes that the decrease in
software license fees was also attributable, in part, to customers' decisions to
postpone new orders until such customers address their own internal year 2000
concerns.  Management expects this trend to continue in the fourth quarter of
1999.

  Maintenance Fees.  Maintenance fees decreased slightly by 6% to $20.8 million
for the third quarter of 1999 from $22.0 million for the same period in 1998.
The decrease was primarily due to the retirement of certain products in the
fourth quarter of 1998.

  Professional Services Fees.  Professional services fees were $15.4 million and
$19.1 million for the three months ended September 30, 1999 and 1998,
respectively, representing a decrease of 19%.  This decrease was

                                       14
<PAGE>

primarily due to a decrease in the year 2000 related services revenue. Year 2000
related services revenues have been declining since the fourth quarter of 1998
and represented approximately 20% of the total professional services revenue in
the third quarter of 1999. Management anticipates this decreasing trend to
continue for the remainder of 1999 and that year 2000 professional service
revenues will be non-existent thereafter.

Cost of Revenues

  Software License. Software license costs were $3.5 million and $5.5 million
for the three months ended September 30, 1999 and 1998, respectively,
representing 22% and 25% of software license fees for each respective period.
The decrease in dollar amount was primarily due to a decrease in sales volume.
The decrease in the percentage was primarily due to a shift in the mix of
products sold from the third party owned products to company owned products.
Third party products have royalty rates that generally vary from 24% to 40% of
gross software license fees and there are no royalty expenses on sales of
company owned products.

  Maintenance. Maintenance costs were $6.7 million and $7.8 million for the
three months ended September 30, 1999 and 1998, respectively, representing 32%
and 35% of maintenance fees for each respective period.  The decrease in dollar
amount was primarily due to the decrease in sales volume.  The increase in the
margins was primarily attributable to improved utilization and efficiency of the
existing support personnel.

  Professional Services. Professional services costs were $11.9 million and
$14.6 million for the three months ended September 30, 1999 and 1998,
respectively, representing 77% and 76% of professional services fees for each
respective period.  The decrease in dollar amount was primarily due to a
decrease in professional service fees revenues.  The slight decrease in margin
was primarily due to costs incurred relating to the transition of resources from
the year 2000 service offerings into enterprise integration related service
offerings in the third quarter of 1999.

Operating Expenses

  Software Product Development. Software product development costs were $2.6
million and $1.6 million for the three months ended September 30, 1999 and 1998,
respectively.  This increase was primarily due to expenses incurred in the
development of Sagavista, the Company's new EI product suite.  Sagavista became
available for general release on September 29, 1999.  The production costs
related to Sagavista incurred between technological feasibility, as defined by
SFAS No. 86, and general release were not material to the Company's operating
results and financial condition.  Therefore, these expenditures were expensed as
incurred.

  Sales and Marketing. Sales and marketing expenses were $11.9 million and $10.7
million for the three months ended September 30, 1999 and 1998, respectively,
representing 23% and 17% of total revenues for each respective three-month
period.  The increase in marketing expenses is mainly due to expenses incurred
for the launch of Sagavista, offset by a decrease in commission expenses as a
result of decreased sales volume in the current period compared to same period
last year.

  Administrative and General. Administrative and general expenses were $10.0
million and $12.4 million for the three months ended September 30, 1999 and
1998, respectively, representing 19% and 20% of total revenues for each
respective period.  This decrease was primarily due to a reduction in company-
wide bonus expenses, which was based on the Company's financial performance.

Other

  Other Income and Expense, Net. Other income and expense, net, was $1.3
million and $1.0 million for the three months ended September 30, 1999 and 1998,
respectively.

  Income Tax Provision. The income tax provision was $2.5 million and $4.5
million for the three months ended September 30, 1999 and 1998, respectively,
resulting in effective tax rates of 39.0% and 39.8%, respectively.

