<PAGE>

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                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
                                   FORM 10-K
(Mark One)

[x]  Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934 For the fiscal year ended December 31, 1997; or

[_]  Transition Report pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934 For the transition period from _____ to _____

Commission File Number 0-22667


                        TSI International Software Ltd.
            (Exact Name of Registrant as Specified in its Charter)

            Delaware                                   06-1132156
  (State or Other Jurisdiction            (I.R.S. Employer Identification No.)
of Incorporation or Organization)

        45 Danbury Road                                  06897
      Wilton, Connecticut                              (Zip Code)


Registrant's Telephone Number, Including Area Code:    (203) 761-8600
                                                   ----------------------

Securities Registered Pursuant to Section 12(b) of the Act:    NONE

Securities Registered Pursuant to Section 12(g) of the Act:  Common Stock, Par
Value $.01 per share

     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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.

                                      [x]

     State the aggregate market value of the voting and non-voting equity held
by non-affiliates of the Registrant as of March 23, 1998:

                                  $84,842,885

     As of that date, there were 9,211,380 shares of the Registrant's Common
Stock outstanding.


                      DOCUMENTS INCORPORATED BY REFERENCE


     Portions of the definitive Proxy Statement to be delivered to shareholders
in connection with the Annual Meeting of Stockholders to be held in June, 1998
are incorporated by reference into Part III.
<PAGE>

                       TSI INTERNATIONAL SOFTWARE, LTD.


                          Annual Report on Form 10-K

                  For the fiscal year ended December 31, 1997


                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                          PART I
                                                                                              Page
                                                                                              ----
<S>                                                                                          <C>
Item 1.   Business.........................................................................     1
Item 2.   Properties.......................................................................    12
Item 3.   Legal Proceedings................................................................    12
Item 4.   Submission of Matters to a Vote of Security Holders..............................    12

                                          PART II

Item 5.   Market for Registrant's Common Equity and Related
          Stockholder Matters..............................................................    13
Item 6.   Selected Financial Data..........................................................    16
Item 7.   Management's Discussion and Analysis of Financial
          Condition and Results of Operations..............................................    16
Item 7A.  Quantitative and Qualitative Disclosures About Market Risk.......................    29
Item 8.   Financial Statements and Supplementary Data......................................    29
Item 9.   Changes in and Disagreements with Accountants on
          Accounting and Financial Disclosure..............................................    29

                                         PART III

Item 10.  Directors and Executive Officers.................................................    29
Item 11.  Executive Compensation...........................................................    32
Item 12.  Security Ownership of Certain Beneficial Owners
          and Management...................................................................    32
Item 13.  Certain Relationships and Related Transactions...................................    32

                                        PART IV

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K..................    32

Signatures.................................................................................    35
</TABLE>

TSI, the TSI logo, Mercator, Trading Partner, OnCall and KEY/MASTER are
registered trademarks, and Mercator for R/3, Trading Partner EC, Trading Partner
PC, Trading Partner PC/32 and OnCall*EDI are trademarks of the Company. This
Report also contains trademarks and trade names of other companies.

<PAGE>

                                    PART I


Forward-Looking Information

     This report contains or may contain certain forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934 as
amended, and Section 27A of the Securities Act of 1933, as amended, that involve
risks and uncertainties. When used in this report, words such as "anticipate,"
"believe," "estimate," "expect," "future," "intend," "plan," and similar
expressions as they relate to the Company or the Company's management, identify
forward-looking statements. All forward-looking statements included in this
document are based on information available to the Company on the date hereof,
and the Company assumes no obligation to update any such forward-looking
statement. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, (i) the effects of rapid
technological change and the need to make frequent product transitions, (ii) the
potential for software defects, (iii) the impact of competitive products and
pricing, (iv) less-than-anticipated growth in the market for the SAP R/3 system
and related services, (v) uncertainties in attracting and retaining needed
management, marketing, sales, professional services and product development
personnel, (vi) the Company's ability to manage growth, (vii) the success of the
Company's Mercator product line, and (viii) the Company's ability to develop
additional channels. These are discussed in the Company's other reports with the
Securities and Exchange Commission, including but not limited to those discussed
under the heading "Risk Factors" in the Company's Registration Statement on Form
S-1 (File No. 333-27293). Should one or more of these risks or uncertainties
materialize, or should the underlying estimates or assumptions prove incorrect,
actual results or outcomes may vary significantly from those anticipated,
believed, estimated, expected, intended or planned.


ITEM 1.  BUSINESS

General

     TSI International Software (the "Company") is a leading provider of
software and related services that enable organizations to integrate their
business applications both internally and with external business partners. The
Company's flagship product, Mercator, is a data transformation product which
permits enterprises to integrate ERP applications, such as SAP's R/3, legacy
systems, best-of-breed applications, data warehouses, databases, electronic
commerce data, and Web-based applications. Unlike software tools which focus on
the connectivity aspects of application integration, Mercator enables business-
level integration through the complete transformation of application content
between systems. To date, the Company has directly licensed its products to over
8,700 customers worldwide, representing a broad range of industries. The
Company's customers include Allegiance Corporation, American Express Travel
Related Services, Inc., CIGNA Corporation, Citibank, N.A., Federal Express
Corporation,

                                       1
<PAGE>

Hewlett-Packard Company, Hoechst AG, International Business Machines
Corporation, Lucent Technologies, Inc., Mitsui & Co. Ltd., and Prudential
Insurance Company of America.


Products and Services

     The Company's business application integration products include two
software product lines, the Mercator family and the Trading Partner family. The
following table depicts the Company's current business application integration
product offerings and suggested list prices:

<TABLE>
<CAPTION>
                              Original          Most
                              --------          ----
   Product Name             Release Date    Recent Release      US Suggested List Price/(1)/
-----------------           ------------    --------------      ----------------------------
<S>                         <C>             <C>                 <C>
Mercator Products:

Mercator:
  Authoring System......        12/93           8/97             $3,000/seat
  Execution Engines.....        12/93           8/97             from $600 for
                                                                 Windows/DOS to
                                                                 $50,000 mainframe
Mercator for R/3........         6/96           8/97             from $37,500/system

Trading Partner
 Products:

Trading Partner PC......         6/88           2/97             $ 1,495
Trading Partner PC/32...        10/96           3/98             $ 1,995
Trading Partner Kits....        10/92          various           from $295
Trading Partner EC......        11/90          10/95             $80,000
</TABLE>

(1) The terms and conditions, including sales prices and discounts from list
    prices, of individual license transactions may be negotiated based on
    volumes and commitments and may vary considerably from customer to customer.


 Mercator Products.

     The Company's flagship Mercator family of products is an integrated set of
tools used by IT professionals to integrate data between different business
applications. Mercator was initially released in December 1993 and, as of
December 31, 1997, had been licensed to more than 1,200 customers worldwide.

     Mercator. Mercator enables application integration by transforming or
mapping data between and among multiple data formats of business applications.
It provides a Windows-based Authoring System which is used to define data
formats and mapping solutions, and separate run-time Execution Engines for map
execution. Complete data transformations can be created without writing custom
interface programs. Mercator requires no pre-processing of data prior to

                                       2
<PAGE>

mapping, can transform data between multiple sources and destinations in a
single process, and supports map execution on a wide range of platforms.
Customers who deploy a map to run on multiple platforms also license an
Execution Engine for each platform. The Company currently offers Execution
Engines for Windows 3.1, Windows 95, Windows NT, PC DOS, SCO UNIX, HP-UX, Sun
Solaris/OS, AIX, Alpha NT, Digital UNIX, VAX VMS, Open VMS, OS/400, Stratus FTX,
VOS and Continuum, MVS, and MVS/CICS.

     Mercator for R/3. Initially released in June 1996, Mercator for R/3 is a
version of Mercator that includes specific extensions to meet the needs of
integration of data with SAP's R/3 system. Mercator for R/3 was the first
software product to be certified by SAP for use with its ALE architecture. In
addition, SAP AG has certified its Mercator for R/3 product for both EDI and
Data Migration Interfaces ("DMI") to R/3. This makes TSI the first company to be
certified by SAP for all three interfaces (ALE, EDI and DMI). Mercator for R/3
extends the core Mercator product by providing tools to automatically capture
R/3 data definitions, and adapters for integrating with R/3's inter-application
messaging system. In addition, Mercator for R/3 provides data transformation
support for other R/3 data conversion and interfacing requirements including the
initial conversion of data to R/3 from existing systems and interfaces with data
warehouses.

