<PAGE>

                                          
                         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 June 30, 1998

/ /  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                      19,685,651
   (Class of common stock)              (Shares outstanding at June 30, 1998)

<PAGE>

FORTE SOFTWARE, INC.
FORM 10-Q QUARTERLY REPORT

Table of Contents
<TABLE>
<CAPTION>

PART I       FINANCIAL INFORMATION
                                                                          Page
                                                                         ------
<S>         <C>                                                         <C>
Item 1.      Financial Statements

             Condensed Consolidated Balance Sheet                           3
             At June 30, 1998 and March 31, 1998

             Condensed Consolidated Results of Operations                   4
             For the Three Months Ended June 30, 1998 and 1997

             Condensed Consolidated Statement of Cash Flow                  5
             For the Three Months Ended June 30, 1998 and 1997

             Notes to Condensed Consolidated Financial Statements           6

Item 2.      Management's Discussion and Analysis of Financial              9
             Condition and Results of Operations


Part II      OTHER INFORMATION

Item 1.      Legal Proceedings                                             25
Item 2.      Changes in Securities                                         25
Item 3.      Defaults on Senior Securities                                 25
Item 4.      Submission of Matters to a Vote of Security Holders           25
Item 5.      Other Information                                             25
Item 6.      Exhibits, Financial Statement Schedules and Reports on        25

Signatures                                                                 26
</TABLE>

                                                                              2
<PAGE>

PART 1.  
ITEM 1.   FINANCIAL STATEMENTS

                                FORTE SOFTWARE, INC.
                        CONDENSED CONSOLIDATED BALANCE SHEET
                                   (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                            As of,
                                                 ----------------------------
                                                    June 30,      March 31,
                                                     1998           1998
                                                 -------------   ------------
                                                  (unaudited)
<S>                                             <C>             <C>
ASSETS
Current assets:
    Cash and cash equivalents                       $ 17,979        $13,358
    Short-term investments                            14,247         20,802
    Accounts receivable, net of allowances 
          of $1,097 ($1,151 at March 31, 1998)        17,226         20,277
    Prepaid expense and other current assets           2,063          1,635
                                                    --------        -------
Total current assets                                  51,515         56,072

Equipment and leasehold improvements, net              6,678          7,416
Other assets                                             250            250
                                                     -------        -------
Total assets                                         $58,443        $63,738
                                                     -------        -------
                                                     -------        -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Accounts payable                                 $ 1,141        $ 1,530
    Accrued expenses and other liabilities             9,736         11,503
    Deferred revenue                                  10,656         12,312
    Current portion of capital lease obligations         486            695
                                                     -------        -------
Total current liabilities                             22,019         26,040

Capital lease obligations, due after one year            123            123
Deferred revenue                                         232            265
Commitments
Stockholders' equity:
    Common stock                                         199            195
    Additional paid-in capital                        67,928         66,851
    Accumulated deficit                              (32,009)       (29,663)
    Foreign currency translation adjustments             (49)           (73)
                                                     -------        -------
Total stockholders' equity                            36,069         37,310
                                                     -------        -------
Total liabilities and stockholders' equity           $58,443        $63,738
                                                     -------        -------
                                                     -------        -------
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.

                                                                             3
<PAGE>

                                FORTE SOFTWARE, INC.
                    CONDENSED CONSOLIDATED RESULTS OF OPERATIONS
                  (IN THOUSANDS, EXCEPT PER SHARE DATA; UNAUDITED)
<TABLE>
<CAPTION>
                                                  Three months ended June 30,
                                                  ---------------------------
                                                        1998           1997
                                                  -------------   -----------
<S>                                              <C>             <C>
Revenue:
    License fees                                     $ 8,331        $ 7,965
    Maintenance and services                           9,825          6,709
                                                     -------        -------
  Total revenue                                       18,156         14,674
                                                     -------        -------
Cost of revenue:
    Cost of license fees                                 234             69
    Cost of maintenance and services                   4,934          4,129
                                                     -------        -------
Total cost of revenue                                  5,168          4,198

    Gross profit                                      12,988         10,476

Operating expense:
    Sales and marketing                               10,029          9,257
    Product development and engineering                4,145          3,046
    General and administrative                         1,417          1,547
                                                     -------        -------
Total operating expense                               15,591         13,850
                                                     -------        -------
Operating loss                                        (2,603)        (3,374)

Interest income, net                                     385            553
                                                     -------        -------
Loss before income taxes                              (2,218)        (2,821)

Provision (benefit) for income taxes                     128           (575)
                                                     -------        -------
Net loss                                             $(2,346)       $(2,246)
                                                     -------        -------
                                                     -------        -------
Net loss per share---basic                           $ (0.12)       $ (0.12)
                                                     -------        -------
                                                     -------        -------
Net loss per share---diluted                         $ (0.12)       $ (0.12)
                                                     -------        -------
                                                     -------        -------
Shares used in per share calculation
           Basic                                      19,686         19,105
                                                     -------        -------
                                                     -------        -------
           Diluted                                    19,686         19,105
                                                     -------        -------
                                                     -------        -------
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.

