SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                               ------------------

                                    FORM 10-Q
(Mark One)

|X|  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934.

                For the quarterly period ended December 31, 1996

|_|  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: 0-27838

                              --------------------

                              FORTE SOFTWARE, INC.
                              --------------------
             (Exact name of registrant as specified in its charter)

                Delaware                                    94-3131872
                --------                                    ----------
     (State or other jurisdiction of                     (I.R.S. Employer
     incorporation or organization)                      Identification No.)

                              1800 Harrison Street
                            Oakland, California 94612
                                 (510) 869-3400
             (Address, including zip code, of Registrant's principal
          executive offices and telephone number, including area code)

                              --------------------

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

                                   Yes  X  No 
                                       ---    ---

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

   Common Stock, $0.01 par value                     18,609,142
      (Class of common stock)          (Shares outstanding at December 31, 1996)



<PAGE>



<TABLE>

FORTE SOFTWARE, INC.
REPORT ON FORM 10-Q

Table of Contents

PART I           FINANCIAL INFORMATION

<CAPTION>
Item 1.          Financial Statements                                                                     Page
<S>                                                                                                        <C>

                 Condensed Consolidated Balance Sheets                                                      3
                 At March 31, 1996 and December 31, 1996

                 Condensed Consolidated Statements of Operations                                            4
                 For the Three and Nine Months Ended December 31, 1995 and 1996

                 Condensed Consolidated Statements of Cash Flows                                            5
                 For the Nine Months Ended December 31, 1995 and 1996

                 Notes to Condensed Consolidated Financial Statements                                       6

Item 2.          Management's Discussion and Analysis of Financial                                          8
                 Condition and Results of Operations


PART II          OTHER INFORMATION

Item 1.          Legal Proceedings                                                                         21
Item 2.          Changes in Securities                                                                     21
Item 3.          Defaults on Senior Securities                                                             21
Item 4.          Submission of Matters to a Vote of Security Holders                                       21
Item 5.          Other Information                                                                         22
Item 6.          Exhibits and Reports on Form 8-K                                                          22

Signatures                                                                                                 23

</TABLE>
                                                                               2
<PAGE>

<TABLE>

PART 1.
ITEM 1.           FINANCIAL STATEMENTS

                                                        FORTE SOFTWARE, INC.
                                                CONDENSED CONSOLIDATED BALANCE SHEETS
                                                           (in thousands)
<CAPTION>

                                                                                                        March 31,       December 31,
                                                                                                          1996              1996
                                                                                                        --------           --------
                                                                                                                         (unaudited)
ASSETS
Current assets:
<S>                                                                                                     <C>                <C>     
    Cash and cash equivalents                                                                           $ 35,081           $ 30,991
    Short-term investments                                                                                 6,236             12,194
    Accounts receivable, net of allowances of $945 ($531 at March 31, 1996)                               11,059             16,666
    Prepaid expenses and other current assets                                                                839                916
                                                                                                        --------           --------
Total current assets                                                                                      53,215             60,767

Equipment and leasehold improvements, net                                                                  3,903              5,354
Other assets                                                                                                 173                250
                                                                                                        --------           --------
Total assets                                                                                            $ 57,291           $ 66,371
                                                                                                        ========           ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Accounts payable                                                                                    $  1,066           $  1,252
    Accrued expenses and other liabilities                                                                 5,410              8,666
    Deferred revenue                                                                                       5,941              7,646
    Current portion of capital lease obligations                                                           1,084                981
                                                                                                        --------           --------
Total current liabilities                                                                                 13,501             18,545

Capital lease obligations and notes payable, due after one year                                            1,714              1,038
Deferred revenue                                                                                           2,032                725
Commitments
Stockholders' equity:
    Common Stock                                                                                             183                186
    Additional paid-in capital                                                                            62,618             64,047
    Accumulated deficit                                                                                  (22,735)           (18,448)
    Foreign currency translation adjustments                                                                 (22)               248
    Unrealized gain (loss) on short-term investments                                                        --                   30
                                                                                                        --------           --------
Total stockholders' equity                                                                                40,044             46,063
                                                                                                        --------           --------
Total liabilities and stockholders' equity                                                              $ 57,291           $ 66,371
                                                                                                        ========           ========

<FN>
See accompanying notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
                                                                               3

<PAGE>


<TABLE>

                                                        FORTE SOFTWARE, INC.
                                            CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                         (in thousands, except per share amounts; unaudited)
<CAPTION>

                                                                Three months ended December 31,       Nine months ended December 31,
                                                                    1995               1996               1995              1996
                                                                  --------           --------           --------           --------
<S>                                                               <C>                <C>                <C>                <C>     
Revenues:
    License fees                                                  $  6,196           $ 12,205           $ 12,890           $ 30,061
    Maintenance and service                                          2,530              5,368              6,013             13,406
                                                                  --------           --------           --------           --------
  Total revenues                                                     8,726             17,573             18,903             43,467

Operating expenses:
    Cost of license fees                                               127                228                332                494
    Cost of maintenance and service                                  1,446              3,211              3,628              8,131
    Sales and marketing                                              3,820              7,697              9,917             20,063
    Product development and engineering                              2,155              2,784              5,823              7,633
    General and administrative                                         831              1,250              2,285              3,777
                                                                  --------           --------           --------           --------

  Total operating expenses                                           6,806             11,731             18,025             31,473

Income (loss) from operations                                          347              2,403             (3,082)             3,369

Interest income, net                                                    10                488                174              1,497
                                                                  --------           --------           --------           --------

Income (loss) before income taxes                                      357              2,891             (2,908)             4,866
Provision for income taxes                                             (12)              (342)               (35)              (579)
                                                                  --------           --------           --------           --------

Net income (loss)                                                 $    345           $  2,549           $ (2,943)          $  4,287
                                                                  ========           ========           ========           ========

Pro forma net income (loss) per share                             $   0.02               0.12           $  (0.17)          $   0.20
                                                                  ========           ========           ========           ========

Shares used in computing pro forma net
income (loss) per share                                             18,920             21,156             17,773             21,124
                                                                  ========           ========           ========           ========
<FN>
See accompanying notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
                                                                               4

<PAGE>

<TABLE>


                                                        FORTE SOFTWARE, INC.
                                           CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                      (in thousands; unaudited)
<CAPTION>

                                                                                                      Nine Months Ended December 31,
                                                                                                       ----------------------------
                                                                                                          1995               1996
                                                                                                        --------           --------
<S>                                                                                                     <C>                <C>     
Operating activities
Net income (loss)                                                                                       $ (2,943)          $  4,287