                                       15
<PAGE>

Liquidity and Capital Resources

  The Company has financed its operations principally through cash flow from
operating activities.  Net cash provided by operating activities was $11.0
million and $15.4 million for the nine months ended September 30, 1999 and 1998,
respectively, primarily from net income from each respective period and the net
proceeds from sales of accounts receivables in the amount of $18.1 million in
1998.

  Investing activities used net cash of $17.5 million and $2.4 million for the
nine months ended September 30, 1999 and 1998, respectively, primarily to fund
the acquisition of Blue Lobster in June 1999 (See Note 4 of the Notes to
Condensed Consolidated Financial Statements), to purchase short-term investments
in 1999 and to fund capital expenditures for each respective period.

  Financing activities used net cash of $21.4 million for the nine months ended
September 30, 1999, primarily for the repurchase of Common Stock.  For the nine
months ended September 30, 1998, financing activities provided net cash of $1.2
million primarily from the proceeds from stock options exercised.

  The Company had $47.3 million and $70.9 million in cash, cash equivalents and
short-term investments as of September 30, 1999 and December 31, 1998,
respectively.  The decrease in cash, cash equivalents and short-term investments
was primarily the result of the Company's use of cash to fund the acquisition of
Blue Lobster for $12.0 million in June 1999 and the Company's repurchase,
pursuant to the Stock Repurchase Program, of 1,865,300 shares of Common Stock as
of September 30, 1999 for approximately $22.4 million (see Note 3 of the Notes
to Condensed Consolidated Financial Statements).

  The Company currently has relationships with two third parties whereby the
Company may sell long term receivable contracts in which control over and the
economic interest in the contract is transferred to the buyer.  As of September
30, 1999 and December 31, 1998, the Company remained contingently liable under
the recourse provisions associated with the sales made prior to 1998 in the
amount of $10.6 million and $24.7 million, respectively. The Company's accounts
receivable days sales outstanding at September 30, 1999 and December 31, 1998
was 78 and 64, respectively.

  The Company's international distributors report and pay in U.S. dollars.  In
addition, royalties reported and paid by the Company to SAG under the
Cooperation Agreement are in U.S. dollars.  The Company terminated a distributor
relationship in Mexico and instead commenced operations through a subsidiary in
1996, which has represented approximately 2% of total revenues since that time.
Revenues from the Company's Canadian subsidiary has represented approximately 7%
of total revenues since its acquisition in September 1997.  The Company,
therefore, has not to date engaged in foreign currency hedging transactions.
The Company may enter into hedging transactions in the future.

  In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133").  SFAS No. 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999.  SFAS No. 133
establishes accounting and reporting standards for derivative instruments
embedded in other contracts and for hedging activities.  It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measures those instruments at fair value.
If certain conditions are met, a derivative may be designated as a hedge.  As
stated previously, the Company does not currently enter into any derivative or
hedging transactions.  If the Company enters into any of these transactions in
the future, the adoption of SFAS No. 133 may impact the accounting for those
transactions.

  The Company traditionally leases all major equipment, and has no investment in
inventory or facilities other than leasehold improvements.

                                       16
<PAGE>

  As fully described in Note 8 of the Notes to Condensed Consolidated Financial
Statements, on October 15, 1999, the Company entered into the Revolving Credit
Agreement, which provides an unsecured revolving credit loan in the aggregate
principal amount of up to $25.0 million. The funds under the credit agreement
may be used for general corporate purposes including future potential
acquisitions, if any, but excluding the Stock Repurchase Program. The
commitments made under the Revolving Credit Agreement expire November 1, 2002.
The Company has agreed to pay commitment fees of 0.125% per annum on the unused
commitment amount on a quarterly basis. As of November 11, 1999, the Company had
no outstanding balance under the Revolving Credit Agreement.