                                                                             4
<PAGE>

                                          
                                FORTE SOFTWARE, INC.
                   CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW
                             (IN THOUSANDS; UNAUDITED)
<TABLE>
<CAPTION>
                                                   Three Months Ended June 30,
                                                   ---------------------------
                                                        1998           1997
                                                   ------------   ------------
<S>                                               <C>            <C>
OPERATING ACTIVITIES
Net loss                                             $(2,346)       $(2,246)
Adjustments to reconcile net loss to net cash 
    used in operating activities:
  Depreciation and amortization                        1,035            884
  Changes in operating assets and liabilities:
    Accounts receivable                                3,064          1,636
    Prepaid expenses and other assets                   (428)          (451)
    Accounts payable                                    (377)        (1,493)
    Accrued expenses and other liabilities            (1,767)        (2,859)
    Deferred revenue                                  (1,689)        (1,087)
                                                     -------        -------
Net cash used in operating activities                 (2,508)        (5,616)
                                                     -------        -------
INVESTING ACTIVITIES
Purchases of equipment and leasehold improvements       (207)        (1,204)
Purchases of short-term investments                   (6,836)        (5,653)
Maturities of short-term investments                  13,390          1,250
                                                     -------        -------
Net cash provided by (used in) investing activities    6,347         (5,607)
                                                     -------        -------
FINANCING ACTIVITIES
Reduction in capital lease obligations                  (299)          (248)
Proceeds from issuance of common stock                 1,081          1,403
                                                     -------        -------
Net cash provided by financing activities                782          1,155
                                                     -------        -------
Increase (decrease) in cash and cash equivalents       4,621        (10,068)
Cash and cash equivalents at beginning of period      13,358         35,103
                                                     -------        -------
Cash and cash equivalents at end of period           $17,979        $25,035
                                                     -------        -------
                                                     -------        -------
Supplemental disclosures:
  Interest paid                                      $    22        $    62
                                                     -------        -------
                                                     -------        -------
  Income taxes paid                                  $   152        $   128
                                                     -------        -------
                                                     -------        -------
</TABLE>

See accompanying notes to Condensed Consolidated Financial Statements.

                                                                             5
<PAGE>

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

NOTE 1. BASIS OF PRESENTATION

     The unaudited condensed consolidated financial statements included herein
reflect all adjustments, consisting only of normal recurring accruals, which in
the opinion of management are necessary to fairly present the Company's
consolidated financial position, results of operations, and cash flow 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, 1998.  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 condensed consolidated  results of
operations for the period ended June 30, 1998 are not necessarily indicative of
the results to be expected for any subsequent quarter or for the entire fiscal
year ending March 31, 1999.  The March 31, 1998 condensed consolidated balance
sheet was derived from audited consolidated financial statements, but does not
include all disclosures required by generally accepted accounting principles.

 NOTE 2. NET LOSS PER SHARE

     Basic net loss per share is computed using the weighted average number of
shares outstanding during the period.  Diluted net loss per share is computed
using the weighted average number of common shares plus the dilutive effect of
outstanding stock options using the "treasury stock" method. The following table
shows the computation of basic and diluted net loss per share.

<TABLE>
<CAPTION>

                                                             Three Months Ended June 30,
                                                                    1998          1997
                                                       --------------------  ---------------
                                                       (in thousands, except per share data)
<S>                                                   <C>                   <C>
Net loss                                                          $(2,346)     $(2,246)
                                                                  -------      -------
Shares used in computing basic net loss per share                  19,686       19,105
Effect of diluted securities (The effect of 
  outstanding stock options is excluded from the 
  calculation of diluted net loss  per share as 
  their inclusion would be antidiluted.)                                -            -  
                                                                  -------      -------
Shares used in computing diluted net loss per share                19,686       19,105
                                                                  -------      -------
                                                                  -------      -------
Basic                                                             $ (0.12)     $ (0.12)
                                                                  -------      -------
                                                                  -------      -------
Diluted                                                           $ (0.12)     $ (0.12)
                                                                  -------      -------
                                                                  -------      -------
</TABLE>
                                                                             6
<PAGE>
                                          
                                FORTE SOFTWARE, INC.
           NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
                                    (UNAUDITED)

NOTE 3. SHORT-TERM INVESTMENTS

     As of June 30, 1998, all short-term investments were classified as
available-for-sale securities pursuant to the provisions of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Available-for-sale securities are stated at
estimated fair market value.  Differences between the estimated fair market
value and cost were not material. 

     The following is a summary of the Company's investments and reconciliation
of the Company's investments to the condensed consolidated balance sheet at June
30, 1998 (in thousands).

<TABLE>
<CAPTION>

                                      Estimated
                                         Fair
                                        Value
                                    -------------
<S>                                 <C>
Commercial Paper                        $13,201
Treasury Notes                            2,023
Medium Term Notes                         7,823
Corporate Notes                           2,487
Auction rate preferred stock              1,604
                                        -------
Total investments                       $27,138
                                        -------
                                        -------

                                      Estimated 
                                         Fair
                                        Value
                                     -----------
<S>                                 <C>
Cash equivalents                        $12,891
Short-term investments                   14,247
                                        -------
Total investments                        27,138 
                                        -------
                                        -------
Cash                                      5,088
                                        -------
Total cash, cash equivalents and
short-term investments                  $32,226
                                        -------
                                        -------
</TABLE>
                                                                             7
<PAGE>

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

NOTE 4. REVENUE RECOGNITION

     Effective April 1, 1998, the Company adopted the American Institute of 
Certified Public Accountants Statement of Position No. 97-2, "Software 
Revenue Recognition," ("SOP 97-2") which supercedes SOP 91-1.  SOP 97-2 
addresses software revenue recognition matters primarily from a conceptual 
level and detailed implementation guidelines have not been issued.  

     In March 1998, the American Institute of Certified Public Accountants 
issued Statement of Position No. 98-4, "Deferral of the Effective Date of a 
Provision of SOP 97-2, Software Revenue Recognition," which defers for one 
year the application of certain provisions of SOP 97-2.  These provisions 
limit what is considered vendor-specific objective evidence of the fair value 
of the various elements in a multiple-element arrangement.  All other 
provisions of SOP 97-2 remain in effect.  

