<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 September 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)


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

                              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.

<TABLE>
     <S>                               <C>
     Common Stock, $0.01 par value                    20,009,863
        (Class of common stock)        (Shares outstanding at November 2, 1998)
</TABLE>

<PAGE>

FORTE SOFTWARE, INC.
FORM 10-Q QUARTERLY REPORT
QUARTER ENDED SEPTEMBER 30, 1998

Table of Contents

PART I     FINANCIAL INFORMATION

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

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

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

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

           Notes to Condensed Consolidated Financial Statements                  6

Item 2.    Management's Discussion and Analysis of Financial
           Condition and Results of Operations                                  10


Part II    OTHER INFORMATION

Item 1.    Legal Proceedings                                                    27

Item 5.    Other Information                                                    27

Item 6.    Exhibits, Financial Statement Schedules and Reports on Form 8-K      27

Signatures                                                                      28
</TABLE>


                                      2
<PAGE>

PART 1.
ITEM 1.  FINANCIAL STATEMENTS

                              FORTE SOFTWARE, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEET
                            (IN THOUSANDS; UNAUDITED)

<TABLE>
<CAPTION>
                                                              ------------------------------
                                                              September 30,      March 31,
                                                                   1998            1998
                                                              --------------     -----------
<S>                                                           <C>                <C>
ASSETS
Current assets:
    Cash and cash equivalents                                    $ 13,849         $ 13,358 
    Short-term investments                                         14,087           20,802 
    Accounts receivable, net                                       19,967           20,277 
    Prepaid expense and other current assets                        2,644            1,635 
                                                                 --------         -------- 
Total current assets                                               50,547           56,072 
                                                                                           
Equipment and leasehold improvements, net                           6,250            7,416 
Other assets                                                        1,319              250 
                                                                 --------         -------- 
Total assets                                                     $ 58,116         $ 63,738 
                                                                 --------         -------- 
                                                                 --------         -------- 
                                                                                           
LIABILITIES AND STOCKHOLDERS' EQUITY                                                       
Current liabilities:                                                                       
    Accounts payable                                             $  2,550         $  1,530 
    Accrued expenses and other liabilities                          8,686           11,503 
    Deferred revenue                                                9,887           12,312 
    Current portion of capital lease obligations                      277              695 
                                                                 --------         -------- 
Total current liabilities                                          21,400           26,040 
                                                                                           
Capital lease obligations, due after one year                         123              123 
Deferred revenue                                                       72              265 
Commitments                                                                                
Stockholders' equity:                                                                      
    Common stock                                                      199              195 
    Additional paid-in capital                                     67,974           66,851 
    Accumulated deficit                                           (31,677)         (29,663)
    Foreign currency translation adjustments                           25              (73)
                                                                                           
Total stockholders' equity                                         36,521           37,310 
                                                                 --------         -------- 
Total liabilities and stockholders' equity                       $ 58,116         $ 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          Six months ended
                                                 September 30,              September 30,
                                            ----------------------       ---------------------
                                              1998          1997           1998       1997
                                              ----          ----           ----       ----
<S>                                         <C>           <C>            <C>        <C>
Revenue:                                                  
    License fees                            $ 8,732       $  9,919        $17,063     $17,884 
    Maintenance and services                  9,780          7,569         19,605      14,278 
                                            -------       --------        -------     ------- 
  Total revenue                              18,512         17,488         36,668      32,162 
                                            -------       --------        -------     ------- 
Cost of revenue:                                          
    Cost of license fees                        112            171            346         240 
    Cost of maintenance and services          5,168          4,509         10,102       8,638 
                                            -------       --------        -------     ------- 
  Total cost of revenue                       5,280          4,680         10,448       8,878 

    Gross profit                             13,232         12,808         26,220      23,284 

Operating expenses:                                       
    Sales and marketing                       8,035         10,752         18,064      20,009 
    Product development and engineering       3,872          3,667          8,017       6,713 
    General and administrative                1,272          1,907          2,689       3,454 
                                            -------       --------        -------     ------- 
  Total operating expenses                   13,179         16,326         28,770      30,176 
                                            -------       --------        -------     ------- 
Operating income (loss)                          53         (3,518)        (2,550)     (6,892)
Interest income, net                            360            515            745       1,068 
                                            -------       --------        -------     ------- 
Income (loss) before income taxes               413         (3,003)        (1,805)     (5,824)
Provision (benefit) for income taxes             81            (20)           209        (595)
                                            -------       --------        -------     ------- 
Net income (loss)                           $   332       $ (2,983)       $(2,014)    $(5,229)
                                            -------       --------        -------     ------- 
                                            -------       --------        -------     ------- 
                                                                                              