     Mercator for EC. Mercator for EC is an enterprise-wide client/server
application for distributed electronic commerce based on the Windows NT
platform. It supports distributed management and maintenance of the EC
environment as well as distributed processing of EC transactions. With Mercator
for EC, numerous business units within an enterprise can be supported
autonomously. Each business unit can create its own customizable job streams for
transaction processing. Transaction workflows can be tailored to match the
processing requirements of each area of the business with virtually no
limitations. Mercator for EC extends the underlying power of Mercator to the
world of electronic commerce by providing a flexible, open architecture for
creating robust electronic commerce solutions for today's event-driven
enterprises.

 Trading Partner Products.

     The Company's Trading Partner products consist of a set of electronic data
interchange ("EDI") management software products and include Trading Partner PC,
a Windows-based product, and Trading Partner EC, a mainframe-based product. The
Trading Partner products can be sold as stand-alone EDI products, but are often
sold in conjunction with Mercator products to enable businesses to both manage
their EDI relationships and to integrate their EDI data into enterprise
applications. Trading Partner products allow customers to communicate with their
partners through direct connections, value-added networks ("VANs") or the
Internet.

     Trading Partner PC. Introduced in 1989, Trading Partner PC was the first
Windows-based EDI translator in the United States and has been licensed to more
than 5,000 businesses worldwide. In October 1996, the Company introduced Trading
Partner PC/32, the first Windows 95 desktop solution in the market. The Company
has developed more than 100 ''kits'' which support a particular trading
partner's EDI specifications and provide ''plug and play'' solutions for EDI
trading. The Company markets kits for many major EDI trading partners including
Compaq

                                       3
<PAGE>

Computer Corporation Hewlett-Packard, International Business Machines
Corporation, J.C. Penney Company, Inc., Kohler Company, Kaiser Permanente,
Sears, Roebuck and Company, Target Stores and Wal-Mart Stores, Inc. The
Company's OnCall*EDI products are a series of EDI kits for electronic purchasing
for the healthcare provider market and has been licensed to more than 1,300
hospitals.

     Trading Partner EC. Trading Partner EC is a mainframe-based EDI translation
product which provides EDI management capability for companies with large EDI
programs. It includes Mercator as its core data transformation engine and offers
the user the means to integrate EDI data directly into applications without the
need to write custom interface programs commonly required by other translator
products. Using Mercator, customers who plan to migrate their EDI program from
the mainframe can do so without incurring additional cost and effort for
recreating their EDI interfaces. Trading Partner EC and its predecessor product
have been licensed to more than 200 businesses worldwide.


 KEY/MASTER

     In addition to the Company's applications integration products described
above, the Company licenses and supports KEY/MASTER, a legacy data entry product
which is used on mainframe terminals or PCs on local area networks, and is the
leading software product for automating the key entry of high-volume, repetitive
data from business documents. KEY/MASTER has been licensed to more than 900
customers worldwide. Because KEY/MASTER is a mature product, revenues derived
from KEY/MASTER are primarily maintenance-related and the Company expects in the
future to make only minor investments in KEY/MASTER.

 Services

     Professional Services.   The Company offers consulting and professional
services to customers who wish to have the Company's professionals plan, design
or implement their application integration projects. The Company intends to
expand the number of service professionals and the scope of the services offered
as it continues to address the enterprise application integration needs of large
organizations. The Company believes that enterprises implementing the R/3 system
in particular represent a significant opportunity for the Company to market its
professional services in support of Mercator for R/3.

     Training. In order to assure that its customers are successful in using its
products, the Company provides training in its four training centers or at
customer locations. The Company offers a number of courses ranging from two to
five days in length with educational content including basic product
functionality and hands-on use of the product. The Company recommends that its
Mercator customers attend a basic three-day training course and believes that a
majority of its Mercator customers elect to participate in such training.

                                       4
<PAGE>

Customers

     As of December 31, 1997, the Company had directly licensed its software to
more than 8,700 customers worldwide. Numerous others have licensed the Company's
products through Value Added Resellers (VARs), Independent Software Vendors
(ISVs), Systems Integrators (SIs) or other third parties who distribute its
products to business partners to facilitate the integration of their respective
business applications.

     The Company's customer base includes businesses from many industries,
including finance, banking, healthcare, technology, government, retail,
manufacturing, automotive, oil and gas, utilities, communications, insurance,
and transportation. The following is a partial list of the Company's end-user
and third-party Mercator customers who have purchased Mercator:

                              End User Customers
<TABLE>
<CAPTION>

            End-User Customers                                VARs, ISVs and Sis
-----------------------------------------       -------------------------------------------------
<S>                                             <C>
Abbott Labs                                     Allegiance Corporation
Blue Cross Blue Shield of Massachusetts         American Express Travel Related  Services, Inc.
Brooks Bros.                                    American Software, Inc.
Canadian National Railway Company               ARI Services Network, Inc.
CIGNA Corporation                               Axolotl Corp.
Deere & Company                                 CEBRA Inc.
Dow Corning                                     Citibank, N.A.
Dun & Bradstreet                                Compaq Computer Corporation
Eastman Kodak Company                           Connect, Inc.
First Chicago NBD Corporation                   Federal Express Corporation
General Mills, Inc.                             GTE Data Services Incorporated
Georgia-Pacific Corporation                     HBO & Company
Hoechst AG                                      Hewlett-Packard Company
Hershey                                         International Business Machines Corporation
Home Savings of America                         Netscape
International Business Machines                 Mitsui & Co. Ltd.
LitleNet, Inc.                                  Pivotpoint, Inc.
Lucent Technologies Inc.                        Power Crew
MCI                                             Price Waterhouse LLC
Mercedes Benz Credit Corp.                      RS Information Systems, Inc.
Nestle Canada, Inc.                             S2 Systems, Inc.
NYNEX Corporation                               Saratoga
Petroleos de Venezuela, S.A.                    Software Consulting Partners, Inc.
Prudential Insurance Company of America
Royal Canadian Mounted Police
Sara Lee Hosiery, Inc.
Texas Instruments
Whirlpool Corporation
The Toronto Dominion Bank
U.S. Surgical
</TABLE>

                                       5
<PAGE>

Sales and Marketing

 Sales

     The Company markets its products and services through both direct and
third-party channels. The Company's goal is to achieve broad market penetration
by pursuing multiple channels of distribution.

     As of December 31, 1997, the Company's sales organization consisted of 54
employees. The Company's direct field sales force focuses on sales of Mercator
and Trading Partner products to Fortune 1000 companies. The Company also
maintains a telesales organization as part of its direct sales force which
generally targets smaller businesses. The field sales force also includes
alternate channel managers who are responsible for sales through third parties.
The sales organization includes systems engineers who assist with both pre- and
post-sales activities.

     An important part of the Company's sales strategy is to continue to develop
its indirect distribution channels such as VARs, ISVs, SIs and distributors. As
of December 31, 1997, over 100 third parties had agreements with the Company to
resell, embed or otherwise bundle the Company's products with their offerings in
the United States.

     The Company markets its products and services outside of North America
through sales offices located in the United Kingdom and France as well as
through indirect channels. Revenues from international customers were
approximately 9.4% of the Company's total revenues during 1997. The
international market is important to the Company, and it intends to continue to
expand its sales and marketing efforts outside North America by adding
distributors and additional sales staff.

     On February 5, 1998, the Company announced the signing of a Pan-Asian
distribution agreement with Mitsui & Co. LTD, Japan's largest general trading
company. Under the terms of the agreement, Mitsui will distribute Mercator for
integration of Enterprise Resource Planning ("ERP") software, such as SAP R/3,
and electronic commerce.

 Marketing

     The Company utilizes a wide variety of marketing programs which are
intended to attract potential customers and to promote the Company and its brand
names. The Company uses a mix of market research, analyst updates, seminars,
direct mail, print advertising, trade shows, speaking engagements, public
relations, customer newsletters, and Web-site marketing in order to achieve
these goals. The marketing department also produces collateral material for
distribution to prospects including demonstrations, presentation materials,
white papers, brochures, fact sheets, and materials that are specific to the
area of interest. The Company also hosts an annual user conference for its
customers and maintains an Alliance Program designed to support its channel
partners with a variety of programs, incentives, support plans, and an annual
conference. As of December 31, 1997, there were 10 employees in the Company's
marketing organization.