Adjustments to reconcile net loss to net cash used in operating activities:
  Depreciation and amortization                                                                              913              1,788
  Changes in operating assets and liabilities:
    Accounts receivable                                                                                   (5,379)            (5,472)
    Prepaid expenses and other assets                                                                        182               (154)
    Accounts payable                                                                                         522                321
    Accrued expenses and other liabilities                                                                   872              3,256
    Deferred revenue                                                                                       1,800                398
                                                                                                        --------           --------
Net cash provided by (used in) operating activities                                                       (4,033)             4,424
                                                                                                        --------           --------

Investing activities
Purchases of equipment and leasehold improvements                                                           (848)            (3,149)
Purchase of short-term investments                                                                          --              (10,784)
Maturities of short-term investments                                                                       2,915              4,856
                                                                                                        --------           --------
Net cash provided by (used in) investing activities                                                        2,067             (9,077)
                                                                                                        --------           --------

Financing activities
Payment on notes payable                                                                                    (729)              --
Reduction in capital lease obligations                                                                      (532)              (869)
Proceeds from issuance of common stock                                                                       109              1,432
                                                                                                        --------           --------
Net cash provided by (used in) financing activities                                                       (1,152)               563
                                                                                                        --------           --------
Decrease in cash and cash equivalents                                                                     (3,118)            (4,090)
Cash and cash equivalents at beginning of period                                                           9,860             35,081
                                                                                                        --------           --------
Cash and cash equivalents at end of period                                                              $  6,742           $ 30,991
                                                                                                        ========           ========

Supplemental disclosures:
  Interest paid                                                                                         $    207           $    192
                                                                                                        ========           ========
  Income taxes paid                                                                                     $     40           $    162
                                                                                                        ========           ========

Supplemental disclosures of noncash investing and financing activities:
  Capital lease obligations incurred                                                                    $  1,752           $     90
                                                                                                        ========           ========

<FN>
See accompanying notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
                                                                               5
<PAGE>


                              FORTE SOFTWARE, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


Basis of Presentation

The  unaudited  condensed  consolidated  financial  statements  included  herein
reflect all adjustments,  consisting only of normal recurring adjustments, which
in the opinion of  management  are  necessary  to fairly  present the  Company's
consolidated financial position,  results of operations,  and cash flows for the
periods presented. These financial statements should be read in conjunction with
the  Company's  audited  consolidated  financial  statements  as included in the
Annual  Report  on  Form  10-K  for the  year  ended  March  31,  1996.  Certain
information  and footnote  disclosures  normally  included in audited  financial
statements prepared in accordance with generally accepted accounting  principles
have  been  condensed  or  omitted  pursuant  to  the  Securities  and  Exchange
Commission rules and regulations. The consolidated results of operations for the
period ended December 31, 1996 are not necessarily  indicative of the results to
be  expected  for any  subsequent  quarter or for the entire  fiscal year ending
March 31,  1997.  The March 31,  1996  balance  sheet was derived  from  audited
financial statements, but does not include all disclosures required by generally
accepted accounting principles.

Net Income (Loss) Per Share

Except  as noted  below,  net  income  (loss)  per share is  computed  using the
weighted average number of shares of common stock  outstanding.  Pursuant to the
Securities and Exchange Commission Staff Accounting Bulletins, common and common
equivalent  shares  issued by the  Company at prices  below the  initial  public
offering  price during the  twelve-month  period prior to the Company's  initial
public  offering  have  been  included  in  the  calculation  as  if  they  were
outstanding  for all  periods  presented  through  December  31, 1995 (using the
treasury stock method).

Net income (loss) per share information  calculated on the above noted basis for
the three month  period  ended  December  31,  1995 is $0.05 based on  6,890,000
weighted  average shares  outstanding,  and $(0.51) based on 5,743,000  weighted
average shares outstanding for the nine month period ended December 31, 1995.

Pro forma net income (loss) per share has been  computed as described  above and
also gives  effect,  even if  antidilutive,  to common  equivalent  shares  from
convertible preferred stock that automatically converted upon the closing of the
Company's initial public offering (using the as-if-converted method). All of the
convertible  preferred stock outstanding as of the closing date, March 11, 1996,
was  automatically  converted  into an aggregate of 12,029,883  shares of common
stock.

                                                                               6


<PAGE>


                              FORTE SOFTWARE, INC.
         NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
                                   (Unaudited)

Short-Term Investments

As  of  December  31,  1996,  all  short-term  investments  were  classified  as
available-for-sale securities pursuant to the provisions of Financial Accounting
Standards  No.  115,  "Accounting  for  Certain  Investments  in Debt and Equity
Securities."  Available-for-sale  securities are stated at estimated fair value.
Differences  between  the  estimated  fair  value and cost are  included  in the
balance sheet as an unrealized loss on short-term investments.

The following is a summary of the Company's  investments and  reconciliation  of
the  Company's  investments  to the  balance  sheet  at  December  31,  1996 (in
thousands).

                                             Estimated
                                               Fair
                                               Value
                                         ------------------


Commercial Paper                          $         27,271
Treasury Notes                                       2,892
Medium Term Notes                                    4,251
Corporate Notes and Bonds                            5,272
                                          ----------------
Total investments                         $         39,686
                                          ================




                                             Estimated
                                               Fair
                                               Value
                                         ------------------

Cash equivalents                           $        27,492
Short-term investments                              12,194
                                          ----------------

Total investments                                   39,686
                                          ----------------

Cash                                                 3,499
                                          ----------------

Total cash, cash equivalents and
short-term investments                    $         43,185
                                          ================

                                                                               7

<PAGE>



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

         This  Quarterly  Report  on  Form  10-Q  may  contain   forward-looking
statements that involve risks and  uncertainties.  The Company's  actual results
may differ  materially  from the results  discussed in any such  forward-looking
statements.  Factors  that might cause such a  difference  include,  but are not
limited to,  those  discussed  under the  caption  "Business  Risks"  herein and
elsewhere under the caption "Business Risks" in the fiscal 1996 Annual Report on
Form 10-K.