Net income (loss) per share---basic         $  0.02       $  (0.15)       $ (0.10)    $ (0.27)
                                            -------       --------        -------     ------- 
                                            -------       --------        -------     ------- 
Net income (loss) per share---diluted       $  0.02       $  (0.15)       $ (0.10)    $ (0.27)
                                            -------       --------        -------     ------- 
                                            -------       --------        -------     ------- 
Shares used in per share calculation                                                          
           Basic                             19,870         19,296         19,778      19,200 
                                            -------       --------        -------     ------- 
                                            -------       --------        -------     ------- 
           Diluted                           20,864         19,296         19,778      19,200 
                                            -------       --------        -------     ------- 
                                            -------       --------        -------     ------- 
</TABLE>

                                      4
<PAGE>

See accompanying notes to Condensed Consolidated Financial Statements.















                                      5
<PAGE>

                              FORTE SOFTWARE, INC.
                  CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW
                            (IN THOUSANDS; UNAUDITED)

<TABLE>
<CAPTION>
                                                                       Six Months Ended September 30,
                                                                       ------------------------------
                                                                            1998             1997
                                                                          --------         --------
<S>                                                                       <C>              <C>
OPERATING ACTIVITIES
Net loss                                                                  $ (2,014)        $ (5,229)
Adjustments to reconcile net loss to net cash used in operating
     activities: 
  Depreciation and amortization                                              2,144            1,879
  Changes in operating assets and liabilities:
    Accounts receivable                                                        316              659
    Prepaid expenses and other assets                                         (983)          (1,172)
    Accounts payable                                                         1,026             (441)
    Accrued expenses and other liabilities                                  (2,817)          (1,300)
    Deferred revenue                                                        (2,618)          (1,463)
                                                                          --------         -------- 
Net cash used in operating activities                                       (4,946)          (7,067)
                                                                          --------         -------- 

INVESTING ACTIVITIES
Purchases of equipment and leasehold improvements                             (978)          (2,628)
Purchases of short-term investments                                         (6,599)          (5,492)
Maturities of short-term investments                                        13,400            3,350 
Loan to officer                                                             (1,095)               - 
                                                                          --------         -------- 
Net cash provided by (used in) investing activities                          4,728           (4,770)
                                                                          --------         -------- 

FINANCING ACTIVITIES
Reduction in capital lease obligations                                        (418)            (493)
Proceeds from issuance of common stock                                       1,127            1,576 
                                                                          --------         -------- 
Net cash provided by financing activities                                      709            1,083 
                                                                          --------         -------- 
Increase (decrease) in cash and cash equivalents                               491          (10,754)
Cash and cash equivalents at beginning of period                            13,358           35,103 
                                                                          --------         -------- 
Cash and cash equivalents at end of period                                $ 13,849         $ 24,349 
                                                                          --------         -------- 
                                                                          --------         -------- 
</TABLE>

See accompanying notes to Condensed Consolidated Financial Statements.


                                      6
<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 condensed consolidated financial 
statements should be read in conjunction with the Company's audited 
consolidated financial statements as included in the Company's 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 three and six month periods ended September 30, 1998 are not necessarily 
indicative of the results that may be expected for 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 INCOME (LOSS) PER SHARE

         Basic net income (loss) per share is computed using the weighted 
average number of shares outstanding during the period. Diluted net income 
(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 income (loss) per share.

<TABLE>
<CAPTION>
                                                   Three Months Ended            Six Months Ended     
                                                       September 30,                 September 30,    
                                                 -----------------------       ---------------------  
                                                 1998             1997          1998           1997   
                                                 ------         -------        -------       -------  
                                                         (in thousands, except per Share data)        
<S>                                              <C>            <C>             <C>          <C>      
Net income (loss)                                $   332        $(2,983)        $(2,014)     $ (5,229)
                                                 -------        -------         -------      -------- 
Shares used in computing basic net
  income (loss) per share                         19,870         19,296          19,778        19,200 
Effect of diluted securities (If their                                                                
  inclusion would not be antidilutive)               994              -               -             - 
                                                 -------        -------         -------      -------- 
Shares used in computing diluted net 
  income (loss) per share                         20,864         19,296           19,778       19,200 
                                                 -------        -------         -------      -------- 
                                                 -------        -------         -------      -------- 
Basic                                            $  0.02        $ (0.15)        $  (0.10)     $ (0.27)
                                                 -------        -------         -------      -------- 
                                                 -------        -------         -------      -------- 
Diluted                                          $  0.02        $ (0.15)        $  (0.10)     $ (0.27)
                                                 -------        -------         -------      -------- 
                                                 -------        -------         -------      -------- 
</TABLE>