                                       6
<PAGE>

Technology

     The Company's core Mercator technology provides a platform for creating
data transformation solutions which satisfy application integration requirements
across a variety of computing environments. The architecture of the Mercator
platform is based on object concepts, providing reusability, interoperability,
and scaleability during the design process and in the resulting solutions. The
Mercator platform permits the Company to efficiently construct and deliver
integration solutions for specific markets and also allows ISVs and SIs to embed
Mercator functionality within their own offerings.

     The central components of the Mercator platform are a Windows-based
Authoring System for creating data transformation "maps" and one or more run-
time Execution Engines for map execution. A map is an executable module that
describes the required transformation and re-ordering of data between source and
destination objects such as files, databases, applications and messages. The
Authoring System provides an intuitive drag-and-drop environment for defining
the source and destination data objects, defining the rules for mapping the
sources to the destinations, and building the resulting map object. Map objects
built using Mercator can be ported automatically to any of 20 different
execution environments.

     Descriptions of source and destination objects are entered by the user
through Mercator's graphical interface. To simplify data definition, the Company
provides pre-packaged objects for a number of commonly used data standards and
the Company also provides importers for creating objects from higher level
(meta) data definitions. Data object definitions within Mercator include
information regarding their format, structure and business rules, which
eliminates the need to explicitly identify the context of a data object during
map construction and maintains the logical integrity of the resulting mapping
solution.

     Once the source and destination objects have been defined, the user creates
maps by specifying the rules for transforming data from the sources to the
destinations. For many mapping tasks, the user need only "drag" a source
object and "drop" it on the destination object. Multiple data sources can be
transformed to multiple destinations in a single mapping operation. The user has
point-and-click access to a variety of pre-built functions to enhance the
mapping rules including support for selection, extraction, computation, logical
operations, parsing, substitution, re-ordering, validation, and conversion.

     Using Mercator`s Authoring System, map objects are built and tested in the
Windows environment. The resulting Mercator map can be implemented using a
Mercator Execution Engine appropriate to the target platform. Target platforms
currently supported include Windows 3.1, Windows 95, Windows NT, PC DOS, SCO
UNIX, open server, IBM Aix, OS/400, OS/390, MVS and MVS/CICS, Stratus FTX, VOS,
MVS and MVS/CICS, Sun Solaris O/S, Digital Alpha NT, Alpha Unix, Open VMS and
VAX VMS.

                                       7
<PAGE>

     The Company provides adapters and importers which interface to and from
specific databases, messaging systems, and applications enabling connectivity to
a specific source or destination that can be defined directly within a mapping
operation. Database adapters are currently available for ODBC-compliant
databases and Oracle7 databases. Messaging adapters are available for SAP's ALE,
IBM's MQSeries, MSMQ and Tibco, Oracle AQ and DCA Message Q. Importers are
currently available for COBOL copybooks, database tables for ODBC-compliant and
Oracle7 databases, and SAP R/3 IDocs. In addition, the Company provides pre-
packaged data objects for national and international standards for EDI, SWIFT
and data definitions for specific industries such as healthcare and
transportation.

     Mercator was architected so that adapters and importers can be added
without modifying the core Mercator technology. Mercator for R/3, for example,
is a packaged offering which leverages the core Mercator Authoring System and
Execution Engines by providing adapters for communicating with SAP's ALE
architecture and importers for R/3 data definitions ("IDocs"). The Company's
other products also leverage Mercator's core technology. The underlying EDI
translation support for OnCall*EDI is provided by Mercator and Trading Partner
EC incorporates Mercator as the data integration component for integrating EDI
data with existing applications. In addition, the Company's customers can use
Mercator to create their own applications where embedded data transformation is
a requirement.


Product Development

     Since inception, the Company has made substantial investments in research
and development through both internal development and technology acquisition.
The Company expects that most of its enhancements to existing products and new
products will be developed internally. However, the Company will evaluate on an
ongoing basis externally-developed technologies for integration into its product
lines.

     The Company expects that a substantial majority of its research and
development activities will be related to developing enhancements and extensions
to its Mercator and Trading Partner product lines. Following Mercator's
introduction, product development was initially driven by demand for additional
mapping functionality and support for additional execution platforms. Later,
development focus shifted to automating Mercator support for specific sources
and destinations through an expanded set of adapters and importers, and
development of additional pre-packaged integration solutions for specific
markets.  During the second half of 1997, the Company added a graphical
transaction workflow management tool to the core set of Mercator capabilities.
This tool was designed to support graphical design and specification of
transaction workflows, sources and destinations for maps, triggering events, and
options for map execution.

     As of December 31, 1997, there were 44 employees in the Company's research
and development organization, more than half of which were dedicated to
Mercator. The Company's product development expenditures for 1995, 1996 and 1997
were $3.1 million, $3.5 million, and $4.5 million, respectively. The Company
expects that it will continue to commit significant

                                       8
<PAGE>

resources to product development in the future. To date, all product development
expenses were expensed as incurred.

     The market for the Company's products and services is characterized by
extremely rapid technological change, frequent new product introductions and
enhancements, evolving industry standards, and rapidly changing customer
requirements. The introduction of products incorporating new technologies and
the emergence of new industry standards could render existing products obsolete
and unmarketable. The Company's future success will depend in part upon its
ability to anticipate changes and enhance its current products and develop and
introduce new products that keep pace with technological advancements and
address the increasingly sophisticated needs of its customers.


Customer Support

     The Company believes that a high level of customer service and support is
important to its success, and the Company provides a range of support services
to its customers. The Company maintains product and technology experts on call
at all times and has support call centers located at its offices in Wilton,
Connecticut; Bannockburn, Illinois; and Boca Raton, Florida, in the United
States, and in its United Kingdom office. The Company has also implemented an
automated Company-wide help desk system to augment its customer support efforts.
This system allows for the optimization of the Company's resources and knowledge
base at all locations and offers the customer improved service through one point
of contact.


Competition

     The market for the Company's products and services is extremely competitive
and subject to rapid change. Because there are relatively low barriers to entry
in the software market, the Company expects additional competition from other
established and emerging companies. The Company believes that the competitive
factors affecting the market for the Company's products and services include
product functionality and features; quality of professional services offerings;
product quality, performance and price; ease of product implementation; quality
of customer support services; customer training and documentation; and vendor
and product reputation. The relative importance of each of these factors depends
upon the specific customer environment. Although the Company believes that its
products and services currently compete favorably with respect to such factors,
there can be no assurance that the Company can maintain its competitive position
against current and potential competitors.

     In the business application integration market, the Company's  Mercator
products and related services compete primarily against solutions developed
internally by individual businesses to meet their specific business application
integration needs. As a result, the Company must educate prospective customers
as to the advantages of the Company's products and services as opposed to
internally-developed solutions and there can be no assurance that the Company
will be able to adequately educate potential customers to the benefits provided
by the Company's products and

                                       9
<PAGE>

services. In the EDI market, the Company's Trading Partner products compete with
products offered by companies offering proprietary VAN services as part of their
EDI solution and the Company's PC-based Trading Partner products also compete
with PC-based products offered by a number of other EDI software vendors.

  Many of the Company's current and potential competitors have longer operating
histories, significantly greater financial, technical, product development and
marketing resources, greater name recognition and larger customer bases than the
Company. The Company's present or future competitors may be able to develop
products comparable or superior to those offered by the Company, adapt more
quickly than the Company to new technologies, evolving industry trends or
customer requirements, or devote greater resources to the development, promotion
and sale of their products than the Company. Accordingly, there can be no
assurance that the Company will be able to compete effectively in its markets,
that competition will not intensify or that future competition will not have a
material adverse effect on the Company's business, operating results and
financial condition.