<TABLE>

         The  following  table  sets forth  certain  consolidated  statement  of
operations  data as a  percentage  of total  revenues  for the three and the six
months ended December 31, 1995 and 1996.
<CAPTION>
                                                                             Three months ended                Nine months ended 
                                                                                December 31,                      December 31, 
                                                                                (unaudited)                       (unaudited)
                                                                          1995              1996             1995             1996
                                                                         -----             -----             -----           -----
<S>                                                                      <C>               <C>               <C>             <C>  
Revenues:
  License                                                                 71.0%             69.4%             68.2%           69.2%
  Maintenance and service                                                 29.0              30.6              31.8            30.8
                                                                         -----             -----             -----           -----
    Total revenues                                                       100.0             100.0             100.0           100.0

Cost of revenues:
  License                                                                  1.5               1.3               1.8             1.1
  Maintenance and service                                                 16.5              18.3              19.1            18.7
                                                                         -----             -----             -----           -----
    Total cost of revenues                                                18.0              19.6              20.9            19.8

Gross profit                                                              82.0              80.4              79.1            80.2

Operating expenses:
  Sales and marketing                                                     43.8              43.8              52.4            46.2
  Product development and engineering                                     24.7              15.8              30.8            17.6
  General and administrative                                               9.5               7.1              12.1             8.7
                                                                         -----             -----             -----           -----
    Total operating expenses                                              78.0              66.7              95.3            72.5

Income (loss) from operations                                              4.0              13.7             (16.2)            7.7
Interest income, net                                                       0.1               2.8               0.9             3.4
                                                                         -----             -----             -----           -----
Income (loss) before income taxes                                          4.1              16.5             (15.3)           11.1

Provision for income taxes                                                (0.1)             (1.9)             (0.2)           (1.3)
                                                                         -----             -----             -----           -----
Net income (loss)                                                          4.0%             14.6%            (15.5)%           9.8%
                                                                         =====             =====             =====           =====
</TABLE>
                                                                               8

<PAGE>


Results of Operations

Revenues.  The Company licenses software under non-cancelable license agreements
and provides services including  maintenance,  training and consulting.  License
revenues are recognized when a non-cancelable license agreement has been signed,
the  product  has  been  shipped,  the  fees  are  fixed  and  determinable  and
collectibility  is probable.  Fees for services are charged  separately from the
license of the Company's software products. Maintenance revenues consist of fees
for ongoing support and product updates and are recognized ratably over the term
of the contract,  which is typically  twelve months.  Revenues from training are
recognized upon completion of the related  training class.  Consulting  revenues
are  recognized as the services are  performed.  Allowances for credit risks and
for estimated  future  returns are provided for upon  shipment.  Returns to date
have not been  material.  Actual  credit  losses and returns may differ from the
Company's  estimates  and such  differences  could be material to the  financial
statements.

The Company's  total revenues  increased 101% to $17.6 million from $8.7 million
for the quarters  ended December 31, 1996 and 1995,  respectively.  For the nine
months ended  December 31, 1996 total  revenues  increased 130% to $43.5 million
compared to $18.9  million for the nine months  ended  December  31,  1995.  The
Company's  license  revenues  increased  97% to $12.2  million,  or 69% of total
revenues,  from $6.2 million,  or 71% of total revenues,  for the quarters ended
December 31, 1996 and 1995, respectively. For the nine months ended December 31,
1996,  license  revenues  increased 133% to $30.1 million from $12.9 million for
the corresponding  period in 1995. Total license revenues increased primarily as
a result of an  increase  in the number of licenses  sold  reflecting  increased
market  awareness,  acceptance  of the  Company's  products in the market place,
expansion of the Company's direct sales organization,  and growing revenues from
international distributors and value added resellers.

Maintenance and service revenues increased 112% to $5.4 million, or 31% of total
revenues,  from $2.5 million,  or 29% of total revenues,  for the quarters ended
December 31, 1996 and 1995,  respectively.  Maintenance and service revenues for
the nine months ended December 31, 1996  increased by 123% to $13.4 million,  or
31% of total  revenues in 1996 from $6.0 million,  or 32% of total  revenues for
the same  period in 1995.  These  increases  in total  maintenance  and  service
revenues were primarily a result of the growing  installed base of the Company's
software  products  and the  associated  increase  in  demand  for  maintenance,
training and  consulting  services.  Service  revenues as a percentage  of total
revenues  may vary  between  periods due to changes in demand for the  Company's
services and changes in the rate of growth in license revenue.

International  revenues  include all revenues other than from the United States.
International  revenues  consist  of  sales  from  the  Company's  direct  sales
organizations in Europe and Australia and export sales through  distributors and
resellers in Europe and other areas of the world, as well as international sales
made by the domestic direct sales organization. International revenues increased
271% to $7.8 million for the quarter  ended  December 31, 1996  compared to $2.1
million for the quarter  ended  December  31, 1995  representing  44% and 24% of
total  revenues,  respectively.  For the nine  months  ended  December  31, 1996
international revenues increased 268% to $16.2 million from $4.4 million for the
same period in 1995,  representing 37% and 23% of total revenues,  respectively.
The increase in international  revenues reflects a growing direct sales presence
in Europe,  Australia and Canada through the Company's foreign  subsidiaries and
branches as well as

                                                                               9
<PAGE>


growth from distributors in Asia, Europe and South America.  The Company expects
that  international  license and related  maintenance and service  revenues will
continue  to account  for a  significant  portion of its total  revenues  in the
future.  The Company believes that in order to increase sales  opportunities and
profitability it will be required to expand its  international  operations.  The
Company has committed and continues to commit  significant  management  time and
financial  resources to developing direct and indirect  international  sales and
support channels.  There can be no assurance,  however, that the Company will be
able to maintain  or  increase  international  market  demand for the  Company's
products.  To the extent that the Company is unable to do so in a timely manner,
the Company's  international sales will be limited,  and the Company's business,
operating  results  and  financial  condition  would  be  materially   adversely
affected.

Cost of Revenues

Cost of  License  Revenues.  Cost  of  license  revenues  consist  primarily  of
royalties paid to third-party  vendors,  product  packaging,  documentation  and
production.  Cost of license revenues was $127,000 and $228,000 for the quarters
ended  December  31,  1995 and 1996,  respectively,  representing  2% of license
revenues. Cost of license revenues was $322,000 and $494,000 representing 3% and
2% of total license fee revenue for the nine month  periods  ended  December 31,
1995 and 1996,  respectively.  The Company has  experienced  economies  of scale
related to cost of licenses as a result of revenue growth.

Cost of  Maintenance  and  Service  Revenues.  Cost of  maintenance  and service
revenues consist primarily of personnel-related and facilities costs incurred in
providing  customer  support,  training  and  consulting  services,  as  well as
third-party costs incurred in providing training and consulting  services.  Cost
of  maintenance  and service  revenues was $1.4 million and $3.2 million for the
quarters ended December 31, 1995 and 1996,  respectively,  representing  57% and
60% of maintenance and service revenues,  respectively.  Cost of maintenance and
services for the nine months  ended  December 31, 1995 and 1996 was $3.6 million
and $8.1 million,  representing  60% and 61% of maintenance,  respectively.  The
cost of services as a percentage  of service  revenues may vary between  periods
depending on the mix of services provided by the Company and the extent to which
external contractors are used to provide those services.