NOTE 5. COMPREHENSIVE INCOME 

     Effective April 1, 1998, the Company adopted Statement of Financial 
Accounting Standards No. 130, "Reporting Comprehensive Income," ("SFAS 130"). 
SFAS 130 requires the reporting of comprehensive income and its components 
and requires foreign currency translation adjustment and unrealized gains or 
losses on the Company's available-for-sale investments, which prior to 
adoption were reported in stockholders' equity, to be included in other 
comprehensive income. The Company has evaluated the impact of comprehensive 
income components on the Company's financial statements and has determined 
that the amounts are immaterial to the financial statements taken as a whole.

NOTE 6. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     In 1997, the FASB issued Statement of Financial Accounting Standards No. 
131, "Disclosures about Segments of an Enterprise and Related Information", 
("SFAS 131") which establishes standards for the way public business 
enterprises report information about operating segments in annual financial 
statements and requires that those enterprises report selected information 
about operating segments in interim financial reports issued to stockholders. 
In addition, SFAS 131 establishes standards for related disclosures about 
products and services, geographic areas and major customers.  The Company 
will comply with the requirements of SFAS 131 in its annual consolidated 
financial statements for the year ending March 31, 1999.

     In June 1998, the FASB issued Statement of Financial Accounting 
Standards No. 133 "Accounting for Derivative Instruments and Hedging 
Activities," ("SFAS 133").  The Company is required to adopt this statement 
for the year ending March 31, 2001.  Statement 133 establishes methods of 
accounting for derivative financial instruments and hedging activities 
related to those instruments as well as other hedging activities.  The 
Company is not able to currently determine the effect, if any, that adoption 
will have on its financial position, results of operations or cash flows.

                                                                             8
<PAGE>

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

     THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS 
WHICH REFLECT THE COMPANY'S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND 
FINANCIAL PERFORMANCE. IN THIS REPORT, THE WORDS "ANTICIPATE," "BELIEVES," 
"EXPECTS," "INTENDS," "FUTURE," AND OTHER SIMILAR EXPRESSIONS IDENTIFY 
FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO 
CERTAIN RISKS AND UNCERTAINTIES, INCLUDING THOSE DISCUSSED  IN "BUSINESS 
RISKS" BELOW AND IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 
CONDITION AND RESULTS OF OPERATIONS," THAT COULD CAUSE ACTUAL RESULTS TO 
DIFFER MATERIALLY FROM HISTORICAL RESULTS OR THOSE ANTICIPATED.

     The following table sets forth certain condensed consolidated results of 
operations data as a percentage of total revenue for the three months ended 
June 30, 1998 and 1997.

<TABLE>
<CAPTION>
                                                 Three months ended June 30,
                                                      1998           1997
                                                ---------------  ------------
                                                   (unaudited)    (unaudited)
<S>                                            <C>               <C>
Revenue:
  License fees                                          45.9%          54.3%
  Maintenance and services                              54.1           45.7
                                                      ------         ------
    Total revenue                                      100.0          100.0
                                                      ------         ------
                                                      ------         ------
Cost of revenue:
  Cost of license fees                                   1.3            0.5
  Cost of maintenance and services                      27.2           28.1
                                                      ------         ------
    Total cost of revenue                               28.5           28.6
                                                      ------         ------
Gross profit                                            71.5           71.4

Operating expense:
  Sales and marketing                                   55.2           63.1
  Product development and engineering                   22.8           20.8
  General and administrative                             7.8           10.5
                                                      ------         ------
    Total operating expense                             85.8           94.4

Operating loss                                         (14.3)         (23.0)
                                                      ------         ------
Interest income, net                                     2.1            3.8
                                                      ------         ------
Loss before income taxes                               (12.2)         (19.2)

Provision (benefit) for income taxes                     0.7           (3.9)
                                                      ------         ------
Net loss                                               (12.9)%        (15.3)%
                                                      ------         ------
                                                      ------         ------
</TABLE>
                                                                             9
<PAGE>

RESULTS OF OPERATIONS

     REVENUE.  The Company's total revenue consists of license fees for its 
Forte Application Environment and related products as well as associated 
maintenance and services revenue. The Company licenses software under 
non-cancelable license agreements and provides services including 
maintenance, training and consulting. License fees revenue is recognized when 
a non-cancelable license agreement has been signed, the product has been 
shipped, the fees are fixed and determinable and collectibility is reasonably 
assured. License fees revenue from distributors is generally recognized as 
sales to end users are reported, the product is shipped and collectibility is 
assured.  Fees for services are charged separately from the license of the 
Company's software products. Maintenance revenue consists of fees for ongoing 
support and product updates and is recognized ratably over the term of the 
contract, which is typically twelve months. Revenue from training is 
recognized upon completion of the related training class. Consulting revenue 
is recognized as the services are performed. Allowances for credit risks and 
for estimated future returns are provided for upon product 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 
consolidated financial statements.

     The Company's license agreements typically require the payment of a 
nonrefundable, one-time license fee for a license of perpetual term. 
Customers make separate payments for annual maintenance and other services. 
The Company can terminate the license agreement only upon a material breach 
by the other party, provided that the breach is not cured within a specified 
cure period.

     The Company's total revenue increased 24 percent to $18.2 million from 
$14.7 million for the quarter ended June 30, 1998 and 1997, respectively. 
United States revenue increased by 2 percent to $8.6 million from $8.4 million
for the quarter ended June 30, 1998 and 1997, respectively.  International 
revenue increased by 53 percent to $9.5 million from $6.2 million for the 
quarter ended June 30, 1998 and 1997, respectively.  The United States 
revenue increase was primarily due to an increase in maintenance and services 
revenue. The International revenue increase was due to an increased license, 
maintenance and services revenue as the Company continued to expand its 
International sales organization. During the quarter ended June 30, 1998, 
sales offices in Belgium, Canada and Switzerland were added to the direct 
International sales organization. 
     