  The Company expects that it will face increasing pricing pressures from its
current competitors and new market entrants. The Company's competitors may
engage in pricing practices that reduce the average selling prices of the
Company's products and related services. To offset declining average selling
prices, the Company believes that it must successfully introduce and sell
enhancements to existing products and new products on a timely basis and develop
enhancements to existing products and new products that incorporate features
that can be sold at higher average selling prices. To the extent that
enhancements to existing products and new products are not developed in a timely
manner, do not achieve customer acceptance or do not generate higher average
selling prices, the Company's gross margins may decline, and such decline could
have a material adverse effect on the Company's business, operating results and
financial condition.


Proprietary Technology

  The Company's success is dependent upon its proprietary software technology.
The Company does not currently have any patents and relies principally on trade
secret, copyright and trademark laws, nondisclosure and other contractual
agreements and technical measures to protect its technology. The Company also
believes that factors such as the technological and creative skills of its
personnel, product enhancements and new product developments are essential to
establishing and maintaining a technology leadership position. The Company
enters into confidentiality and/or license agreements with its employees,
distributors and customers, and limits access to and distribution of its
software, documentation and other proprietary information. There can be no
assurance that the steps taken by the Company will prevent misappropriation of
its technology, and such protections do not preclude competitors from developing
products with functionality or features similar to the Company's products.
Furthermore, there can be no assurance that third parties will not independently
develop competing technologies that are substantially equivalent or superior to
the Company's technologies. In addition, effective copyright and trade secret
protection may be unavailable or limited in certain foreign countries.

                                       10
<PAGE>

Any failure by or inability of the Company to protect its proprietary technology
could have a material adverse effect on the Company's business, operating
results and financial condition.

  Although the Company does not believe its products infringe the proprietary
rights of any third parties, there can be no assurance that infringement claims
will not be asserted against the Company or its customers in the future.
Furthermore, the Company may initiate claims or litigation against third parties
for infringement of the Company's proprietary rights or to establish the
validity of the Company's proprietary rights. Litigation, either as plaintiff or
defendant, would cause the Company to incur substantial costs and divert
management resources from productive tasks whether or not such litigation is
resolved in the Company's favor, which could have a material adverse effect on
the Company's business, operating results and financial condition. Parties
making claims against the Company could secure substantial damages, as well as
injunctive or other equitable relief which could effectively block the Company's
ability to license its products in the United States or abroad. Such a judgment
could have a material adverse effect on the Company's business, operating
results and financial condition. If it appears necessary or desirable, the
Company may seek licenses to intellectual property that it is allegedly
infringing. There can be no assurance, however, that licenses could be obtained
on commercially reasonable terms, if at all, or that the terms of any offered
licensed will be acceptable to the Company. The failure to obtain the necessary
licenses or other rights could have a material adverse effect on the Company's
business, operating results and financial condition. As the number of software
products in the industry increases and the functionality of these products
further overlaps, the Company believes that software developers may become
increasingly subject to infringement claims. Any such claims, with or without
merit, can be time-consuming and expensive to defend and could adversely affect
the Company's business, operating results and financial condition. The Company
is not aware of any currently pending claims that the Company's products,
trademarks or other proprietary rights infringe upon the proprietary rights of
third parties.


Employees

  As of December 31, 1997, the Company had 173 full-time employees, including 44
in research and development, 44 in professional services and customer support,
64 in sales and marketing and 21 in finance and administration. The Company's
employees are not represented by any union and the Company believes that its
relations with employees are good.

  The Company's future success depends in large part on the continued service of
its key technical, professional services and sales personnel, as well as senior
management.  The loss of the services of any of one or more of the Company's key
employees could have a material adverse effect on the Company's business,
operating results and financial condition.  All employees are employed at-will
and the Company has no fixed-term employment agreements with its employees.  The
Company's future success also depends on its ability to attract, train and
retain highly-qualified sales, technical, professional services and managerial
personnel, particularly sales, professional services and technical personnel
with expertise in the SAP R/3 system.  An increase in the Company's sales staff
is required to expand both the Company's

                                       11
<PAGE>

direct and indirect sales activities and to achieve revenue growth.  Competition
for such personnel is intense, particularly for personnel with expertise in the
SAP R/3 system, and there can be no assurance that the Company can attract,
assimilate or retain such personnel.  The Company has at times experienced and
continues to experience difficulty in recruiting qualified technical and sales
personnel, and anticipates such difficulties in the future.  The Company has in
the past experienced and in the future expects to continue to experience a
significant time lag between the date technical, professional services and sales
personnel are hired and the date such personnel become fully productive.  If the
Company is unable to hire and train on a timely basis and subsequently retain
such personnel in the future, the Company's business, operating results and
financial condition could be materially and adversely affected.


ITEM 2.  PROPERTIES

  The Company's principal executive offices are located in Wilton, Connecticut
and consist of approximately 19,000 square feet under a lease expiring in 2001.
The Company also leases approximately 12,000 square feet of office space in
Bannockburn, Illinois which is used primarily for its telesales operations;
approximately 11,000 square feet of office space in Boca Raton, Florida, which
is used primarily for research and development activities; approximately 3,600
square feet of office space in the United Kingdom; and small offices in Paris,
France and Landover, Maryland.  The Company is currently negotiating a lease to
take on additional space at its executive offices and in Boca Raton at a
commercially reasonable rate.  The remaining facilities are deemed presently
adequate to support the current needs, and if required the Company can obtain
additional space on a timely basis and on commercially reasonable terms.


ITEM 3.  LEGAL PROCEEDINGS

  In December 1997 the Company filed a complaint in the United States District
Court for the district of Connecticut (Case No. 397CV02628) against Transition
Systems Inc. for trademark infringement and unfair competition and trade
practices, including using the trademark "TSI".  Transition Systems Inc. is a
software company in the healthcare industry and is located in Massachusetts.
The Company is seeking to enjoin Transition Systems Inc. from using any of the
Company's trademarks and to pay the Company all profits derived from using the
Company's trademarks and to pay additional damages sustained by the Company.
The Company does not believe Transition Systems Inc. has filed an answer to this
claim.  Because of the preliminary nature of this litigation, it is not possible
for the Company to determine the outcome of this case.  However, the Company
intends to pursue all available remedies.


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

  Not applicable.

                                       12
<PAGE>

                                    PART II


ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
         STOCKHOLDER MATTERS

  The Company's  Common Stock is listed for trading on the NASDAQ National
Market (Symbol:  TSFW).  The Company's Common Stock began trading on the NASDAQ
National Market on July 2, 1997.  Prior to that time, there was no public market
for the Company's Common Stock.  The following table sets forth for the fiscal
periods indicated the high and low reported sale prices for the Company's Common
Stock as reported by NASDAQ.

                                                  Reported
                    1997                         Sale Price
                    ----                      ---------------
                                               High     Low
                                              ------   ------
                First Quarter                    --       --
                Second Quarter                   --       --
                Third Quarter*                 15.125   9.75
                Fourth Quarter                 14.75    9.125

                    1998
                    ----
                First Quarter**                 17.25   9.50

                *  From July 2, 1997.
                ** Through March 23, 1998.

  The closing price for the Common Stock on the NASDAQ National Market on March
23, 1998 was $16-1/2.

  There were approximately 1233 holders of record of the Common Stock as of
February 20, 1998, although the Company believes that there is a larger number
of beneficial owners of its Common Stock.

  The Company has never paid cash dividends on its Common Stock and does not
anticipate the payment of cash dividends in the foreseeable future.  The
Company's credit agreement prohibits the payment of dividends without the bank's
written consent.  The Company currently anticipates that any future earnings
will be retained to finance the Company's operations.


Recent Sales of Unregistered Securities

     Not applicable.

                                       13
<PAGE>

Use of Initial Public Offering Proceeds


     The Form S-1 Registration Statement (SEC File No. 333-27293) related to the
Company's initial public offering of Common Stock, $0.01 par value per share,
was declared effective by the SEC on July 1, 1997.  A total of 4,600,000 shares
(including shares issuable upon exercise of the Underwriters' over-allotment
option) of the Company's Common Stock was registered with the SEC with an
aggregate registered offering price of $41,400,000, which consisted of 3,000,000
shares registered on behalf of the Company (with an aggregate registered
offering price of $27,000,000) and 1,000,000 shares registered on behalf of
certain stockholders of the Company (with an aggregate registered offering price
of $9,000,000).  The offering commenced on July 2, 1997 and all of the shares of
Common Stock being offered by the Company and certain stockholders of the
Company, respectively, were sold for the aggregate registered offering price
through a syndicate of underwriters managed by Robertson, Stephens & Company,
SoundView Financial Group, Inc. and Wessels, Arnold & Henderson.  The offering
terminated on July 2, 1997, immediately after all of the Common Stock was sold.