                                      7
<PAGE>

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

NOTE 3. SHORT-TERM INVESTMENTS

         As of September 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 a 
reconciliation of the Company's investments to the condensed consolidated 
balance sheet at September 30, 1998 (in thousands).


<TABLE>
<CAPTION>
                                          Estimated
                                            Fair
                                            Value
                                           --------
<S>                                       <C>
Commercial Paper                           $ 8,137
Treasury Notes                               2,082
Medium Term Notes                            7,865
Corporate Notes                              3,776
Money Market Funds                               6
                                           -------

Total investments                          $21,866
                                           -------
                                           -------
</TABLE>

<TABLE>
<CAPTION>
                                          Estimated
                                            Fair
                                            Value
                                           --------
<S>                                       <C>
Cash equivalents                           $ 7,779
Short-term investments                      14,087
                                           -------

Total investments                           21,866

Cash                                         6,070
                                           -------

Total cash, cash equivalents and
short-term investments                     $27,936
                                           -------
                                           -------
</TABLE>


                                      8
<PAGE>

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

NOTE 4. LOAN TO OFFICER

      In August and September 1998, the Company loaned one of its executive 
officers a promissory note for $1.1 million. This non-recourse note is 
collateralized at 140 percent of the loan value in shares of the Company's 
common stock owned by this individual, and is due and payable to the Company 
in August 2000 at an interest rate of seven and one-half percent per annum. 
Amount is classified in other assets in the Company's Condensed Consolidated 
Balance Sheet. In October 1998, a $0.2 million payment was received and 
applied against this loan balance.

NOTE 5. REPRICING OF STOCK OPTIONS

      In August 1998, the Company offered all employees the choice to 
exchange options to purchase shares of the Company's common stock for new 
options with an exercise price of $4.125 per share. All options that were 
exchanged continued to vest under the original terms of the option grant, 
except that no options were exercisable for a period of nine months from the 
exchange date.

NOTE 6. 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 7. COMPREHENSIVE INCOME

         Effective April 1, 1998, the Company adopted Statement of Financial 
Accounting Standards No. 130, "Reporting Comprehensive Income," ("SFAS 130"). 
SFAS 130 requires certain revenues, expenses, gains or losses that, prior to 
adoption, were reported separately in stockholders' equity and excluded from 
net income (loss) to be included in other comprehensive income (loss). 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.


                                      9
<PAGE>

NOTE 8. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

      In 1997, the Financial Accounting Standards Board ("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 
its fiscal year ending March 31, 2001. SFAS 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 currently able to determine the effect, if any, that adoption 
will have on its consolidated financial position, results of operations or 
cash flow.


                                      10
<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 unaudited condensed 
consolidated results of operations data as a percentage of total revenue for 
the three and six months ended September 30, 1998 and 1997.

<TABLE>
<CAPTION>
                                              Three months ended          Six months ended
                                                 September 30,              September 30,
                                            ----------------------       ---------------------
                                              1998          1997          1998       1997
                                              ----          ----          ----       ----
<S>                                         <C>            <C>            <C>        <C>
Revenue:
  License fees                                 47.2%        56.7%          46.5%      55.6%
  Maintenance and services                     52.8         43.3           53.5       44.4
                                            -------        -----          -----      -----
    Total revenue                             100.0        100.0          100.0      100.0
                                            -------        -----          -----      -----
                                            -------        -----          -----      -----
Cost of revenue:
  Cost of license fees                          0.6          1.0            0.9        0.7
  Cost of maintenance and services             27.9         25.8           27.6       26.9
                                            -------        -----          -----      -----
    Total cost of revenue                      28.5         26.8           28.5       27.6
                                            -------        -----          -----      -----
Gross profit                                   71.5         73.2           71.5       72.4
Operating expense:
  Sales and marketing                          43.4         61.5           49.3       62.2
  Product development and engineering          20.9         20.9           21.9       20.9
  General and administrative                    6.9         10.9            7.3       10.7
                                            -------        -----          -----      -----
    Total operating expense                    71.2         93.3           78.5       93.8