     The Company's license fees revenue increased 5 percent to $8.3 million 
from $8.0 million for the quarter ended June 30, 1998 and 1997, respectively. 
The Company believes that  United States license fees revenue has been 
impacted by a slowdown in the overall market for enterprise application 
development software, and the extended sales productivity ramp up needed for 
the Company's new sales representatives.  The Company believes the market 
slowdown resulted from several factors, including but not limited to (1) a 
diversion of customer resources from enterprise application development to 
the Year 2000 Problem, (2) a general shortage of qualified programmers and a 
shift of available programming resources from corporate users to systems 
integrators, (3) market confusion caused by the complex and rapidly changing 
mix of alternative technologies for enterprise application development, and 
(4) the increased availability and popularity of packaged software 
applications.  The Company believes market factors have resulted in 
progressively longer and more complex sales cycle for the Company's products. 

                                                                            10
<PAGE>

     The Company believes that companies in its target market have 
significantly shifted from building internal enterprise applications to using 
system integrators to develop and deploy their enterprise applications. Also 
see "Dependence on Key Personnel, Product Concentration," "Dependence on 
Emerging Market" and "Risks Associated with the Year 2000 Problem," in the 
section entitled "Business Risks."
     
     The Company's services revenue increased 46 percent to $9.8 million from 
$6.7 million for the quarter ended June 30, 1998 and 1997, respectively. The 
increase in total maintenance and services revenue was primarily a result of 
the growing installed base in the Company's software products and the 
associated increase in demand for maintenance, training and consulting 
services. Services revenue as a percentage of total revenue may vary between 
periods as a result of changes in demand for the Company's services and 
changes in the rate of growth of license fees revenue.
     
     International revenue includes all revenue other than from the United 
States. International revenue includes sales from the Company's direct sales 
organizations in Europe, Canada and Australia and export sales through 
distributors and resellers in Europe, Asia and other areas of the world. 
International sales accounted for 52 percent and 42 percent of total revenue 
for the quarter ended June 30, 1998 and 1997, respectively. Direct sales 
through the Company's European, Canadian and Austrailian subsidiaries totaled 
$6.9 million and $4.2 million for the quarter ended June 30, 1998 and 1997, 
respectively. The table below sets forth the Company's export sales data from 
the United States for the first quarter ended June 30, 1998 and 1997. 

<TABLE>
<CAPTION>
                              (in thousands)
                        Three months ended June 30,   
                              1998      1997
                       -----------------------------
<S>                    <C>            <C>
Total export revenue          $2,630    $1,988
Total direct revenue           6,890     4,221
                       -----------------------------
Total International           $9,520    $6,209
                       -----------------------------
                       -----------------------------
</TABLE>

     The increase in international revenue reflects growing direct sales 
presence in Europe through the Company's international direct sales 
organization, partially offset by lower revenue in Asia and Latin America. 
The economic crises in Asia has not had a material impact on the Company's 
revenue. Revenue from Asian markets were less then five percent of total 
revenue for each of the quarters presented. The Company expects that 
international license and related maintenance and services revenue will 
continue to account for a significant portion of its total revenue in the 
future. The Company believes that in order to increase sales opportunities 
and market share, it will be required to continue expanding its international 
sales organization. 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 Forte and related 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.

                                                                            11
<PAGE>

 COST OF REVENUE

     COST OF LICENSE FEES REVENUE.  Cost of license fees revenue consists 
primarily of royalties paid to third-party vendors, product packaging, 
documentation and production. Cost of license fees revenue was $234,000 and 
$69,000 for the quarter ending June 30, 1998 and 1997 respectively, 
representing 3 percent and 1 percent of license fees revenue, respectively. 
The increase is primarily due to royalties paid to third-party vendors. 
Additionally, cost of license fees revenue varies as a percentage of license 
fees revenue because costs of media production and product packaging have not 
been material and have been expensed as incurred.  Such costs are dependent 
on the number of new releases in a given quarter.  

     COST OF MAINTENANCE AND SERVICES REVENUE.  Cost of maintenance and 
services revenue consists 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 services revenue was $4.9 million and $4.1 
million for the quarter ending June 30, 1998 and 1997 respectively, 
representing 50 percent and 62 percent of maintenance and services revenue, 
respectively.  The decrease in cost of maintenance and services revenue for 
the quarter ended June 30, 1998 as a percentage of maintenance and services 
revenue was primarily due to improved economies of scale of the technical 
support center and increased productivity from training, support and 
consulting personnel. The Company does not expect its cost of maintenance and 
services revenue to continue to materially decrease as a percentage of 
maintenance and services revenue. The cost of services as a percentage of 
services revenue may vary between periods due to the mix of services provided 
by the Company and the extent to which external contractors are used to 
provide those services.

OPERATING EXPENSE

     SALES AND MARKETING.  Sales and marketing expense consists primarily of 
salaries, commissions and bonuses earned by sales and marketing personnel, 
field office expenses, travel and entertainment and promotional expenses and 
advertising. Sales and marketing expense increased to $10.0 million for the 
quarter ended June 30, 1998 from $9.3 million for the quarter ended June 30, 
1997. This increase reflects the hiring of additional sales and marketing 
personnel, and their related costs, as well as increased costs associated 
with expanded promotional and advertising activities. Sales and marketing 
expense represented 55 percent and 63 percent of total revenue for the 
quarter ended June 30, 1998 and 1997, respectively. While decreasing as a 
percentage of total revenue, sales and marketing expense increased in 
absolute dollars due to expansion of the Company's international direct sales 
organization. The Company has announced a re-organization of its US sales 
organization. The direct sales organization is being reduced to reflect the 
Company's anticipated short-term revenue opportunities and the 
partnering/channel organization is being emphasized to leverage this channel 
of distribution.  The re-organization was completed prior to July 31, 1998 
and did not result in a significant charge to expense  for severance and 
other costs associated with the re-organization.  The Company anticipates 
that sales and marketing expense will decrease as a percentage of revenue 
over the next several quarter.
           