     The Company and the selling stockholders paid to the underwriters an
underwriting discount totaling $1,890,000 and $630,000, respectively, in
connection with the offering. In addition the Company incurred additional
expenses of approximately $800,000 in connection with the offering. Thus the net
offering proceeds to the Company and the selling stockholders were approximately
$24,272,300 and $8,370,000, respectively. The underwriting discount and the
other offering expenses were not made directly or indirectly to any directors,
officers of the Company (or their associates), or persons owning ten (10)
percent or more of any class of equity securities of the Company or to any other
affiliates of the Company.

     On July 23, 1997, the underwriters exercised the over-allotment option to
purchase the additional 600,000 shares registered from certain selling
stockholders.  Proceeds to the selling stockholders were an additional
$5,022,000, and an underwriting discount of $378,000 was paid to the
underwriters with respect to these shares.

                                       14
<PAGE>

     Through December 31, 1997 the net offering proceeds to the Company have
been utilized as follows:


                             Direct or indirect payments to
                              directors, officers, general
                               partners of the Company or
                              their associates; to persons
                              owning ten percent or more of
                             any class of equity securities      Direct or
         Use                      of the Company; and to      indirect payments
                                affiliates of the Company         to others
-------------------------    -----------------------------    -----------------

Construction of plant,                   --                           0
 building and facilities

Purchase and installation                --                     $   508,345
 of machinery and equipment

Purchase of real estate                  --                           0

Acquisition of other                     --                           0
 business(es)

Repayment of indebtedness                --                       2,790,100
--Debt/                                                              23,100
  Capital Leases

Working capital                          --                           0

Temporary investment--                   --                      20,950,755
Purchase Marketable
Securities and Cash Equivalents

Other purposes (specify)                 --                          --

TOTAL NET PROCEEDS                                              $24,272,300
                                                                ===========


                                       15
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>

                                                                             Year Ended December 31,
                                                                -------------------------------------------------
                                                                  1993       1994      1995      1996      1997
                                                                ---------  --------  --------  --------  --------
Statements of Operations Data:                                        (In thousands, except per share data)
<S>                                                             <C>        <C>       <C>       <C>       <C>
Revenues:.....................................................  $  5,242   $ 6,275   $ 7,553   $ 9,310    $14,603
 Software licensing...........................................     7,601     7,659     8,508     9,694     12,067
                                                                --------   -------   -------   -------    -------
 Service, maintenance and other...............................    12,843    13,934    16,061    19,004     26,670
                                                                --------   -------   -------   -------    -------
  Total revenues
Cost of revenues:
 Software licensing...........................................       934     1,035       725       495        778
 Service, maintenance and other...............................     2,276     2,522     2,200     2,006      2,490
                                                                --------   -------   -------   -------    -------
  Total cost of revenues......................................     3,210     3,557     2,925     2,501      3,268
                                                                --------   -------   -------   -------    -------
Gross profit..................................................     9,633    10,377    13,136    16,503     23,402
                                                                --------   -------   -------   -------    -------
Operating Expenses
 Product development..........................................     2,498     2,231     3,068     3,452      4,462
 Selling and marketing........................................     6,218     6,124     7,160     8,715     13,095
 General and administrative...................................     1,919     1,927     2,001     2,922      3,792
                                                                --------   -------   -------   -------    -------
  Total operating expenses....................................    10,635    10,282    12,229    15,089     21,349
                                                                --------   -------   -------   -------    -------
Operating income (loss).......................................    (1,002)       95       907     1,414      2,053
Other income (expense), net...................................      (226)     (208)      (84)     (186)       427
                                                                --------   -------   -------   -------    -------
Net income (loss).............................................   ($1,228)    ($113)  $   823   $ 1,228    $ 2,480
                                                                ========   =======   =======   =======    =======
Net income (loss) per share(1) - Basic........................                         $0.29     $0.43      $0.42
   - Diluted..................................................                         $0.15     $0.21      $0.29
Weighted average number of common and
 common equivalent shares outstanding(1) - Basic..............                         2,846     2,887      5,916
                                         - Diluted............                         5,455     5,811      8,567
</TABLE>


<TABLE>
<CAPTION>

                                                                                  December 31,
                                                                ------------------------------------------------
                                                                  1993      1994      1995      1996      1997
                                                                --------  --------  --------  --------  --------

                                                                  (In thousands)
Balance Sheet Data:
<S>                                                             <C>       <C>       <C>       <C>       <C>
Cash..........................................................  $   178   $   450   $   143   $    41    $10,913
Working capital...............................................   (2,195)   (2,630)   (2,128)   (1,220)    23,371
Total assets..................................................    7,218     6,387     6,237     7,521     32,942
Total stockholders' equity (deficit)..........................   (4,306)   (4,393)   (3,570)   (2,294)    25,416
</TABLE>

(1)  For an explanation of the determination of the number of shares used in
     computing per share amounts, see note 7 of Notes to Financial Statements.


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
         CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Information

  This report contains or may contain certain forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934 as amended,
and Section 27A of the Securities Act of 1933, as amended, that involve risks
and uncertainties.  When used in this report, words such as "anticipate,"
"believe," "estimate," "expect," "future," "intend," "plan," and similar
expressions as they relate to the Company or the Company's management, identify
forward-looking statements.  All forward-looking statements included in this
document are based on information available to the Company on the date hereof,
and the Company assumes no

                                       16
<PAGE>

obligation to update any such forward-looking statement.  The Company's actual
results may differ significantly from the results discussed in the forward-
looking statements.  Factors that might cause such a difference include, but are
not limited to, (i) the effects of rapid technological change and the need to
make frequent product transitions, (ii) the potential for software defects,
(iii) the impact of competitive products and pricing, (iv) less-than-anticipated
growth in the market for the SAP R/3 system and related services, (v)
uncertainties in attracting and retaining needed management, marketing, sales,
professional services and product development personnel, (vi) the Company's
ability to manage growth, (vii) the success of the Company's Mercator product
line, and (viii) the Company's ability to develop additional channels.  These
are discussed in the Company's other reports with the Securities and Exchange
Commission, including but not limited to those discussed under the heading "Risk
Factors" in the Company's Registration Statement on Form S-1 (File No. 333-
27293).  Should one or more of these risks or uncertainties materialize, or
should the underlying estimates or assumptions prove incorrect, actual results
or outcomes may vary significantly from those anticipated, believed, estimated,
expected, intended or planned.


Overview

  The Company was incorporated in Connecticut in 1985 and reincorporated in
Delaware in September 1993. In June 1991, the Company began developing its
Mercator product and in December 1993 released Version 1.0 of Mercator. The
Company released the latest version of Mercator in August 1997 and released its
Mercator for R/3 product in June 1996.

  Historically, the Company has derived a majority of its revenues from products
other than Mercator, primarily its Trading Partner family of products and its
KEY/MASTER product. However, revenue related to Mercator has grown significantly
in each of the last three years and has increased as a percentage of total
revenues. The Company believes that future growth in revenues, if any, will be
mainly attributable to its Mercator product line. In view of the relatively
recent introduction of Mercator, the Company believes it cannot accurately
predict the amount of revenues that will be attributable to such products or the
life of such products. To the extent the Company's  Mercator products do not
achieve market acceptance, the Company's business, operating results and
financial condition will be materially and adversely affected.

  The Company's revenues are derived principally from two sources: (i) license
fees for the use of the Company's software products and (ii) service fees for
maintenance, consulting services and training related to the Company's software
products. The Company generally recognizes revenue from software license fees
upon shipment, unless the Company has significant post-delivery obligations, in
which case revenues are recognized when such obligations are satisfied. The
Company's KEY/MASTER product is licensed under term-use contracts rather than
for a one-time license fee, and the Company recognizes revenue from such
arrangements on a present-value basis at the inception of the contract. Revenues
from consulting and training are recognized as services are performed, and
maintenance revenues are recognized ratably over the maintenance period,
typically one year. The Company does not actively market new term-use contracts
for KEY/MASTER but continues to receive maintenance revenues.  As a result,
maintenance revenue

                                       17
<PAGE>

accounts for a larger proportion of KEY/MASTER revenue than license revenues and
increases the percentage of the Company's total revenues represented by
services, maintenance and other revenues. The Company intends to increase the
scope of its service offerings insofar as it supports the sale of license
revenues from sales of its products. The Company believes that software
licensing will account for a larger portion of its revenues than service,
maintenance and other revenues in the future.