Operating income (loss)                         0.3        (20.1)          (7.0)     (21.4)
                                            -------        -----          -----      -----
Interest income, net                            1.9          2.9            2.0        3.3
                                            -------        -----          -----      -----
Income (loss) before income taxes               2.2        (17.2)          (5.0)     (18.1)

Provision (benefit) for income taxes            0.4         (0.1)            0.5      (1.8)
                                            -------        -----          -----      -----
Net income (loss)                              1.8%        (17.1)%         (5.5)%    (16.3)%
                                            -------        -----          -----      -----
                                            -------        -----          -----      -----
</TABLE>


                                      11
<PAGE>

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 reasonably 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 sales 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 6 percent to $18.5 million for 
the quarter ended September 30, 1998 from $17.5 million for the same prior 
year quarter and increased 14 percent to $36.7 million for the six months 
ended September 30, 1998 from $32.2 million for the same period in the prior 
year. International revenue was essentially flat at $7.7 million for the 
quarter ended September 30, 1998, as compared to $7.8 million for the same 
quarter in the prior year. International revenue increased 23 percent to 
$17.2 million for the six months ended September 30, 1998 from $14.0 million 
in the same prior year period. The international revenue increase was due to 
increased license, maintenance and services revenue as a result of the 
Company's continued expansion of its international sales organization. 
Further, international revenue contributed 42 percent of total revenue for 
the quarter ended September 30, 1998, as compared to 45 percent of total 
revenue in the same prior year quarter and contributed 47 percent for the six 
months ended September 30, 1998, as compared to 44 percent for the same prior 
year period. United States revenue increased by 12 percent to $10.8 million 
for the quarter ended September 30, 1998 from $9.7 million in the same prior 
year quarter and increased by 7 percent to $19.4 million for the six months 
ended September 30, 1998 from $18.2 for the same period in the prior year. 
Significant growth in domestic maintenance and service revenue contributed to 
the increase.

         LICENSE FEES REVENUE. The Company's license fees revenue decreased 
12 percent to $8.7 million for the quarter ended September 30, 1998 from $9.9 
million for the same quarter in the prior year and decreased by 5 percent to 
$17.1 million for the six months ended September 30, 1998 from $17.9 million 
for the same prior year period. License fees revenue increased 


                                      12
<PAGE>

sequentially by 5 percent from $8.3 million for the first quarter ended June 
30, 1998. The Company believes that United States license fees revenue has 
been impacted by a slowdown in the overall market for enterprise application 
development software. 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 Issue, (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 a progressively longer and more 
complex sales cycle for the Company's products.

         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 "Product Concentration; Impact of Market Factors," "Risks Associated with 
the Year 2000 Issue," "Dependence on Key Personnel," and "Competition" in the 
section entitled "Business Risks."

         MAINTENANCE AND SERVICES REVENUE. The Company's services revenue 
increased 29 percent to $9.8 million for the quarter ended September 30, 1998 
from $7.6 million for the same quarter in the prior year and increased 37 
percent to $19.6 million for the six months ended September 30, 1998 from 
$14.3 million for the same period in the prior year. 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. 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. Direct sales through the Company's European, Canadian and 
Australian subsidiaries totaled $5.4 million and $12.2 million for the 
quarter and six months ended September 30, 1998, respectively, as compared to 
$5.0 million and $9.3 million for the quarter and six months ended September 
30, 1997, respectively. The table below sets forth the Company's export sales 
data from the United States for the quarter and six months ended September 
30, 1998 and 1997.

<TABLE>
<CAPTION>
                      ---------------------------------   -------------------------------
                                (in thousands)                     (in thousands)
                       Three months ended September 30,    Six months ended September 30,
                       --------------------------------   -------------------------------
                           1998                1997           1998                1997
                           ----                ----           ----                ----
<S>                       <C>                 <C>           <C>                 <C>
Total export revenue      $2,341              $2,756        $  4,971            $  4,744
Total direct revenue       5,357               5,046          12,247               9,267
Total International       $7,698              $7,802        $ 17,218            $ 14,011
                      ---------------------------------   -------------------------------
</TABLE>


                                      13
<PAGE>

         The increase in international revenue for the six months ended 
September 30, 1998, as compared to the same period in the prior year, 
reflects growing direct sales presence in Europe through the Company's 
international direct sales organization, partially offset by lower revenue in 
Asia and Canada. The economic crises in Asia has not had a material impact on 
the Company's revenue. Revenue from Asian markets were less then 5 percent of 
total revenue for each of the periods 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.