     PRODUCT DEVELOPMENT.  Product development expense consists primarily of 
salaries and other personnel-related expense and depreciation of development 
equipment. The Company

                                                                            12
<PAGE>

believes that a significant level of investment for product development is 
required to remain competitive.  Product development expense increased to 
$4.1 million for the quarter ended June 30, 1998 from $3.0 million for the 
quarter ended June 30, 1997. This increase was primarily attributable to 
additional hiring of product development personnel. Product development 
expense represented 23 percent and 21 percent of total revenue for the 
quarter ended June 30, 1998 and 1997, respectively. The increase in product 
development expense as a percentage of total revenue was primarily due to the 
Company's continued investment in significant Internet, Java and mainframe 
development activities, the increase in the number of product development 
personnel, and the outsourcing of certain development work. The Company 
anticipates that it will continue to devote substantial resources to product 
development activities. All costs incurred in the research and development of 
software products and enhancements to existing software products have been 
expensed as incurred; accordingly, cost of license fees revenue includes no 
amortization of capitalized software development costs.

     GENERAL AND ADMINISTRATIVE. General and administrative expense consists 
of costs for the Company's human resources, finance, information technology 
and general management functions.  General and administrative expense 
decreased to $1.4 million for the quarter ended June 30, 1998 from $1.5 
million for the quarter ended June 30, 1997. General and administrative 
expense represented 7.8 percent and 10.5 percent of total revenue for the 
quarter ended June 30, 1998 and 1997, respectively. The Company believes that 
its general and administrative expense 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. 
     
     PROVISION FOR INCOME TAXES. There was no provision for federal or state 
income taxes for the quarter ended June 30, 1998 as the Company incurred net 
operating losses, and there can be no assurance that the Company will realize 
the benefit of the net operating loss carryforwards. The Company recorded 
$128,000 in foreign income tax withholdings on certain license  and services 
fees paid to the Company by foreign licensees. 

LIQUIDITY AND CAPITAL RESOURCES

The Company has funded its operations and investments in furniture and 
equipment through an initial public offering of common stock on March 11, 
1996 with net proceeds of $34.3 million. The Company used cash of $2.5 
million in operating activities for the quarter ended June 30, 1998 compared 
to cash used in operating activities of $5.6 million for the quarter ended 
June 30, 1997. The net cash used in operating activities resulted primarily 
from the net loss for the quarter and decreases in accounts payable, accrued 
expense, other liabilities and deferred revenue, partially offset by a 
decrease in accounts receivable. At June 30, 1998, Company's accounts 
receivable days sales outstanding ("DSO") decreased by 13 percent to 86 days 
from 99 days at June 30, 1997. This decrease resulted primarily from the 
timing of payments received and increased revenue during the current quarter. 
The Company's DSO could vary significantly on a quarterly or yearly basis. 

     The Company's investing activities consisted of the purchases of 
interest-bearing securities representing a shift from cash equivalents to 
short-term investments, as well as purchases of property and equipment.  
Capital expenditures were $0.2 million for the quarter ended June 30, 1998 
compared to $1.2 million for the quarter ended June 30, 1997. Capital 
expenditures consisted

                                                                            13
<PAGE>

of purchases of computer equipment and office furniture. For the quarter 
ended June 30, 1997, the Company was in the process of expanding its 
headquarter offices, thus incurring significant leasehold improvements and 
furniture additions compared to the quarter ended June 30, 1998. At June 30, 
1998, the Company did not have any material commitments for capital 
expenditures.

     At June 30, 1998, the Company had $32.2 million in cash and cash 
equivalents and short-term investments and $29.5 million in working capital. 
The Company believes that its existing cash and 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 at all or that, if available, such financing will be obtainable 
on terms favorable to the Company and would not be dilutive.


                                                                            14
<PAGE>

BUSINESS RISKS

     IN EVALUATING THE COMPANY'S BUSINESS, READERS SHOULD CAREFULLY CONSIDER 
THE BUSINESS RISKS DISCUSSED IN THIS SECTION IN ADDITION TO THE OTHER 
INFORMATION PRESENTED IN THIS QUARTERLY REPORT ON FORM 10-Q.  THIS REPORT ON 
FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS WHICH REFLECT THE COMPANY'S 
CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE. IN 
THIS REPORT, THE WORDS "ANTICIPATE," "BELIEVES," "EXPECTS," "INTENDS," 
"FUTURE," AND OTHER SIMILAR EXPRESSIONS IDENTIFY  FORWARD-LOOKING STATEMENTS. 
THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND 
UNCERTAINTIES, INCLUDING THOSE DISCUSSED BELOW, THAT COULD CAUSE ACTUAL 
RESULTS TO DIFFER MATERIALLY FROM HISTORICAL RESULTS OR THOSE ANTICIPATED.

     LIMITED OPERATING HISTORY; HISTORY OF OPERATING LOSSES.  The Company was 
founded in February 1991 and first shipped product in August 1994.  After 
achieving profitability from December 1995 through March 31, 1997, the 
Company incurred net losses for each subsequent quarter through the quarter 
ended June 30, 1998. At June 30, 1998, the Company had an accumulated deficit 
of $32.0 million. A substantial portion of the accumulated deficit is due to 
the deployment of significant resources to the Company's product development, 
sales and marketing organizations. The Company expects to continue to devote 
substantial resources in these areas and as a result will need to 
significantly increase revenue to return to 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 OPERATING RESULTS; UNCERTAINTY OF 
FUTURE OPERATING RESULTS; SEASONALITY; EXPECTED LOSS IN QUARTER ENDING 
SEPTEMBER 30, 1998.  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, the rate of adoption and use of the Company's products by third-party 
system integrators and value added resellers, changes in the level of 
operating expense, changes in the Company's sales incentive plans, budgeting 
cycles of its customers, customer order deferrals due to intervening 
information technology projects of a higher priority such as, the Year 2000 
Problem, or in anticipation of enhancements or new products offered by the 
Company or its competitors or other causes, the cancellation of licenses 
during the warranty period or non-renewal 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 total revenue has 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, competition for sales 
personnel is intense, and there can be no assurance that the Company can 
retain its existing sales personnel or that it can attract, assimilate and 
retain highly qualified sales personnel in the future. The timing of the 
Company's hiring of new sales personnel and the rate at which new sales 
people become