  Mercator can be used by Information Technology (IT) professionals as well as
VARs, ISVs, SIs or other third parties who resell, embed or otherwise bundle
Mercator with their products. To date, license fee revenues have been derived
principally from direct sales of software products through the Company's direct
sales force. Although the Company believes that such direct sales will continue
to account for a significant portion of software licensing revenues, the Company
intends to increase its use of distributors and resellers. Furthermore, the
Company's planned expansion of its sales organization is expected to cause sales
and marketing expenses to increase.

  The Company markets its products in North America primarily through its direct
sales and telesales organizations. Throughout the rest of the world, the Company
markets its products through distributors, resellers and direct sales.
International revenue accounted for 10.4% and 9.4% of total revenues for 1996
and 1997, respectively. The Company maintains an international sales and support
office in the United Kingdom. The Company intends to increase its international
direct sales force and focus on establishing additional international
distributor and reseller relationships, as in the Mitsui agreement for
distribution of product in the Asian market.

  The size of the Company's orders can range from a few thousand dollars to over
$100,000 per order. The loss or delay of large individual orders, therefore, can
have a significant impact on the revenues and other quarterly results of the
Company. In addition, the Company has generally recognized a substantial portion
of its quarterly software licensing revenues in the last month of each quarter,
and as a result, revenue for any particular quarter may be difficult to predict
in advance. Because the Company's operating expenses are relatively fixed, a
delay in the recognitions of revenue from a limited number of license
transactions could cause significant variations in operating results from
quarter to quarter and could result in significant losses. To the extent such
expenses precede, or are not subsequently followed by, increased revenue, the
Company's operating results would be materially and adversely affected. As a
result of these and other factors, operating results for any quarter are subject
to variation, and the Company believes that period-to-period comparisons of its
results of operations are not necessarily meaningful and should not be relied
upon as indications of future performance.

  In accordance with Statement of Financial Accounting Standards No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed, software development costs are expensed as incurred until
technological feasibility has been established, at which time such costs are
capitalized until the product is available for general release to customers. To
date, the establishment of technological feasibility of the Company's products
and general release of such software have substantially coincided. As a result,
software development costs qualifying for capitalization have been
insignificant, and therefore, the Company has not capitalized any software
development costs.

                                       18
<PAGE>

Results of Operations

  The following table sets forth, for the periods indicated, the percentage of
total revenues represented by certain items from the Company's Statements of
Operations.


                                             Years Ended December 31,
                                           ----------------------------
                                             1995      1996      1997
                                           --------  --------  --------
     Revenues:
       Software licensing................     47.0%     49.0%     54.7%
       Service, maintenance and other....     53.0      51.0      45.3
                                             -----     -----     -----
          Total revenues.................    100.0     100.0     100.0
                                             -----     -----     -----
     Cost of revenues:
       Software licensing................      4.5       2.6       2.9
       Service, maintenance and other....     13.7      10.6       9.3
                                             -----     -----     -----
          Total cost of revenues.........     18.2      13.2      12.2
                                             -----     -----     -----
     Gross profit........................     81.8      86.8      87.8
                                             -----     -----     -----
     Operating expenses:
       Product development...............     19.1      18.2      16.7
       Selling and marketing.............     44.6      45.9      49.1
       General and administrative........     12.5      15.3      14.2
                                             -----     -----     -----
          Total operating expenses.......     76.2      79.4      80.0
                                             -----     -----     -----
     Operating income (loss).............      5.6       7.4       7.8
     Other income (expense), net.........     (0.5)     (0.9)      1.5
                                             -----     -----     -----
     Net income (loss)...................      5.1%      6.5%      9.3%
                                             -----     -----     -----

     Gross profit:
       Software licensing................     90.4%     94.7%     94.8%
       Service, maintenance and other....     74.1      79.3      81.3


Year Ended December 31, 1997 Compared with Year Ended December 31, 1996

 Revenues

  Total Revenues.  Total revenues increased 40% from $19.0 million in 1996 to
$26.7 million in 1997.

  Software Licensing.  Software licensing revenues increased 57% from $9.3
million in 1996 to $14.6 million in 1997, primarily due to a 97% increase in
Mercator license revenues, partially offset by a decrease in licenses of the
Company's mainframe-based Trading Partner and KEY/MASTER products.

  Service, Maintenance and Other.  Service, maintenance and other revenues
increased 25% from $9.7 million in 1996 to $12.1 million in 1997, primarily due
to a 125% increase in

                                       19
<PAGE>

professional services revenues, particularly professional services associated
with Mercator and, to a lesser extent, an increase in Mercator maintenance
revenue, offset by a slight decrease in maintenance revenue related to the
Company's mainframe-based Trading Partner and KEY/MASTER products. Maintenance
revenues attributable to KEY/MASTER were $4.6 million and $4.2 million for 1996
and 1997, respectively.

 Cost of Revenues

     Cost of software licensing revenues consists primarily of media, manuals,
distribution costs and the cost of third-party software that the Company
resells.  Cost of service, maintenance and other revenues consists primarily of
personnel-related costs in providing maintenance, technical support, consulting,
and training to customers.  Gross margin on software licensing revenues is
higher than gross margin on service, maintenance and other revenues, reflecting
the low materials, packaging and other costs of software products compared with
the relatively high personnel costs associated with providing maintenance,
technical support, consulting and training services.  Cost of service,
maintenance and other revenues also varies based upon the mix of maintenance,
technical support, consulting and training services.

  Cost of Software Licensing.   Cost of software licensing revenues increased
57% from $495,000 in 1996 to $778,000 in 1997.  This increase was due to an
increase in product sales of Mercator.  Software licensing gross margin remained
constant at 95% in 1996 and 1997.

  Cost of Service, Maintenance and Other.   Cost of service, maintenance and
other revenues increased 25% from $2.0 million in 1996 to $2.5 million in 1997.
The increase was primarily due to an increase in the number of support personnel
related to the Company's Mercator product. Service, maintenance and other gross
margin remained constant at 79% in 1996 and 1997.

 Operating Expenses

  Product Development. Product development expenses include expenses associated
with the development of new products and enhancements to existing products and
consist primarily of salaries, recruiting and other personnel-related expenses,
depreciation of development equipment, supplies, travel and allocated facilities
and communications costs.  Product development expenses increased 29% from $3.5
million in 1996 to $4.5 million in 1997, primarily due to increased headcount
associated with the development of new Mercator-based products.  Product
development expenses represented 18% and 17% of total revenues for 1996 and
1997, respectively. The Company believes that a significant level of research
and development expenditures is required to remain competitive.  Accordingly,
the Company anticipates that it will continue to devote substantial resources to
research and development.  The Company expects that the dollar amount of
research and development expenses will increase through at least the remainder
of 1998.  To date, all research and development expenditures have been expensed
as incurred.

  Selling and Marketing. Selling and marketing expenses consist of sales and
marketing personnel costs, including sales commissions, recruiting, travel,
advertising, public relations, seminars, trade shows, product descriptive
literature, and allocated facilities and communications

                                       20
<PAGE>

costs.  Selling and marketing expenses increased 51% from $8.7 million in 1996
to $13.1 million in 1997. This increase was primarily due to the increased
number of sales and marketing personnel required to address Mercator marketing
opportunities and increased spending on Mercator-related marketing programs.
Selling and marketing expenses represented 46% and 49% of total revenues for
1996 and 1997, respectively. The Company expects to continue hiring additional
sales and marketing personnel and to increase promotional expenses through at
least the remainder of 1998 to address Mercator marketing opportunities and
anticipates that sales and marketing expenses will increase in absolute dollar
amount.