Operating Expenses

Sales and Marketing. Sales and marketing expenses consist primarily of salaries,
commissions  and bonuses earned by sales and marketing  personnel,  field office
expenses, travel and entertainment,  promotional expenses and advertising. Sales
and  marketing  expenses  increased  from $3.8  million  for the  quarter  ended
December 31, 1995 to $7.7 million for the quarter ended  December 31, 1996,  and
increased from $9.9 million for the nine months ended December 31, 1995 to $20.1
million for the nine months ended December 31, 1996. These increases reflect the
hiring of additional sales and marketing personnel,  and their related costs, as
well as increased costs associated with expanded promotional  activities.  Sales
and  marketing  expenses  represented  44% of  total  revenues  for  each of the
quarters ended December 31, 1995 and 1996, respectively, and represented 52% and
46% of total  revenues  for the nine months  ended  December  31, 1995 and 1996,
respectively. The decrease in sales and marketing expenses for nine months ended
December 31, 1996 as a percentage of total revenue was primarily due to the more
rapid growth in revenues. 

                                                                              10

<PAGE>

The Company expects that sales and marketing  expenses will continue to increase
in dollar amount as the Company continues to hire additional sales and marketing
personnel and increase promotional activities in the future.


Product Development.  Product development expenses consist primarily of salaries
and other personnel-related  expenses and depreciation of development equipment.
The  Company  believes  that a  significant  level  of  investment  for  product
development  is required to remain  competitive.  Product  development  expenses
increased  from $2.2  million for the quarter  ended  December  31, 1995 to $2.8
million for the quarter ended December 31, 1996.  Product  development  expenses
increased  from $5.8 million to $7.6 million for the nine months ended  December
31, 1995 and 1996, respectively.  These increases were primarily attributable to
additional hiring of product development personnel. Product development expenses
represented  25% and 16% of total  revenues for the quarters  ended December 31,
1995 and 1996,  respectively,  and  represented  31% and 18% for the nine months
ended  December  31,  1995 and  1996,  respectively.  The  decrease  in  product
development  expenses for nine months ended December 31, 1996 as a percentage of
total  revenue  was  primarily  due to the more rapid  growth in  revenues.  The
Company  anticipates  that it will continue to devote  substantial  resources to
product  development  and that product  development  expenses  will  increase in
dollar  amount in the future.  Because all costs  incurred in the  research  and
development of software  products and enhancements to existing software products
have  been  expensed  as  incurred,   cost  of  license  revenues   includes  no
amortization of capitalized software development costs.

General and Administrative.  General and administrative  expenses increased from
$831,000 for the quarter ended December 31, 1995 to $1.3 million for the quarter
ended December 31, 1996. General and administrative expenses increased from $2.3
million for the nine months ended December 31, 1995 to $3.8 million for the nine
months ended December 31, 1996.  These increases were primarily due to increased
staffing and associated  expenses  necessary to manage and support the Company's
increased scale of operations.  General and administrative  expenses represented
10% and 7% of total  revenues for the quarters ended December 31, 1995 and 1996,
respectively,  and  represented 12% and 9% of total revenues for the nine months
ended  December 31, 1995 and 1996,  respectively.  The  decreases in general and
administrative  expenses  for the  nine  months  ended  December  31,  1996 as a
percentage  of total  revenue  was  primarily  due to the more  rapid  growth in
revenues. The Company believes that its general and administrative expenses will
increase  in dollar  amount in the  future as a result of the  expansion  of the
Company's administrative staff to support its growing operations and as a result
of the increased expense associated with being a public company.

Interest Income,  Net. Interest income,  net,  represents interest earned by the
Company on its cash and cash  equivalents and short-term  investments  offset by
interest expense and capitalized  leases.  Interest income,  net, increased from
$10,000  for the quarter  ended  December  31, 1995 to $488,000  for the quarter
ended December 31, 1996.  Interest income,  net, increased from $174,000 for the
nine months  ended  December  31, 1995 to $1.5 million for the nine months ended
December 31, 1996.  These  increases are  primarily a result of interest  income
from the Company  investing  proceeds of the Company's  initial public  offering
completed on March 11, 1996.

                                                                              11
<PAGE>

Provision for Income Taxes. The effective tax rate for the third quarter and the
nine months ended  December 31, 1996 was 12%. The provision for income taxes was
due to state and  federal  alternative  minimum  taxes and  foreign  withholding
taxes.   The  Company   expects  its  fiscal  1997  effective  tax  rate  to  be
approximately  12%. This rate differs from the federal  statutory rate primarily
due to the  utilization of net operating loss  carryovers and tax credits.  This
rate  could  change  based on a change in the  estimated  geographic  mix of the
Company's earnings,  the amount of permanent  reinvestment offshore of a portion
of the Company's earnings for the nine months ended December 31, 1996 or changes
in the U.S. tax law.

Liquidity and Capital Resources

The Company  completed an initial  public  offering of common stock on March 11,
1996 with net  proceeds  of $34.3  million.  The common  stock is trading on the
Nasdaq National Market under the symbol FRTE.

The Company  generated  cash of $4.4 million from  operating  activities for the
nine months ended  December 31, 1996 compared to cash used in operations of $4.0
million for the nine months ended  December 31, 1995.  For the nine months ended
December 31, 1996, the increase in cash flow from operations  resulted primarily
from net income for the  period,  an  increase  in  accrued  expenses  and other
liabilities,  an increase in depreciation and amortization,  partially offset by
an increase in accounts receivable. For the nine months ended December 31, 1995,
the net cash used in operating  activities  was  primarily due to net losses for
the period, an increase in accounts  receivable  partially offset by an increase
in deferred revenue, accrued liabilities and depreciation and amortization.

The   Company's   investing   activities   consisted   of   the   purchases   of
interest-bearing  securities,  as well as purchases  of property and  equipment.
Capital  expenditures  were $3.1 million for the nine months ended  December 31,
1996 compared to $848,000 for the nine months ended  December 31, 1995.  Capital
expenditures  consisted of purchases of computer  equipment and office furniture
to support the Company's  growing  employee base.  The Company  expects that its
capital  expenditures  will  increase as the Company's  employee base grows.  At
December 31, 1996, the Company did not have any material commitments for capital
expenditures.

At December 31, 1996,  the Company had $43.2 million in cash,  cash  equivalents
and short term investments and $42.2 million in working capital. The Company has
an equipment lease line, which at December 31, 1996, provided up to $5.8 million
of leasing  capacity at 12% interest and is repayable over 42 months through the
year 2000.  Approximately  $1.5 million was available  under the equipment lease
line as of December 31, 1996.

The Company  believes that its existing cash,  cash  equivalents  and short-term
investments  will be  adequate  to meet its cash  needs for at least the next 12
months.  Thereafter,  the Company may  require  additional  funds to support its
working  capital  requirements  or for other purposes and may seek to raise such
additional  funds  through  public or private  equity  financings  or from other
sources.  There can be no assurance that additional  financing will be available
or that, if available,  such financing will be obtainable on terms  favorable to
the Company and would not be dilutive.