  The Company believes that its existing cash balances, short-term investments,
funds generated from operations, funds available under the Revolving Credit
Agreement and funds received from the sale of receivables, if any, will be
sufficient to finance the Company's operations for at least the next twelve
months.  Although operating activities may provide cash in certain periods, to
the extent the Company grows in the future, its operating and investing
activities may use such cash.  There can be no assurances that any necessary
additional financing will be available to the Company on commercially reasonable
terms.  The Company had no other material capital commitments or planned
expenditures as of September 30, 1999.

Year 2000 Compliance

  The year 2000 poses certain issues for business and consumer computing,
particularly the functionality of software for two-digit storage of dates.  The
year 2000 is also a leap year, which may also lead to incorrect calculations,
functions, or system failure.  The problem exists for many kinds of software,
including software for mainframes, PCs, and embedded systems.  The Company is
aware of and is addressing issues associated with the programming code existing
in computer systems as the year 2000 approaches.

   Substantially all of the Company's revenues have been derived from the
licensing and servicing of products developed or acquired by SAG.  Under the
terms of both the Original Cooperation Agreements and the Cooperation Agreement,
as amended, SAG is contractually required to ensure that its products are year
2000 compliant, as defined in the Original Cooperation Agreement, in accordance
with a specified timetable.  SAG has provided the Company with written
assurances that the SAG-developed products that the Company is selling are year
2000 compliant.  Both SAG and the Company are actively cooperating to verify the
year 2000 compliance of these products through the exchange of information
relative to the year 2000 test plans and results for these products.  There can
be no assurance, however, that compliant products will be delivered by SAG in a
timely manner.  In addition, there can be no assurances that the year 2000
compliant products delivered by SAG will not contain undetected errors or
defects associated with year 2000 date functions that may result in material
costs to the Company.  Some commentators have stated that a significant amount
of litigation will arise out of year 2000 compliance issues, and the Company is
aware of a growing number of lawsuits against other software vendors.  Because
of the unprecedented nature of such litigation, it is uncertain to what extent
the Company may be affected by it.

  All other third party products sold by the Company, which are not developed or
acquired by SAG, are expected to be year 2000 compliant by the end of 1999.  The
Company has sought written assurances from its principal third party vendors
that their products are or will be year 2000 compliant.  To date, the Company
has received no indication from these vendors that their products will not be
year 2000 compliant, therefore, the year 2000 risks associated with these
products are not currently anticipated to have a material effect on the
Company's business, financial condition or results of operations.  For the nine
months ended September 30, 1999, total product revenues from the sale of other
third party products, excluding products developed or acquired by SAG, were
approximately $1.0 million, which represents approximately 1% of total revenues
for that period.  There can be no assurance, however, that year 2000 compliant
products will be delivered by third parties in a timely manner.

  The Company's plans call for all products developed or acquired by the Company
that are in general release, as such term is defined by the Company, and which
will be supported with maintenance in the year 2000, to be year 2000 compliant.
The Company considers a product to be "year 2000 compliant" when the product in
question is capable of accurately processing, providing and receiving data from,
into and between the twentieth and twenty-

                                       17
<PAGE>

first centuries, and will correctly create, store, process and output
information related to or including dates on or after January 1, 2000, provided
that the product in question is used in accordance with any applicable
documentation and, provided further that all other products, including hardware
and software, used in combination with the product in question properly exchange
date data with such product.

  With respect to its internal information technology systems (including
facilities such as voice and data communications, and building management and
security systems), the Company has established an internal readiness program
which when completed is intended to minimize any potential issues that may arise
from the year 2000 date problem.  The program includes the following major
components: (i) a complete analysis, assessment and remediation of all internal
software applications, (ii) a complete inventory of all computer hardware,
communication equipment and third party software used by the Company in support
of its internal operations, (iii) a formal request to all third party suppliers
identified above requesting them to ensure that the products that the Company is
using are or will be year 2000 compliant, and (iv) the upgrade of all
significant hardware and software to year 2000 compliant versions where needed.
The Company substantially completed its year 2000 readiness program for all
hardware systems and its internal software applications as of December 31,1998
and the Company is continuing to test and re-implement back into production its
systems and internal applications in 1999.