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 $112,000 and 
$346,000 for the quarter and six months ended September 30, 1998, 
respectively, as compared to $171,000 and 240,000 for the quarter and six 
months ended September 30, 1997, respectively. The increase for the first six 
months of fiscal 1998, as compared to the same period in the prior year, was 
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 $5.2 million and $10.1 
million for the quarter and six months ended September 30, 1998, 
respectively, representing 53 percent and 52 percent of maintenance and 
services revenue, respectively. Cost of maintenance and services revenue was 
$4.5 million and $8.6 million for the quarter and six months ended September 
30, 1997, respectively, representing 60 percent of maintenance and services 
revenue for each of those periods. The decrease in cost of maintenance and 
services revenue for the quarter and six months ended September 30, 1998 as a 
percentage of maintenance and services revenue was primarily attributable 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 EXPENSES


                                      14
<PAGE>

         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, promotional expenses and 
advertising. Sales and marketing expense decreased to $8.0 million for the 
quarter ended September 30, 1998 from $10.8 million for the same quarter in 
the prior year. Sales and marketing expenses also decreased to $18.1 million 
for the six months ending September 30, 1998 from $20.0 million for the same 
period in the prior year. These decreases were the result of a 
re-organization of the Company's US sales organization. The direct sales 
organization was reduced to reflect the Company's anticipated medium-term 
revenue opportunities, and the partner channel organization is being 
emphasized to leverage this distribution channel. The re-organization was 
completed in the quarter ended September 30, 1998 and did not result in a 
significant charge to expense for severance and other costs associated with 
the re-organization. Sales and marketing expense represented 43 percent and 
49 percent of total revenue for the quarter and six months ended September 
30, 1998, respectively, and represented 61 percent and 62 percent of total 
revenue for the quarter and six months ended September 30, 1997, 
respectively. The Company anticipates that sales and marketing expense will 
decrease as a percentage of revenue over the next several quarters.

         PRODUCT DEVELOPMENT. Product development expense consists primarily 
of salaries and other personnel-related expense, and depreciation of 
development equipment. The Company believes that a significant level of 
investment for product development is required to remain competitive. Product 
development expense increased to $3.9 million and $8.0 million for the 
quarter and six months ended September 30, 1998, respectively, from $3.7 
million and $6.7 million for the quarter and six months ended September 30, 
1997, respectively. This increase was primarily attributable to additional 
hiring of product development personnel. Product development expense 
represented 21 percent and 22 percent of total revenue for the quarter and 
six months ended September 30, 1998, respectively, as compared to 21 percent 
for each of the comparable periods in the prior year. 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 $1.3 million and $2.7 million for the quarter and six 
months ended September 30, 1998, respectively, from $1.9 million and $3.5 
million for the quarter and six months ended September 30, 1997, 
respectively. General and administrative expense represented 7 percent of 
total revenue for both the quarter and six months ended September 30, 1998, 
respectively, as compared to 11 percent for both the quarter and six months 
ended September 30, 1997, respectively. The reduction in general and 
administrative expense from prior year was primarily the result of the sublet 
of excess office space and the reduction in the number of employees in this 
functional area. 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 and six month periods ended September 30, 
1998 and September 30, 1997, 


                                      15
<PAGE>

respectively, 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's recorded income tax expense in fiscal 1999 
represents foreign income tax withholdings on certain license fees paid to 
the Company by foreign licensees.

         RISKS ASSOCIATED WITH THE YEAR 2000 ISSUE. The Year 2000 Issue is 
the result of computer programs being written using two digits rather than 
four to define the applicable year. Any of the Company's computer programs or 
hardware that have date-sensitive software or embedded chips may recognize a 
date using "00" as the year 1900 rather than the year 2000. This could result 
in a system failure or miscalculations causing disruptions of operations, 
including, among other things, a temporary inability to process transactions, 
send invoices, or engage in similar normal business activities.