  General and Administrative. General and administrative expenses consist
primarily of salaries, recruiting, and other personnel-related expenses for the
Company's administrative, executive, and finance personnel as well as outside
legal and audit costs.  General and administrative expenses increased 31% from
$2.9 million in 1996 to $3.8 million in 1997. The increase was primarily due to
increased management and management information system staff and increased
depreciation expenses for computer equipment and system upgrades.  General and
administrative expenses represented 15% and 14% of total revenues for 1996 and
1997, respectively. The Company believes that the dollar amount of its general
and administrative expenses will increase as the Company expands its
administrative staff and incurs additional costs (including directors' and
officers' liability insurance, investor relations programs and increased
professional fees) related to being a public company.

 Other Income (Expense), Net

  Interest income increased from $135,000 in 1996 to $688,000 in 1997 due to
investment income earned on proceeds from the Company's initial public offering.
Borrowing expenses decreased from $286,000 in 1996 to $186,000 in 1997 due to
the repayment of the Company's bank debt with the proceeds of the IPO.

 Taxes

  Due to the utilization of net operating loss carryforwards, the provisions for
income taxes for 1997 and 1996 were not significant.  At December 31, 1997, the
Company had federal net operating loss carryforwards of $6.8 million, all of
which expire through 2009. Due to the ''change in ownership'' provisions of the
Internal Revenue Code of 1986, the availability of net operating loss
carryforwards and research tax credits to offset federal taxable income in
future periods could be subject to an annual limitation if a change in ownership
for income tax purposes should occur. See note 9 of Notes to Financial
Statements.

                                       21
<PAGE>

Year Ended December 31, 1996 Compared with Year Ended December 31, 1995


 Revenues

  Total Revenues.   Total revenues increased 18% from $16.1 million in 1995 to
$19.0 million in 1996.

  Software Licensing.   Software licensing revenues increased 23% from $7.6
million in 1995 to $9.3 million in 1996, primarily due to a 74% increase in
Mercator license revenues, partially offset by a decrease in licenses of the
Company's mainframe-based Trading Partner and KEY/MASTER products.

  Service, Maintenance and Other.   Service, maintenance and other revenues
increased 14% from $8.5 million in 1995 to $9.7 million in 1996, primarily due
to a 53% increase in professional services revenues, particularly professional
services associated with Mercator and, to a lesser extent, an increase in
Mercator maintenance revenue, offset by a slight decrease in maintenance revenue
related to the Company's mainframe-based Trading Partner and KEY/MASTER
products. Maintenance revenues attributable to KEY/MASTER were $4.9 million and
$4.6 million for 1995 and 1996, respectively.

 Cost of Revenues

  Cost of Software Licensing.   Cost of software licensing revenues decreased
32% from $725,000 in 1995 to $495,000 in 1996, primarily due to termination of
amortization relating to the Company's acquisition of Foretell Corp. Software
licensing gross margin increased from 90% in 1995 to 95% in 1996, primarily due
to termination of such amortization.

  Cost of Service, Maintenance and Other.   Cost of service, maintenance and
other revenues decreased 9% from $2.2 million in 1995 to $2.0 million in 1996.
The decrease was primarily due to a decrease in the number of support personnel
related to the Company's mainframe-based Trading Partner and KEY/MASTER
products. Service, maintenance and other gross margin increased from 74% in 1995
to 79% in 1996, primarily due to the decrease in such support personnel.

 Operating Expenses

  Product Development.   Product development expenses increased 13% from $3.1
million in 1995 to $3.5 million in 1996, primarily due to increased headcount
associated with the development of Mercator. Product development expenses
represented 19% and 18% of total revenues for 1995 and 1996, respectively.

  Selling and Marketing.   Selling and marketing expenses increased 22% from
$7.2 million in 1995 to $8.7 million in 1996. This increase was primarily due to
the increased number of sales and marketing personnel required to address
Mercator marketing opportunities and increased

                                       22
<PAGE>

spending on Mercator-related marketing programs. Selling and marketing expenses
represented 44% and 46% of total revenues for 1995 and 1996, respectively.

  General and Administrative.   General and administrative expenses increased
46% from $2.0 million in 1995 to $2.9 million in 1996. The increase was
primarily due to increased management and MIS staff, increased provision for bad
debts and increased depreciation. General and administrative expenses
represented 13% and 15% of total revenues for 1995 and 1996, respectively.

 Other Income (Expense), Net

  Other income decreased from $370,000 in 1995 to $135,000 in 1996 due to a one-
time benefit in 1995 of $177,000 from the settlement of a lawsuit in the
Company's favor and a decrease in the amount of interest earned on term license
contracts. Borrowing expenses decreased from $420,000 in 1995 to $286,000 in
1996 due to reduced borrowing levels. Due to the utilization of net operating
loss carryforwards, the provisions for income taxes for 1996 and 1995 were not
significant.

 Taxes

  At December 31, 1996, the Company had federal net operating loss carryforwards
of $8.6 million, all of which expire through 2009. Due to the "change in
ownership" provisions of the Internal Revenue Code of 1986, the availability of
net operating loss carryforwards and research tax credits to offset federal
taxable income in future periods could be subject to an annual limitation if a
change in ownership for income tax purposes should occur. See Note 9 of Notes to
Financial Statements.

 Liquidity and Capital Resources

  At December 31, 1997 the Company had net working capital of $23,371,000, which
includes cash and marketable securities of $21,403,000. Working capital at
December 31, 1996 was ($1,220,000), including cash and marketable securities of
$41,000. For 1997, cash provided by operations was ($195,500), compared to
$729,900 for 1996. The decrease in operating cash and increase in accounts
receivable is due to the increase in sales billed during the last month of the
quarter as compared to 1996. Additions to property, plant and equipment
accounted for $876,200 and $827,500 for 1997 and 1996, respectively.

  Net accounts receivable were $7,864,100 at December 31, 1997 compared to
$4,380,900 at December 31, 1996.  The number of days of average revenues in
accounts receivables was 70 at December 31, 1996 compared to 88 at December 31,
1997.  Capital expenditures have been, and future capital expenditures are
anticipated to be, primarily for facilities, equipment and computer software to
support expansion of the Company's operations.  As of December 31, 1997, the
Company had no material commitments for capital expenditures.  The Company's
bank line of credit generally limits capital expenditures to $400,000 per
quarter.

     The Company has a line of credit facility with The Bank of New York which
provides for Company borrowings equal to the lesser of $4,000,000 or the sum of
80% of eligible accounts

                                       23
<PAGE>

receivable, and a lesser percentage of certain other receivables.  Borrowings
may take the form of prime rate loans (which bear interest at the bank's prime
rate plus 1.0%) or LIBOR rate loans (which bear interest at LIBOR plus 3.0%).
The Company's obligations under this credit line are secured by substantially
all of the Company's assets.  At December 31, 1997 the Company was in compliance
with all financial covenants.  The Company had no borrowings outstanding as of
December 31, 1997 and does not anticipate any additional borrowings in the
foreseeable future.

     The Company believes that its current cash and cash equivalent balances,
its line of credit and net cash generated by operations, will be sufficient to
meet its anticipated cash needs for working capital, capital expenditures and
business expansion for at least the next 12 months. Thereafter, if cash
generated by operations is insufficient to satisfy the Company's operating
requirements, the Company may seek additional debt or equity financing. There
can be no assurance that such financing will be available on terms acceptable to
the Company. The sale of additional equity or debt securities could result in
dilution to the Company's stockholders. In an effort to best utilize its working
capital, the Company intends to pursue the development and acquisition of
additional products or businesses which support the current business needs.
Although the Company is continually considering and evaluating opportunities for
future growth, the Company has no agreements or understandings with respect to
any such acquisition.


Impact of the Year 2000 Issue

The company has completed an assessment of the year 2000 issue with respect to
its computer systems. All of the Company's systems have been replaced or
upgraded within the past 18 months and are year 2000 compliant. The Company is
also in the process of communicating with its suppliers and customers to
determine the extent to which it may be affected by any third parties' plans to
remediate their own system 2000 issues.

In addition, the Company which is in the business of developing software for
organizations to communicate and transfer data, has addressed the year 2000
issue, and all of its products are currently year 2000 compliant. Therefore to
the best of managements' knowledge the impact of year 2000 will not have a
material impact on either its operations or its sales to customers.