  Although the Company has initiated formal communications with all of its
significant suppliers and large customers to determine the extent to which the
Company's systems are vulnerable to those third parties' failure to remediate
their own year 2000 issues, there is no guarantee that the systems of other
companies on which the Company's systems rely will be timely converted and that
any such failure to timely convert will not have an adverse effect on the
Company's systems.  The Company does not believe that the cost associated with a
third party's failure to timely convert its systems will have a material effect
on the Company's results of operations or financial condition but because of the
unprecedented nature of the year 2000 problem, it is not certain to what extent
the Company may ultimately be affected by any such failure by a third party.

   Although the Company believes that its products are or will be year 2000
compliant, there can be no assurance that its customers' applications or
databases will be year 2000 compliant.  The use by customers of non-compliant
applications and databases could cause failure of the customer's system or
systems.  The Company has provided year 2000 remediation and second opinion
services in order to assist customers in correcting year 2000 coding or
integration errors or to provide independent validation that remediation work
that customers or others have performed was accurate, under standard services
agreements with limits placed on liability and in some instances, the execution
of performance bonds.  Cumulative year 2000 related services revenues through
September 30, 1999 were approximately $40.9 million.  A certain amount of
inaccuracy is inherent in all remediation and validation work.  As a result, the
Company cannot guarantee that errors resulting from the year 2000 related
services performed for customers will not materially adversely impact the
Company's business, financial condition or results of operations.  The Company
does not believe that potential liability from these services will materially
impact the Company's financial condition or results of operations, but because
of the unprecedented nature of the year 2000 problem, it is not certain to what
extent the Company may ultimately be impacted by any such liability.

   To date, the costs associated with preparing the Company's products and
internal information technology systems to be year 2000 compliant have not been
material to the Company's business, financial condition or results of operations
and the Company does not expect these costs to materially impact the Company's
business, financial condition or results of operations in the future.  As of
September 30, 1999, the Company incurred approximately $520,000 of costs
associated with preparing the Company's products and internal information
technology systems to be year 2000 compliant and the remaining costs are to be
approximately $100,000.  These costs are expensed as incurred.  There can be no
assurances, however, that the Company will not experience delay in, or increased
cost associated with, the implementation of such changes, and the Company's
inability to implement such changes could have an adverse effect on future
results of operations.  In addition, there can be no assurance that the Company
will not experience serious unanticipated negative consequences and/or material
costs caused by undetected errors or defects in the technology used in its
internal systems, which are composed of third party software, third party
hardware that contains embedded software and the Company's own software
products.  The most reasonably likely worst case scenarios would include: (i)
corruption of data contained in the Company's internal information systems, (ii)
hardware failures, and (iii) the failure of infrastructure services provided by

                                       18
<PAGE>

government agencies and other third parties (e.g., electricity, all emergency
services, phone service, water transport, Internet services, etc.).

  The Company is continuing to prepare its contingency planning, which will
include among other things, manual "work-arounds" for mission critical software
and hardware failures (including systems supporting the Company's Customer
Support organization, as well as substitution of systems, if necessary).  The
Company's year 2000 contingency planning around mission critical systems was
substantially completed as of June 30, 1999.  During the second half of the
year, the Company has continued and expects that it will continue to address
year 2000 contingency planning around certain non-mission critical systems on a
department-by-department basis.  This additional year 2000 contingency planning,
which will have areas of overlap with certain ongoing disaster recovery
initiatives that the Company has underway, will specifically address issues
concerning how individual departments will function in the event that the
Company experiences failures with regard to certain automated support systems.

                                       19
<PAGE>

Item 3.  Quantitative and Qualitative Disclosure about Market Risk

  Most of the Company's short-term investments are in commercial paper with
interest rates tied to the Federal Funds rate.  Although the Federal Fund rate
floats, the Company does not believe there is material market risk exposure with
respect to its short-term investments or other financial instruments that would
require disclosure under this item.