         The Company's plan to resolve the Year 2000 Issue involves the 
following four phases: assessment, remediation, testing, and implementation. 
At present, the Company is nearly complete with regards to the assessment of 
all systems that could be significantly affected by the Year 2000, including 
the Company's products, its internal Information Technology, supplier and 
service provider compliance and operating equipment with embedded chips or 
software (e.g. laptop computers). The Company has substantially completed the 
remediation phase and expects to complete this phase of the process by its 
fiscal first quarter beginning April 1, 1999. Further, the Company plans to 
begin the testing phase during this same quarter and will begin any required 
implementations subsequent to the completion of the testing phase.

         The costs incurred in addressing the Year 2000 problem are being 
expensed as incurred in compliance with generally accepted accounting 
principles. None of these costs are expected to materially impact the results 
of operations in any one period. Funding of these costs will come from the 
Company's normal working capital.

                                       16

<PAGE>

         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 the Company. The Company regularly runs regression tests on 
its software, including tests for the above functionality at the rollover to 
theYear 2000. 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, or 
will contain all features and functionality considered necessary by 
customers, distributors, resellers and system integrators to be Year 2000 
compliant.

         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 an increase in demand will be realized, or that 
companies will resume application development if and when they resolve their 
Year 2000 issues. Either of the foregoing could have a material adverse 
effect upon the Company's business, operating results and financial condition.

         The Company has queried its significant suppliers and service 
providers that do not share information systems with the Company. To date, 
the Company is not aware of any supplier or service provider with a Year 2000 
Issue that would materially impact the Company's business, operating results 
or financial condition. However, the Company has no means of ensuring that 
suppliers and service providers will be Year 2000 ready. The inability of 
suppliers and service providers to complete their Year 2000 resolution 
process in a timely fashion could materially impact the Company. The effect 
of non-compliance by any of the Company's suppliers or service providers is 
not determinable.


                                       17
<PAGE>
         The Company has prepared a draft contingency plan for certain critical
applications and expects to have a finalized draft in the near future. This
business recovery plan discusses classified disasters and provides a list of
priorities including, for example, customer service, billing and invoicing, and
engineering.

         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. Management of the Company believes
it has an effective program in place to resolve the Year 2000 Issue in a timely
manner. However, disruptions in the economy generally resulting from Year 2000
issues could also materially adversely affect the Company. The Company could be
subject to litigation for computer systems product failure, for example,
equipment shutdown or failure to properly date business records. The amount of
potential liability and lost revenue cannot be reasonably estimated.

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 $4.9 
million in operating activities for the six months ended September 30, 1998, 
as compared to cash used in operating activities of $7.1 million for the same 
prior year period. The net cash used in operating activities during the six 
months ended September 30, 1998 resulted primarily from the net loss for the 
period, an increase in prepaid expenses and other assets, and decreases in 
accrued expenses and other liabilities, and deferred revenue, partially 
offset by an increase in accounts payable.

         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, and a 
loan to an officer of the Company. Capital expenditures were $1.0 million for 
the six months ended September 30, 1998 compared to $2.6 million for the six 
months ended September 30, 1997. Capital expenditures consisted of purchases 
of computer equipment and office furniture. For the six months ended 
September 30, 1997, the Company was in the process of expanding its 
headquarter offices, and thus incurred significant leasehold improvement and 
furniture addition expenditures compared to the six months ended September 
30, 1998. At September 30, 1998, the Company did not have any material 
commitments for capital expenditures.

         At September 30, 1998, the Company had $27.9 million in cash and 
cash equivalents, and short-term investments and $29.1 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.


                                      18
<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. The Company showed a modest profit for the quarter ended 
September 30, 1998. At September 30, 1998, the Company had an accumulated 
deficit of $31.7 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. 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 expenses, 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 Issue, 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 


                                      19
<PAGE>

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. 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 of the order, 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 or loss 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 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 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.

         RISKS ASSOCIATED WITH THE YEAR 2000 ISSUE. The Year 2000 Issue is 
the result of computer programs being written using two digits rather than 
four to define the applicable year. Any of the Company's computer programs or 
hardware that have date-sensitive software or embedded chips may recognize a 
date using "00" as the year 1900 rather than the year 2000. This could result 
in a system failure or miscalculations causing disruptions of operations, 
including, among other things, a temporary inability to process transactions, 
send invoices, or engage in similar normal business activities.