                                                                              12
<PAGE>



                                 BUSINESS RISKS

         This  Quarterly  Report  on  Form  10-Q  may  contain   forward-looking
statements that involve risks and  uncertainties.  The Company's  actual results
may differ  materially  from the results  discussed in any such  forward-looking
statements.  Factors  that might cause such a  difference  include,  but are not
limited to, those  discussed  below and  elsewhere  under the caption  "Business
Risks" in the fiscal 1996 Annual Report on Form 10-K.

Limited Operating History;  History of Operating Losses. The Company was founded
in  February  1991 and first  shipped  product  in  August  1994.  Although  the
Company's  revenues  have  increased  in each of the last ten  quarters  and the
Company had net income in each of the quarters  ended  December 31, 1995 through
December  31,  1996,  the  Company  incurred  net  losses in each  quarter  from
inception  through the quarter ended  December 31, 1995,  and had an accumulated
deficit of $18.4 million as of December 31, 1996. A  substantial  portion of the
accumulated  deficit is due to the  significant  commitment  of resources to the
Company's product  development and sales  organizations.  The Company expects to
continue  to devote  substantial  resources  in these areas and as a result will
need to  recognize  significant  quarterly  revenues  to  achieve  and  maintain
profitability.  There can be no  assurance  that any of the  Company's  business
strategies  will be  successful  or the Company will be profitable in any future
quarter or period.

Potential  Fluctuations in Quarterly  Results;  Uncertainty of Future  Operating
Results;  Seasonality.  The Company's  quarterly  operating  results have varied
significantly  in the past and are likely to vary  significantly  in the future,
depending on factors such as the size and timing of significant orders and their
fulfillment,  demand for the Company's products,  changes in pricing policies by
the Company or its competitors,  the number,  timing and significance of product
enhancements  and new product  announcements by the Company and its competitors,
the  ability of the Company to develop,  introduce  and market new and  enhanced
versions of the Company's  products on a timely  basis,  changes in the level of
operating  expenses,  changes in the Company's sales incentive plans,  budgeting
cycles  of  its  customers,   customer  order   deferrals  in   anticipation  of
enhancements  or new  products  offered by the Company or its  competitors,  the
cancellation of licenses during the warranty period or nonrenewal of maintenance
agreements,  product  life  cycles,  software  bugs and  other  product  quality
problems,  personnel changes,  changes in the Company's  strategy,  the level of
international expansion,  seasonal trends and general domestic and international
economic and political  conditions,  among others. A significant  portion of the
Company's  revenues  have been,  and the Company  believes  will continue to be,
derived from a limited number of orders placed by large  organizations,  and the
timing of such  orders and their  fulfillment  has caused and could  continue to
cause material fluctuations in the Company's operating results,  particularly on
a quarterly  basis.  In addition,  the Company intends to continue to expand its
domestic and international  direct sales force. The timing of such expansion and
the rate at which new sales people become  productive  could also cause material
fluctuations in the Company's quarterly operating results.  Due to the foregoing
factors,  quarterly  revenues and  operating  results are difficult to forecast.
Revenues  are also  difficult to forecast  because the market for  client/server
application  development  software is rapidly evolving,  and the Company's sales
cycle,  from  initial  evaluation  to  purchase  and the  provision  of  support
services, is lengthy and varies substantially from customer to customer. Product
orders are typically  shipped  shortly after receipt,  and  consequently,  order
backlog at the

                                                                              13
<PAGE>


beginning  of any quarter has in the past  represented  only a small  portion of
that  quarter's  revenues.  As a result,  license  revenues  in any  quarter are
substantially dependent on orders booked and shipped in that quarter. Due to all
of the foregoing,  revenues for any future quarter are not predictable  with any
significant  degree  of  accuracy.   Accordingly,   the  Company  believes  that
period-to-period  comparisons  of its  operating  results  are  not  necessarily
meaningful and should not be relied upon as  indications of future  performance.
Although the Company has recently experienced revenue growth, such growth should
not be considered  indicative  of future  revenue  growth,  if any, or of future
operating results.  Failure by the Company, for any reason, to increase revenues
would  have a  material  adverse  effect on the  Company's  business,  operating
results and financial condition.

To achieve its  quarterly  revenue  objectives,  the Company is  dependent  upon
obtaining orders in any given quarter for shipment in that quarter. Furthermore,
the Company has often  recognized a  substantial  portion of its revenues in the
last month,  or even weeks or days, of a quarter.  The Company's  expense levels
are based,  in  significant  part,  on the Company's  expectations  as to future
revenues and are therefore relatively fixed in the short term. If revenue levels
fall below expectations, net income is likely to be disproportionately adversely
affected  because a  proportionately  smaller  amount of the Company's  expenses
varies with its  revenues.  There can be no  assurance  that the Company will be
able to achieve or maintain  profitability on a quarterly or annual basis in the
future.  Due to all the  foregoing  factors,  it is likely  that in some  future
quarter the Company's operating results will be below the expectations of public
market analysts and investors.  In such event, the price of the Company's Common
Stock would likely be materially adversely affected.

The operating results of many software  companies  reflect seasonal trends,  and
the Company  expects to be  affected  by such trends in the future.  The Company
believes that it is likely that it will experience relatively higher revenues in
the Company's  quarter ended March 31 and  relatively  lower or flat revenues in
its quarter  ended June 30, as a result of efforts by its direct  sales force to
meet fiscal  year-end  sales  quotas.  As a result,  the  Company  could incur a
decline in net income for the quarter  ended June 30, 1997 compared to the prior
quarter.  The Company also anticipates that it may experience  relatively weaker
demand in the quarter ended  September 30 as a result of reduced sales  activity
in Europe during the summer months.

Product Concentration;  Dependence on Emerging Market for High-End Client/Server
Applications.  All of the Company's  revenues have been attributable to sales of
FORTE and related products and services. The Company currently expects FORTE and
related  products  and services to account for all or  substantially  all of the
Company's future revenues. As a result,  factors adversely affecting the pricing
of or demand for FORTE and related products such as competition or technological
change,  could  have  a  material  adverse  effect  on the  Company's  business,
operating  results and  financial  condition.  The  Company's  future  financial
performance  will depend,  in significant  part, on the successful  development,
introduction and customer  acceptance of new and enhanced  versions of FORTE and
related products. There can be no assurance that the Company will continue to be
successful  in  marketing  the FORTE  products or other  products.  Although the
Company has recently  experienced growth in sales of FORTE and related products,
there can be no assurance that the market for high-end client/server application
development software will continue to grow. If the high-end client/server market
fails to grow, or grows more slowly than the Company currently anticipates,  the
Company's   business,   operating  results  and  financial  condition  would  be

                                                                              14
<PAGE>

materially and adversely affected.