                                                                            15
<PAGE>

productive could also cause material fluctuations in the Company's quarterly 
operating results. Due to the foregoing factors, quarterly revenue and 
operating results are difficult to forecast. Revenue is also difficult to 
forecast because the market for distributed enterprise 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 beginning of any quarter has in the past represented only a small 
portion of that quarter's total revenue. As a result, license fees revenue in 
any quarter is substantially dependent on orders booked and shipped in that 
quarter. Due to all of the foregoing, revenue for any future quarter is 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. The prior revenue growth experienced by the Company 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 total 
revenue 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 
revenue 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 revenue 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 expense varies with its revenue. There can be no 
assurance that the Company will be able to return to 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 and 
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. 
Due to the market slowdown and other factors discussed above in the "Results 
of Operations" section of the Management's Discussion and Analysis of 
Financial Condition and Results of Operations, the Company expects to incur a 
net loss for the quarter ended September 30, 1998. The Company believes that 
it is likely that it will experience lower revenue in its quarter ending June 
30 as a result of efforts by its direct sales organization to meet the March 
31 fiscal year-end sales quotas. Since international operations constitute a 
significant percentage of the Company's total revenue, the Company 
anticipates that it may also experience relatively weaker demand in the 
quarter ending September 30 as a result of reduced sales activity in Europe 
during the summer months.
     
     PRODUCT CONCENTRATION; IMPACT OF MARKET FACTORS.  All of the Company's 
revenue has 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 
revenue. 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

                                                                            16
<PAGE>

no assurance that the Company will continue to be successful in marketing the 
Forte product, related products or other products. The Company's prior 
revenue growth should not be considered indicative of future revenue growth, 
as there can be no assurance that the market for Forte and related products, 
or the market for products used in the development, deployment and management 
of distributed applications, will continue to grow. Recently, industry 
analysts and competitors have noted that market demand in the enterprise 
application development sector appears to be slowing, and predicted that the 
prior success achieved by that sector may not continue in future periods, due 
to a variety of factors including but not limited to (1) a diversion of 
customer resources from enterprise application development to the Year 2000 
Problem and other higher priority information technology projects, (2) a 
general shortage of qualified programmers and a shift of available 
programming resources from corporate users to systems integrators, (3) market 
confusion caused by the complex and rapidly changing mix of alternative 
technologies for enterprise application development, and (4) the increased 
availability and popularity of packaged software applications.  Additionally, 
recent instability in the economies and financial markets in the Asia-Pacific 
region, which had previously been regarded as a potentially strong source of 
revenue growth for enterprise software vendors, has introduced additional 
uncertainty concerning the sector.  If the market for Forte and related 
products or enterprise application development products used in the 
development, deployment and management of distributed applications fails to 
grow, or grows more slowly than the Company currently anticipates, the 
Company's business, operating results and financial condition would be 
materially and adversely affected.
     
     DEPENDENCE ON KEY PERSONNEL.  The Company's success depends to a 
significant degree upon the continuing contributions of its key management, 
sales, marketing, software development and customer support personnel, and 
its ability to attract and retain such highly-skilled personnel.  The loss of 
key personnel could materially and adversely affect the Company.  Competition 
for qualified personnel is intense, particularly in the sales and software 
development areas, and there can be no assurance that the Company can retain 
its existing personnel or that it can attract, assimilate and retain 
additional highly qualified personnel in the future. The timing of the 
Company's hiring of new sales personnel and the rate at which new sales 
people become productive could also cause material fluctuations in the 
Company's quarterly operating results.  The Company has at times experienced 
and continues to experience difficulty in recruiting and retaining qualified 
personnel.  The Company has experienced significant turnover in its North 
America sales organization during fiscal year 1998 and the first quarter in 
fiscal 1999. 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.

     RISKS ASSOCIATED WITH EXPANDING DISTRIBUTION.  To date, the Company has 
sold its products through its direct and indirect sales force, systems 
integrators, distributors and value added resellers. The Company's customers 
and potential customers often rely on third-party system integrators and 
value added resellers to develop and deploy distributed applications. The 
Company's ability to achieve significant revenue growth in the future will 
depend in large part on its success in recruiting, training and retaining 
sufficient sales personnel and establishing and maintaining relationships 
with distributors, resellers and systems integrators. Although the Company is 
currently investing, and plans to continue to invest significant resources to 
maintain and selectively expand its sales force and to develop relationships 
with third-party distributors, resellers and systems integrators, the Company 
has at times experienced and continues to experience difficulty in recruiting 
and retaining qualified sales personnel and in establishing

                                                                            17
<PAGE>

necessary third-party relationships. There can be no assurance that the 
Company will be able to successfully hire, train and retain needed sales 
personnel or develop and maintain sufficient third-party relationships, or 
that such efforts will result in an increase in revenue. Any failure by the 
Company to maintain a sufficiently large and trained sales force and continue 
to establish other distribution channels would materially and adversely 
affect the Company's business, operating results and financial condition.