         The Company's plan to resolve the Year 2000 Issue involves the 
following four phases: assessment, remediation, testing, and implementation. 
At present, the Company is nearly complete with regards to the assessment of 
all systems that could be significantly affected by the Year 2000, including 
the Company's products, its internal Information Technology, supplier and 
service provider compliance and operating equipment with embedded chips or 
software (e.g. laptop computers). The Company has substantially completed the 
remediation phase and expects to complete this phase of the process by its 
fiscal first quarter beginning April 1, 1999. Further, the Company plans to 
begin the testing phase during this same quarter and will begin any required 
implementations subsequent to the completion of the testing phase.

         The costs incurred in addressing the Year 2000 problem are being 
expensed as incurred in compliance with generally accepted accounting 
principles. None of these costs are expected to materially impact the results 
of operations in any one period. Funding of these costs will come from the 
Company's normal working capital.

         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 the Company. The Company regularly runs regression tests on 
its software, including tests for the above functionality at the rollover to 
theYear 2000. 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, or 
will contain all features and functionality considered necessary by 
customers, distributors, resellers and system integrators to be Year 2000 
compliant.

         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 an increase in demand will be realized, or that 
companies will resume application development if and when they resolve their 
Year 2000 issues. Either of the foregoing could have a material adverse 
effect upon the Company's business, operating results and financial condition.

         The Company has queried its significant suppliers and service 
providers that do not share information systems with the Company. To date, 
the Company is not aware of any supplier or service provider with a Year 2000 
Issue that would materially impact the Company's business, operating results 
or financial condition. However, the Company has no means of ensuring that 
suppliers and service providers will be Year 2000 ready. The inability of 
suppliers and service providers to complete their Year 2000 resolution 
process in a timely fashion could materially impact the Company. The effect 
of non-compliance by any of the Company's suppliers or service providers is 
not determinable.

         The Company has prepared a draft contingency plan for certain critical
applications and expects to have a finalized draft in the near future. This
business recovery plan discusses classified disasters and provides a list of
priorities including, for example, customer service, billing and invoicing, and
engineering.

         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. Management of the Company believes
it has an effective program in place to resolve the Year 2000 Issue in a timely
manner. However, disruptions in the economy generally resulting from Year 2000
issues could also materially adversely affect the Company. The Company could be
subject to litigation for computer systems product failure, for example,
equipment shutdown or failure to properly date business records. The amount of
potential liability and lost revenue cannot be reasonably estimated.


         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 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 


                                      20

<PAGE>

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 Issue 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 two quarters of 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 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


                                       21
<PAGE>

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 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


                                      22
<PAGE>

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 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 projects such as Year
2000 compliance. For these and other reasons, the sales cycle associated with


                                      23
<PAGE>

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.

         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 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


                                      24
<PAGE>

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 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 42 percent and 45 percent of the
Company's total revenue for the quarters ended September 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


                                      25
<PAGE>

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 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 six 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


                                      26
<PAGE>

possess 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 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


                                      27
<PAGE>

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.


                                      28
<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 5.  OTHER INFORMATION

STOCKHOLDER PROPOSALS

Proposals of stockholders intended to be presented at the Company's 1999 
annual meeting of stockholders must be received at the Company's principal 
executive offices not later than March 17, 1999 in order to be included in 
the Company's proxy statement and form of proxy relating to the 1999 annual 
meeting. Pursuant to new amendments to Rule 14a-4(c) of the Securities 
Exchange Act of 1934, as amended, if a stockholder who intends to present a 
proposal at the 1999 annual meeting of stockholders does not notify the 
Company of such proposal on or prior to May 27, 1999, then management proxies 
would be allowed to use their discretionary voting authority to vote on the 
proposal when the proposal is raised at the annual meeting, even though there 
is no discussion of the proposal in the 1999 proxy statement. The Company 
currently believes that the 1999 annual meeting of stockholders will be held 
during the second week of August 1999.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         (a)  Exhibits

              27.1     Financial data schedule.
              10.16    Full-recourse Promissory Note with Martin J. Sprinzen.
              10.17    Stock Pledge Agreement with Martin J. Sprinzen.
              10.18    Separation and Release Agreement with James Wambach.
              10.19    Severance Agreement with Jay Shiveley.

         (b)  REPORTS ON FORM 8-K

              No reports on Form 8-K have been filed during the quarter ended
              September 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 13th day of November, 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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