Risks Associated with Expanding Distribution.  To date, the Company has sold its
products through its direct sales force, distributors and value added resellers.
The Company's ability to achieve  significant  revenue growth in the future will
depend in large part on its success in recruiting and training sufficient direct
sales   personnel  and   establishing   and   maintaining   relationships   with
distributors,   resellers  and  system  integrators.  Although  the  Company  is
currently investing,  and plans to continue to invest,  significant resources to
expand its direct  sales force and to develop  distribution  relationships  with
third-party distributors and resellers, the Company has at times experienced and
continues to experience  difficulty in recruiting  qualified sales personnel and
in establishing necessary third-party  relationships.  There can be no assurance
that the Company will be able to  successfully  expand its direct sales force or
other  distribution  channels  or that  any such  expansion  will  result  in an
increase in  revenues.  Any  failure by the  Company to expand its direct  sales
force or other  distribution  channels  would  materially  adversely  affect the
Company's business, operating results and financial condition.

Lengthy  Sales  Cycle.  The  Company's  products are  typically  used to develop
applications that are critical to a customer's  business and the purchase of the
Company's  products  is  often  part of a  customer's  larger  business  process
reengineering  initiative or  implementation  of client/server  computing.  As a
result,  the license  and  implementation  of the  Company's  software  products
generally  involves  a  significant   commitment  of  management  attention  and
resources by prospective customers.  Accordingly, the Company's sales process is
often subject to delays  associated with a long approval  process that typically
accompanies significant initiatives or capital expenditures. For these and other
reasons,  the sales cycle associated with the license of the Company's  products
is often  lengthy and subject to a number of  significant  delays over which the
Company has little or no  control.  There can be no  assurance  that the Company
will not experience these and additional  delays in the future.  Therefore,  the
Company  believes  that its  quarterly  operating  results  are  likely  to vary
significantly in the future.

Limited Deployment;  Dependence on System Integrators. The Company first shipped
FORTE in August 1994. To date, only a limited number of the Company's  customers
have  completed  the  development  and  deployment  of  high-end   client/server
applications  using FORTE.  If any of the  Company's  customers  are not able to
successfully develop and deploy high-end client/server  applications with FORTE,
the Company's  reputation could be damaged,  which could have a material adverse
effect on the Company's business,  operating results and financial condition. In
addition,  the  Company  expects  that a  significant  percentage  of its future
revenues will be derived from sales to existing customers. If existing customers
have difficulty deploying  applications built with FORTE or for any other reason
are not satisfied  with FORTE,  the Company's  business,  operating  results and
financial  condition  would be  materially  adversely  affected.  The  Company's
customers and potential  customers often rely on third-party  system integrators
to  develop,  deploy  and manage  high-end  client/server  applications.  If the
Company is unable to adequately train a sufficient number of system  integrators
or if, for any reason,  a large  number of such  integrators  adopt a product or
technology  other than FORTE,  the  Company's  business,  operating  results and
financial condition would be materially and adversely affected.

                                                                              15
<PAGE>



Competition.   The  market  for  high-end  software  used  in  the  development,
deployment and management of client/server applications is intensely competitive
and characterized by rapidly changing  technology,  evolving industry standards,
frequent new product  introductions and rapidly changing customer  requirements.
High-end client/server applications that can be developed and deployed using the
Company's FORTE environment can also be implemented using a combination of first
generation  application  development tools and more powerful server  programming
techniques  such  as  stored  procedures  in  relational  databases,  C  or  C++
programming,  and  networking  and  database  middleware  to connect the various
components. As such, the Company effectively experiences its primary competition
from potential  customers'  decisions to pursue this type of approach as opposed
to utilizing an application  environment such as FORTE. As a result, the Company
must  continuously  educate  existing  and  prospective   customers  as  to  the
advantages  of the  Company's  products.  There can be no  assurance  that these
customers or potential customers will perceive sufficient value in the Company's
products to justify purchasing them.

The Company has  experienced  and  expects to continue to  experience  increased
competition from current and future competitors, many of whom have significantly
greater  financial,  technical,  marketing and other resources than the Company.
The  Company's  current  direct  competitors  include,   among  others,  Dynasty
Technologies,  Inc.,  NAT  Systems,  Inc.,  Seer  Technologies,  Inc.  and Texas
Instruments,   Inc.  The  Company  expects  to  compete  increasingly  with  IBM
Corporation,  Informix Corporation,  Microsoft Corporation,  Oracle Corporation,
Powersoft (a subsidiary of Sybase,  Inc.) and others. The Company's  competitors
may be able to respond more quickly to new or emerging  technologies and changes
in  customer  requirements  or  devote  greater  resources  to the  development,
promotion and sale of their  products than the Company.  Also,  many current and
potential  competitors have greater name recognition and more extensive customer
bases that could be  leveraged,  thereby  gaining  market share to the Company's
detriment.   The  Company  expects  to  face  additional  competition  as  other
established  and  emerging   companies  enter  the   client/server   application
development  market and new products and technologies are introduced.  Increased
competition  could result in price  reductions,  fewer customer orders,  reduced
gross margins and loss of market share, any of which could materially  adversely
affect the Company's  business,  operating results and financial  condition.  In
addition,  current and potential competitors may make strategic  acquisitions or
establish  cooperative  relationships  among  themselves or with third  parties,
thereby  increasing  the  ability of their  products to address the needs of the
Company's  prospective   customers.   Accordingly,   it  is  possible  that  new
competitors  or  alliances  among  current  and new  competitors  may emerge and
rapidly  gain  significant  market  share.  Such  competition  could  materially
adversely  affect  the  Company's  ability  to  sell  additional   licenses  and
maintenance  and support  renewals on terms  favorable to the Company.  Further,
competitive  pressures  could  require  the Company to reduce the price of FORTE
licenses  and related  services,  which could  materially  adversely  affect the
Company's business,  operating results and financial condition.  There can be no
assurance that the Company will be able to compete  successfully against current
and future  competitors,  and the failure to do so would have a material adverse
effect upon the Company's business, operating results and financial condition.