     COMPETITION. The market for distributed software used in the 
development, deployment and management of distributed applications is 
intensely competitive and characterized by rapidly changing technology, 
evolving industry standards, frequent new product introductions and rapidly 
changing customer requirements. Distributed applications that can be 
developed and deployed using the Company's Forte environment can also be 
implemented by integrating a combination of application development tools and 
more powerful server programming techniques such as stored procedures in 
relational databases and C or C++ programming, along with 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, and third-party 
systems integrators on whom prospective customers are increasingly relying 
for expertise, on the advantages of the Company's products over the approach 
of integrating a combination of products.  There can be no assurance that 
these customers, potential customers or systems integrators will perceive 
sufficient value in the Company's products to justify purchasing or 
recommending them.

     The Company has also experienced and expects to continue to experience 
increased competition from a number of vendors that market software products 
specifically targeted for building distributed applications.  Actual and 
potential competitors include: providers of application development software, 
such as Compuware/Uniface, Dynasty Technologies, Inc., International Business 
Machines Corporation, Microsoft Corporation, NAT Systems, Inc., Oracle 
Corporation, Seer Technologies, Inc., Sterling Software, Inc., and the 
Powersoft unit of Sybase, Inc.; web-based development tools targeting 
production enterprise Internet applications; middleware companies advocating 
a middleware-centric approach to building enterprise applications; developers 
of packaged applications and application components, templates and 
frameworks; and integration software vendors.

     Many of these competing vendors have or will have significantly greater 
financial, technical, marketing and other resources than the Company, and may 
be able to respond more quickly to new or emerging technologies.  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 distributed 
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 and 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

                                                                            18
<PAGE>

competitors may emerge and rapidly gain significant market share. Such 
competition could materially and 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 products and 
services, which could materially and 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.

     The principal competitive factors affecting the market for Forte are 
ease of application development, deployment and management functionality and 
features, product architecture, product performance, reliability and 
scaleability, product quality, price and customer support. The Company 
believes it presently competes favorably with respect to each of these 
factors. However, the Company's market is still evolving and 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 successfully will 
have a material adverse effect upon the Company's business, operating results 
and financial condition.
     
     NEW ACCOUNTING STANDARDS.  Statement of Position ("SOP") 97-2, "Software 
Revenue Recognition," as amended by Statement of Position 98-4, was issued in 
October 1997 and addresses software revenue recognition matters. The SOP 
supersedes SOP 91-1 and is effective for transactions entered into for fiscal 
years beginning after December 15, 1997. The Company was required to adopt 
this SOP in its first quarter of fiscal year 1999 and restatement of prior 
financial statements was prohibited.  Based upon its reading and 
interpretation of SOP 97-2, the Company believes its current revenue 
recognition policies and practices are materially consistent with the SOP. 
However, implementation guidelines for this standard have not yet been issued 
and a wide range of potential interpretations are being discussed by the 
accounting profession. Once available, such implementation guidance could 
lead to unanticipated changes in the Company's current revenue accounting 
practices, and such changes could materially and adversely affect the 
Company's future revenue and operating results.

     Such implementation guidance may necessitate substantial changes in the 
Company's business practices in order for the Company to continue to 
recognize a substantial portion of its license fees revenue upon delivery of 
its software products. Such changes may reduce demand, extend sales cycles, 
increase administrative costs and otherwise adversely affect operations. In 
addition, the Company may be put at a competitive disadvantage relative to 
foreign based competitors not subject to U.S. generally accepted accounting 
principles.

     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  distributed 
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. In addition, there are a large number of alternative methods or 
technologies to develop applications which can require significant time for 
potential customers to evaluate, and implementation of a favorable decision 
to license the Company's products may be subject to delay due to higher 
priority

                                                                            19
<PAGE>

projects such as Year 2000 compliance. 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.
 
     RISKS ASSOCIATED WITH THE YEAR 2000.   Many currently installed computer 
systems and software products are coded to accept only two digit entries in 
the date code field.  These date code fields will need to accept four digit 
entries to distinguish 21st century dates from 20th century dates.  As a 
result, in less than two years, computer systems and/or software used by many 
companies may need to be upgraded to comply with such Year 2000 requirements. 
There are several aspects to the Year 2000 issue, as follows:

     a.   IMPACT ON REVENUE.   The Company believes that the purchasing 
patterns of customers and potential customers may be affected by Year 2000 
issues in a variety of ways. Many companies are expending significant 
resources to correct or patch their current software systems for Year 2000 
compliance. These expenditures may result in reduced funds available to 
purchase enterprise application software products such as those offered by 
the Company.  Conversely, Year 2000 issues may cause other companies to 
accelerate purchases of application development and deployment software to 
replace non-Year 2000 compliant applications, causing a short-term increase 
in demand for the Company's products.  There is no assurance that such 
increase in demand will be realized, or that companies will resume 
application development if and when they resolve their Year 2000 problems.  
Either of the foregoing could have a material adverse effect upon the 
Company's business, operating results and financial condition.

     b.  YEAR 2000 COMPLIANCE.  The Company believes that its products are 
fully Year 2000 compliant.   All Forte  products use four digit years for all 
internal manipulations and representations.  In addition, for customers who 
require the storage and manipulation of two digit years, the Company's 
current products provide the ability to specify a range of years for 
comparison and calculation. For example, the customer may specify that the 
years 0-39 are interpreted as 2000-2039 and the years 40-99 are interpreted 
as 1940-1999.  Using this feature a customer can save on the amount of data 
stored and manipulated by Forte.  The Company regularly runs regression tests 
on its software, including tests  for the above functionality at the Year 
2000 rollover.  Based on the  above, it is not expected that the Company's 
products will be adversely affected by date changes in the year 2000.  
However there can be no assurance that the Company's products contain and 
will contain all features and functionality considered necessary by 
customers, distributors, resellers and systems integrators to be Year 2000 
compliant.

     c.  INTERNAL SYSTEMS.  Although the Company is not aware of any material 
operational issues or costs associated with preparing its internal systems 
for the Year 2000, 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 include third-party software and hardware technology. 
     