Safe Harbor Provision for Forward-Looking Statements

  The statements contained in this report and in documents incorporating this
report by reference include forward-looking statements subject to the safe
harbor created by the Private Securities Litigation Reform Act of 1995.  These
forward-looking statements include, but are not limited to, (1) references to
the Company's business, financial condition, results of operations, products,
competition and markets in which the Company competes, (2) statements preceded
by, followed by or that include the words "may," "will," "could," "should,"
"believe," "expect," "future," "potential," "anticipate," "intend," "plan,"
"estimate" or "continue" or the negative or other variations thereof, and (3)
other statements regarding matters that are not historical facts, and  are based
on the Company's current knowledge, beliefs, expectations and specific
assumptions with respect to future business decisions.  Accordingly, the
statements are subject to significant risks, contingencies and uncertainties
that could cause actual operating results, performance or business prospects to
differ materially from those expressed in, or implied by, these statements.
These risks, contingencies and uncertainties include, but are not limited to;
significant quarterly and other fluctuations in revenues and results of
operations; reliance on SAG for development and timely delivery of products;
reliance on acquisitions and the timely development, production, marketing and
delivery of new products and services; demand for year 2000 products and
services; year 2000 related failures, emergencies and other issues; risks
associated with conducting a professional services business; reliance on the
mainframe computing environment or the enterprise application integration market
and demand for the Company's products; changes in the Company's product and
service mix and product and service pricing; interoperability of the Company's
products with leading software application products; risks of protecting
intellectual property rights and litigation; dependence on third-party
technology; risks associated with international sales, distributors and
operations; dependence on government contracts; control of the company by
affiliates; the Company's ability to implement its acquisition strategy,
successfully integrate any acquired products, services and businesses, adjust to
changes in technology, customer preferences, enhanced competition and new
competitors in software and professional services markets, maintain and enhance
its relationships with vendors, and attract and retain key employees; and other
risks detailed from time to time in the Company's Securities and Exchange
Commission reports.

                                       20
<PAGE>

                                    PART II

Item 1.  Legal Proceedings

  On August 18, 1999, the Company filed a motion to dismiss the shareholder
class action lawsuits previously disclosed in the Quarterly Reports on Form 10-Q
filed on May 12, 1999 and August 12, 1999. The motion to dismiss was denied on
October 1, 1999.  This shareholder class action is in the discovery process.  As
of November 11, 1999, the class has not been certified.  It is not possible at
this time to predict the outcome of the litigation or the amount or nature of
any loss.  The Company believes that the allegations in the lawsuit are without
merit and intends to vigorously defend the charges.  However, there are no
assurances that the resolution of the lawsuit may not materially adversely
affect the Company's financial condition or results of operations.


Item 5.  Other Information

  Effective October 7, 1999, Dr. Erwin Koenigs resigned from the Board of SAGA
SYSTEMS, Inc.


Item 6.  Exhibits and Reports on Form 8-K

(a)  Exhibits

     10.1  Amended and Restated Cooperation Agreement among SAGA SYSTEMS, Inc.,
           SAGA SOFTWARE, Inc. and Software AG (dated as of September 30, 1999).

     10.2  Revolving Credit Loan Agreement between SAGA SOFTWARE, Inc. and The
           Chase Manhattan Bank (dated as of October 15, 1999).

     27    Financial Data Schedule

(b)  Reports on Form 8-K

     The Company filed a Current Report on Form 8-K on September 30, 1999
announcing that the Company extended its open market stock repurchase program
for an indefinite period to repurchase up to an additional two million shares of
the Company's Common Stock.

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<PAGE>

                                  SIGNATURES

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

                             SAGA SYSTEMS, Inc.



  Date: November 12, 1999    By: /s/ Harry K. McCreery
                                 ---------------------
                                 Harry K. McCreery
                                 Vice President, Treasurer and
                                 Chief Financial Officer
                                 (Principal Financial and Accounting Officer and
                                 Duly Authorized Officer)

                                       22