Risk Associated with New Versions and New Products;  Rapid Technological Change.
The  software  market in which the Company  competes is  characterized  by rapid
technological  change,  frequent  introductions  of  new  products,  changes  in
customer demands and evolving industry

                                                                              16
<PAGE>

standards.  The  introduction  of products  embodying new  technologies  and the
emergence of new industry  standards can render existing  products  obsolete and
not marketable. For example, the Company's customers have adopted a wide variety
of hardware,  software,  database and networking platforms,  and as a result, to
gain broad  market  acceptance,  the Company has had to support its  products on
many of such  platforms.  The  Company's  future  success  will  depend upon its
ability to address the  increasingly  sophisticated  needs of its  customers  by
supporting  existing and emerging  hardware,  software,  database and networking
platforms  and by  developing  and  introducing  enhancements  to FORTE  and new
products on a timely basis that keep pace with such  technological  developments
and  emerging  industry  standards  and customer  requirements.  There can be no
assurance  that the Company  will be  successful  in  developing  and  marketing
enhancements to FORTE and related products that respond to technological change,
evolving industry standards or customer requirements,  that the Company will not
experience  difficulties that could delay or prevent the successful development,
introduction  and sale of such  enhancements  and related  products or that such
enhancements or related  products will  adequately meet the  requirements of the
marketplace and achieve any significant degree of market acceptance. The Company
has in the past  experienced  delays in the  release  dates of  enhancements  to
FORTE. If release dates of any future FORTE enhancements and related products or
new  products  are  delayed  or if when  released  they fail to  achieve  market
acceptance,  the Company's  business,  operating results and financial condition
would be  materially  adversely  affected.  In  addition,  the  introduction  or
announcement  of new product  offerings  or  enhancements  by the Company or the
Company's competitors may cause customers to defer or forgo purchases of current
versions of the Company's  products,  which could have a material adverse effect
on the Company's business, operating results and financial condition.

Risk of  Software  Defects.  Software  products as  internally  complex as those
offered by the Company  frequently  contain errors or defects,  especially  when
first  introduced or when new versions or  enhancements  are  released.  Despite
extensive  product testing by the Company,  the Company has discovered  software
errors in versions of FORTE after their  introduction.  Although the Company has
not  experienced  material  adverse  effects  resulting from any such defects or
errors to date,  there can be no assurance that,  despite testing by the Company
and by current and potential customers,  defects and errors will not be found in
current versions,  new versions or enhancements after commencement of commercial
shipments,  resulting in loss of revenues or delay in market  acceptance,  which
could have a material  adverse  effect upon the  Company's  business,  operating
results and financial condition.

Product  Liability.  The Company  markets  its  products  to  customers  for the
development,  deployment and management of high-end client/server  applications.
The Company's license agreements with its customers typically contain provisions
designed to limit the Company's  exposure to potential product liability claims.
It is possible,  however,  that the limitation of liability provisions contained
in the Company's license agreements may not be effective as a result of existing
or future  federal,  state or local laws or ordinances or  unfavorable  judicial
decisions. Although the Company has not experienced any product liability claims
to date, the sale and support of its products by the Company may entail the risk
of such claims,  which are likely to be  substantial in light of the use of such
products in business-critical applications. A successful product liability claim
brought  against  the  Company  could have a material  adverse  effect  upon the
Company's business, operating results and financial condition.

                                                                              17
<PAGE>

Risks   Associated  with   International   Operations.   Revenues  from  foreign
subsidiaries  and export sales  accounted for 24% and 44% of the Company's total
revenue for the quarters ended December 31, 1995 and 1996, respectively, and 23%
and 37% for the nine months ended December 31, 1995 and 1996, respectively.  The
Company currently has international sales offices located in the United Kingdom,
France,  Australia,  Germany,  Canada  and  Switzerland,  which  have  generated
substantially  all direct  international  revenues  recognized by the Company to
date.  The Company  believes that in order to increase sales  opportunities  and
profitability it will be required to expand its  international  operations.  The
Company has committed and continues to commit  significant  management  time and
financial  resources to developing direct and indirect  international  sales and
support channels.  There can be no assurance,  however, that the Company will be
able to maintain or increase  international  market demand for its products.  To
the extent that the Company is unable to do so in a timely manner, the Company's
international  sales will be  limited,  and the  Company's  business,  operating
results and financial condition would be materially and adversely affected.

International  operations are subject to inherent risks, including the impact of
possible recessionary environments in economies outside the United States, costs
of  localizing  products  for foreign  markets,  longer  receivables  collection
periods and greater  difficulty in accounts  receivable  collection,  unexpected
changes in  regulatory  requirements,  difficulties  and costs of  staffing  and
managing foreign operations, reduced protection for intellectual property rights
in some  countries,  potentially  adverse tax  consequences  and  political  and
economic  instability.  There  can  be no  assurance  that  the  Company  or its
distributors  or  resellers  will be able to sustain or  increase  international
revenues from licenses or from  maintenance  and service,  or that the foregoing
factors  will  not  have a  material  adverse  effect  on the  Company's  future
international revenues and, consequently,  on the Company's business,  operating
results and financial condition. The Company's direct international revenues are
generally denominated in local currencies. The Company does not currently engage
in hedging  activities.  Revenues  generated by the Company's  distributors  and
resellers are generally paid to the Company in United States  dollars.  Although
exposure to currency  fluctuations to date has been insignificant,  there can be
no assurance that fluctuations in currency exchange rates in the future will not
have a material adverse impact on revenues from international sales and thus the
Company's business, operating results and financial condition.

Proprietary Rights,  Risks of Infringement and Source Code Release.  The Company
relies primarily on a combination of patent, copyright and trademark laws, trade
secrets,  confidentiality  procedures and contractual  provisions to protect its
proprietary  rights.  The  Company  also  believes  that  factors  such  as  the
technological  and creative skills of its personnel,  new product  developments,
frequent product enhancements, name recognition and reliable product maintenance
are essential to establishing and maintaining a technology  leadership position.
The  Company  seeks to protect its  software,  documentation  and other  written
materials  under trade  secret and  copyright  laws,  which  afford only limited
protection.  The Company  currently  has one issued  United  States  patent that
expires  in 2012  and  corresponding  patent  applications  pending  in  Canada,
Australia,  Japan and  several  member  countries  within  the  European  Patent
Organization.  There can be no assurance  that the Company's  patent will not be
invalidated, circumvented or challenged, that the rights granted thereunder will
provide  competitive  advantages  to the  Company  or that any of the  Company's
pending or future patent applications, whether or not being currently challenged
by applicable  governmental  patent examiners,  will be issued with the scope of
the  claims  sought  by the  Company,  if at all.  Furthermore,  there can be no
assurance that others will not develop technologies