     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 standards. The introduction 
of products embodying new technologies and the emergence of new

                                                                            20
<PAGE>

industry standards can render existing products obsolete and unmarketable. 
For example, the Company's customers have adopted a wide variety of hardware, 
software, database, networking and Internet-based platforms, and as a result, 
to gain broad market acceptance, the Company has had to support Forte on many 
of such platforms. The Company's customers use the Company's proprietary 
development language to develop applications using the Company's products, 
and customers may desire to utilize other widely-used programming languages 
to develop Internet-based and other distributed applications. 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, programming language, database, networking and 
Internet-based platforms and by developing and introducing enhancements to 
Forte, related products and new products on a timely basis that keep pace 
with such technological developments and emerging industry standards and 
changing 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 changing customer requirements, that the Company will not 
experience difficulties that could delay or prevent the successful 
development, introduction and sale of such enhancements or that such 
enhancements 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 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 and 
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 Forte 
and related products, which could have a material adverse effect on the 
Company's business, operating results and financial condition.

     LIMITED DEPLOYMENT; DEPENDENCE ON SYSTEM INTEGRATORS AND VALUE ADDED 
RESELLERS.  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 distributed applications using Forte and related products. If 
any of the Company's customers are not able to successfully develop and 
deploy distributed applications with Forte and related products, 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 
revenue will be derived from sales to existing customers. If existing 
customers have difficulty deploying applications built with Forte and related 
products or for any other reason are not satisfied with Forte products, the 
Company's business, operating results and financial condition would be 
materially and adversely affected. The Company's customers and potential 
customers often rely on third-party system integrators and value added 
resellers to develop and deploy distributed applications. If the Company is 
unable to adequately train a sufficient number of system integrators and 
value added resellers or if, for any reason, a large number of such 
integrators and value added resellers adopt a product or technology other 
than Forte, the Company's business, operating results and financial condition 
would be materially and adversely affected.

     RISK OF SOFTWARE DEFECTS.  Software products as internally complex as 
Forte and related products frequently contain errors or defects, especially 
when first introduced or when new versions or enhancements are released. The 
Company introduced Release 2.0 of Forte in November 1995, Release 3.0 of 
Forte in August in 1997 and the initial release of Forte Conductor in 
September

                                                                            21
<PAGE>

1997. Despite extensive product testing by the Company, the Company has 
discovered software errors in its releases 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, new product or 
enhancements to existing products after commencement of commercial shipments, 
resulting in loss of revenue 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 Forte to customers for the 
development, deployment and management of distributed 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 Forte by the 
Company may entail the risk of such claims, which are likely to be 
substantial in light of the use of Forte 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. 

     RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS.  Revenue from foreign 
subsidiaries and export sales accounted for 52 percent and 42 percent of the 
Company's total revenue for the quarter ended June 30, 1998 and 1997, 
respectively. The Company currently has international sales offices located 
in Australia, Belgium, Canada, France, Germany, Holland, Switzerland, and the 
United Kingdom which have generated substantially all direct international 
revenue recognized by the Company to date. The Company believes that in order 
to increase sales opportunities and regain profitability, it will be required 
to continue 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 Forte and related 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 accounts 
receivable 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 revenue 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 revenue and, consequently, on 
the Company's business, operating results and financial condition. The 
Company's direct international revenue is generally denominated in local 
currencies. The Company does not currently engage in hedging activities. 
Revenue generated by the Company's distributors and resellers are generally 
paid to the Company in United States dollars. Although exposure to currency

                                                                            22
<PAGE>

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 revenue 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 that are similar or superior to the Company's technology 
or design around the patents owned by the Company. The Company has obtained 
registration of the FORTE trademark in two countries and has trademark 
registration applications pending in numerous additional 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") 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 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. 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

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<PAGE>

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 and 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 and adversely 
affect the Company's business, operating results and financial condition.
     
     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 
Common Stock.

     EFFECT OF CERTAIN CHARTER PROVISIONS; ANTI-TAKEOVER EFFECTS OF RIGHTS 
PLAN, CERTIFICATE OF INCORPORATION, DELAWARE LAW AND CERTAIN AGREEMENTS.  The 
Company's Board of Directors has the authority to issue up to 5,000,000 
shares of Preferred Stock and to determine the price, rights, preferences, 
privileges and restrictions, including voting and conversion rights of such 
shares, without any further vote or action by the Company's stockholders.  
The rights of the holders of Common Stock will be subject to, and may be 
adversely affected by, the rights of the holders of any Preferred Stock that 
may be issued in the future.  The issuance of Preferred Stock could have the 
effect of making it more difficult for a third-party to acquire a majority of 
the outstanding voting stock of the Company.  The Company has no current 
plans to issue shares of Preferred stock.  Further, the Company has adopted a 
stockholder rights plan that, in conjunction with certain provisions of the 
Company's Certificate of Incorporation and of Delaware law, could delay or 
make more difficult a merger, tender offer, or proxy contest involving the 
Company.

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<PAGE>

PART II

ITEM 1.   LEGAL PROCEEDINGS

     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

Not applicable.

ITEM 3.   DEFAULTS ON SENIOR SECURITIES

Not applicable.

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

Not applicable.

ITEM 5.   OTHER INFORMATION

Not applicable.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K
     
     (a)  Exhibits
     
          27 Financial data schedule
          
     (b)  REPORTS ON FORM 8-K  
          No reports on Form 8-K have been filed during the quarter ended June
          30, 1998.


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<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 12th day of August, 1998.

                              FORTE SOFTWARE, INC.

                              By:    /s/ BOB L. COREY



                              Bob L. Corey

                              SENIOR VICE PRESIDENT, FINANCE AND ADMINISTRATION,
                              CHIEF FINANCIAL OFFICER AND SECRETARY



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