                                                                              18
<PAGE>

that are similar or superior to the  Company's  technology  or design around the
patents owned by the Company.  The Company has registered the trademark FORTE in
the  United  Kingdom,  and  trademark  registration  applications  for FORTE are
pending in the United States and several other countries.  Despite the Company's
efforts to protect its proprietary rights,  unauthorized  parties may attempt to
copy aspects of the Company's products or to obtain and use information that the
Company  regards as  proprietary.  Policing  unauthorized  use of the  Company's
products is  difficult,  and while the Company is unable to determine the extent
to which piracy of its software products exists, software piracy can be expected
to be a persistent problem.  In addition,  the laws of some foreign countries do
not  protect  the  Company's  proprietary  rights as fully as do the laws of the
United States.  There can be no assurance that the Company's means of protecting
its  proprietary  rights in the United States or abroad will be adequate or that
competition will not independently  develop similar technology.  The Company has
entered  into  source  code  escrow  agreements  with a  limited  number  of its
customers   and   resellers   requiring   release  of  source  code  in  certain
circumstances.  Such agreements  generally provide that such parties will have a
limited,  non-exclusive  right to use such  code in the  event  that  there is a
bankruptcy  proceeding  by or against the Company,  if the Company  ceases to do
business or if the Company fails to meet its support  obligations.  In addition,
Digital  Equipment  Corporation  ("Digital"),  Sequent  Computer  Systems,  Inc.
("Sequent") and Mitsubishi  Corporation  ("Mitsubishi") each currently possesses
copies of FORTE source code for certain limited  purposes,  subject to the terms
of separate  written  agreements each company has entered into with the Company.
Digital and Sequent each has an option to purchase a  non-exclusive,  fully-paid
license of the FORTE source code.  Digital's  option becomes  exercisable if the
Company is  acquired  and the  acquiror  fails to agree to assume the  Company's
contractual  obligations to Digital,  and Sequent's option is exercisable if the
Company is acquired by certain Sequent competitors. The provision of source code
may increase the likelihood of misappropriation by third parties.

The Company is not aware that it is infringing any  proprietary  rights of third
parties.  There can be no assurance,  however, that third parties will not claim
infringement by the Company of their  intellectual  property rights. The Company
expects  that  software  product  developers  will  increasingly  be  subject to
infringement  claims as the number of products and  competitors in the Company's
industry segment grows and the  functionality of products in different  industry
segments  overlaps.  Any  such  claims,  with or  without  merit,  could be time
consuming to defend, result in costly litigation,  divert management's attention
and  resources,  cause product  shipment  delays or require the Company to enter
into royalty or licensing agreements.  Such royalty or licensing agreements,  if
required, may not be available on terms acceptable to the Company, if at all. In
the event of a successful claim of product  infringement against the Company and
failure  or  inability  of the  Company  to  license  the  infringed  or similar
technology,  the Company's  business,  operating results and financial condition
would be materially adversely affected.

The Company  relies upon certain  software that it licenses from third  parties,
including  software that is integrated with the Company's  internally  developed
software and used in FORTE to perform key  functions.  There can be no assurance
that these  third-party  software  licenses will continue to be available to the
Company on commercially reasonable terms. The loss of, or inability to maintain,
any such software  licenses could result in shipment delays or reductions  until
equivalent  software  could be developed,  identified,  licensed and  integrated
which  would  materially  adversely  affect the  Company's  business,  operating
results and financial condition.

                                                                              19
<PAGE>

Volatility  of  Stock  Price.   The  Company's   Common  Stock  has  experienced
significant  price  volatility  and such  volatility  may  occur in the  future.
Factors,  such as  announcements  of the  introduction  of new  products  by the
Company or its  competitors and  quarter-to-quarter  variations in the Company's
operating  results,  as well as market conditions in the technology and emerging
growth company sectors, may have a significant impact on the market price of the
Company's  Common  Stock.  Further,  the stock  market has  experienced  extreme
volatility that has particularly affected the market prices of equity securities
of many  high  technology  companies  and  that  often  has  been  unrelated  or
disproportionate  to the operating  performance of such companies.  These market
fluctuations may adversely affect the price of the Company's Common Stock.

Need to Manage a Changing  Business.  The Company  has  recently  experienced  a
period of  significant  revenue  growth  and an  expansion  in the number of its
employees,  the scope of its operating and financial systems and geographic area
of  its   operations.   This   growth  has   resulted   in  new  and   increased
responsibilities for management personnel and has placed significant strain upon
the Company's  management,  operating and financial  systems and  resources.  To
accommodate  recent growth,  compete  effectively  and manage  potential  future
growth, the Company must continue to implement and improve information  systems,
procedures and controls and expand,  train,  motivate and manage its work force.
These  demands  will  require the  addition  of new  management  personnel.  The
Company's  future success will depend to a significant  extent on the ability of
its  current  and  future  management  personnel  to operate  effectively,  both
independently  and as a group.  There  can be no  assurance  that the  Company's
personnel,  systems,  procedures  and  controls  will be adequate to support the
Company's future operations.  Any failure to implement and improve the Company's
operational,  financial and management systems or to expand,  train, motivate or
manage employees could have a material adverse effect on the Company's business,
operating results and financial condition.

Dependence  on Key  Personnel.  The Company's  success  depends to a significant
degree  upon  the  continuing  contributions  of  its  key  management,   sales,
marketing,  customer support and product development personnel.  The loss of key
management or technical  personnel could adversely  affect the Company.  None of
the Company's employees is subject to an employment  agreement with the Company.
The Company  believes that its future success will depend in large part upon its
ability to attract and retain highly-skilled managerial, sales, customer support
and product  development  personnel.  The Company has at times  experienced  and
continues  to  experience   difficulty  in   recruiting   qualified   personnel.
Competition  for qualified  software  development,  sales and other personnel is
intense,  and there can be no assurance  that the Company will be  successful in
attracting and retaining such personnel. Competitors and others have in the past
and may in the future  attempt to recruit the  Company's  employees.  Failure to
attract and retain key  personnel  could have a material  adverse  effect on the
Company's business, operating results and financial condition.

                                                                              20

<PAGE>



PART II

ITEM 1.           LEGAL PROCEEDINGS

The Company is a party to one  litigation  involving  claims brought by a former
employee. The Company intends to defend such litigation vigorously, and does not
believe  that such  litigation  will have a  material  adverse  effect  upon the
Company's business, operating results or financial condition. The Company is not
aware of any pending or threatened litigation that could have a material adverse
effect upon the Company's business, operating results or financial condition.

ITEM 2.           CHANGES IN SECURITIES

         None

ITEM 3.           DEFAULTS ON SENIOR SECURITIES

         None

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

         None

                                                                              21

<PAGE>



ITEM 5.  OTHER INFORMATION

               None

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K


         (a)  Exhibit 11.1 Statement Regarding Computation of Earnings Per Share

               Exhibit 27  Financial Data Schedule

         (b) No  reports on Form 8-K have been filed  during the  quarter  ended
December 31, 1996.

                                                                              22
<PAGE>





                                   SIGNATURES

         Pursuant to the requirements of the Securities Act of 1934, as amended,
the  Registrant  has duly  caused  this  Report on Form 10-Q to be signed on its
behalf by the undersigned,  thereunto duly  authorized,  in the City of Oakland,
State of California, on this 10th day of February, 1997.


                                   FORTE SOFTWARE, INC.
     
                                   By:        /s/ RODGER E. WEISMANN
                                   ---------------------------------------
                                   Rodger E. Weismann

                                   Vice President,  Finance and  Administration,
                                   Chief Financial Officer and Secretary

                                                                              23