FACTORS THAT MAY AFFECT FUTURE RESULTS

     Risk of Fluctuations in Operating Results.  The Company's quarterly and
annual operating results have varied significantly in the past and are expected
to do so in the future.  Accordingly,  the Company believes that period-to-
period comparisons of its results of operations are not necessarily meaningful
and should not be relied upon as indications of future performance. The
Company's revenues and results of operations are difficult to forecast and could
be adversely affected by many factors, including, among others: the size, timing
and terms of individual license transactions; the sales cycle for the Company's
products; demand for and market acceptance of the Company's products and related
services (particularly its Mercator products); the number of businesses
implementing the SAP R/3 system as well as the number of such businesses
requiring third-party business application integration software and related
services; the Company's ability to expand, and market acceptance of, its
professional services business; the timing of expenditures by the Company in
anticipation of product releases or increased revenue; the timing of product
enhancements and product introductions by the Company and its competitors;
market acceptance of enhanced versions of the Company's existing products and of
new products; changes in pricing policies of the Company and its competitors;
variations in the mix of products and services sold by the Company; the mix of
channels through which products and services are sold; the success of the
Company in penetrating international markets; the buying patterns and budgeting
cycles of customers; personnel changes, the Company's ability to attract and
retain qualified sales, professional services and research and development
personnel and the rate at which such personnel become productive; and general
economic conditions. In particular, the ability of the Company to achieve growth
in the future will depend on its success in adding a substantial number of
sales, professional services and research and development personnel. Competition
for such personnel is intense and there can be no assurance the Company will be
able to attract and retain these personnel.

                                       24
<PAGE>

     Licensing of the Company's software products historically has accounted for
a substantial portion of the Company's revenues, and the Company anticipates
that this trend will continue for the foreseeable future. Software license
revenues are difficult to forecast for a number of reasons. The Company
typically does not have a material backlog of unfilled orders, and revenues in
any quarter are substantially dependent on orders booked and shipped in that
quarter. The length of the sales cycles for the Company's products can vary
significantly from customer to customer and from product to product and, in
certain instances, can be as long as nine months or more. Furthermore, the terms
and conditions of individual license transactions, including prices and
discounts, may be negotiated based on volumes and commitments, and may vary
considerably from customer to customer. In addition, the Company has generally
recognized a substantial portion of its quarterly software licensing revenues in
the last month of each quarter. Accordingly, the cancellation or deferral of
even a small number of purchases of the Company's products has in the past and
could in the future have a material adverse effect on the Company's business,
operating results and financial condition.

     The Company's future revenues will also be difficult to predict and the
Company has, in the past, failed to achieve its revenue expectations for certain
periods. The Company's expense levels are based, in part, on its expectation of
future revenues, and expense levels are, to a large extent, fixed in the short
term. The Company may be unable to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall. If revenue levels are below
expectations for any reason, operating results are likely to be materially and
adversely affected. Net income may be disproportionately affected by a reduction
in revenue because a large portion of the Company's expenses is related to
headcount that cannot be easily reduced without adversely affecting the
Company's business. In addition, the Company currently intends to increase its
operating expenses by expanding its research and product development staff,
particularly research and development personnel to be devoted to the Company's
Mercator product line, increasing its professional services and sales and
marketing operations, expanding distribution channels and hiring personnel in
other operating areas. The Company expects to experience a significant time lag
between the date professional services, sales and technical personnel are hired
and the date such personnel become fully productive. The timing of such
expansion and the rate at which new technical, professional services and sales
personnel become productive as well as the timing of the introduction and
success of new distribution channels could cause material fluctuations in
quarterly results of operations. Furthermore, to the extent such increased
operating expenses precede or are not subsequently followed by increased
revenues, the Company's business, operating results and financial condition
could be materially and adversely affected.

     Due to the foregoing factors, it is likely that in some future quarter the
Company's revenue or operating results will not meet 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.

     Dependence on Mercator Product Line.  The Company introduced its Mercator
products in 1993. In recent years, a significant and increasing portion of the
Company's revenue has been attributable to licenses of its Mercator products and
related services, and the Company expects that revenues attributable to Mercator
will represent an increasing portion of the Company's total revenue for the
foreseeable future. The development and marketing of its Mercator product line
has required the Company to, among other things, focus its attention and
resources away from some of its traditional products, market its products to a
different customer base and shift a large portion of its development efforts to
the Mercator product line. Accordingly, the Company's

                                       25
<PAGE>

future operating results are highly dependent on the market acceptance and
growth of its Mercator product line and enhancements thereto. There can be no
assurance that market acceptance of the Mercator product line will increase or
remain at current levels or that the Company will be able to successfully market
the Mercator product line and develop extensions and enhancements to this
product line on a long-term basis. In the event the Company's current or future
competitors release new products that provide, or are perceived as providing,
more advanced features, greater functionality, better performance, better
compatibility with other systems or lower prices than the Mercator product line,
demand for the Company's products and services would likely decline. See "Risks
Associated with Technological Change, Product Enhancements and New Product
Development" and "Competition." A decline in demand for, or market acceptance
of, the Mercator product line as a result of competition, technological change
or other factors would have a material adverse effect on the Company's business,
operating results and financial condition.

     Dependence on SAP R/3 System Implementations.  A substantial portion of the
Company's sales of its Mercator products and related services has been
attributable to sales of Mercator for R/3 and related services. The Company
believes that its future revenue growth, if any, will also depend in significant
part upon continued sales of Mercator for R/3 and related services. The Company
has devoted and must continue to devote substantial resources to identifying
potential customers in the R/3 market, building strategic relationships and
attracting and retaining skilled technical, sales and professional services
personnel with expertise in R/3 systems. Personnel with expertise in the R/3
system are in high demand and as such are typically difficult to hire and
retain. Regardless of the investments the Company makes in pursuing this new
market, there can be no assurance that the Company will be successful in
implementing a sales and marketing strategy appropriate for this market or in
attracting and retaining the necessary skilled personnel.

     Demand for and market acceptance of Mercator for R/3 and related services
will be dependent on the continued market acceptance of the SAP R/3 system. As a
result, any factor adversely affecting demand for or use of SAP's R/3 system
could have a material adverse effect on the Company's business, operating
results and financial condition. Implementation of the SAP R/3 system is a
costly and time-consuming process and there can be no assurance that businesses
will choose to purchase such systems. Furthermore, there can be no assurance
that businesses which may implement such systems will wish to commit the
additional resources required to implement Mercator for R/3. In addition, SAP
could in the future introduce business application integration solutions
competitive with Mercator for R/3 and related services. Moreover, any changes in
or new versions of SAP's R/3 system could materially and adversely affect the
Company's business, operating results and financial condition if the Company
were not able to successfully develop or implement any related changes to
Mercator for R/3 in a timely fashion. The Company will also be required to
maintain ALE, EDI and DMI certifications for Mercator for R/3. In order to
maintain such certification, the Company's product must adhere to SAP's
technical specifications which are updated by SAP from time to time, and the
Company has no control over whether and when such specifications will be
changed. Any material change by SAP in such specifications could require the
Company to devote significant development resources to updating this product to
comply with such specifications. In such event, there can be no assurance that
the Company would be able to successfully modify Mercator for R/3 on a timely
basis, if at all, and any failure to do so could materially and adversely affect
the Company's business, operating results and financial condition.

                                       26
<PAGE>

     Risks Associated with Technological Change, Product Enhancements and New
Product Development.  The market for the Company's products and services is
characterized by extremely rapid technological change, frequent new product
introductions and enhancements, evolving industry standards, and rapidly
changing customer  requirements. The introduction of products incorporating new
technologies and the emergence of new industry standards could render existing
products obsolete and unmarketable. Accordingly, the life cycles of the
Company's products are difficult to estimate. The Company's future success will
depend in part upon its ability to anticipate changes and enhance its current
products and develop and introduce new products that keep pace with
technological advancements and address the increasingly sophisticated needs of
its customers. The Company's products may be rendered obsolete if the Company
fails to anticipate or react to change. Development of enhancements to existing
products and new products depends, in part, on the timing of releases of new
versions of applications systems by vendors, the introduction of new
applications, systems or computing platforms, the timing of changes in
platforms, the release of new standards or changes to existing standards, and
changing customer requirements, among other factors. There can be no assurance
that the Company will be successful in developing and marketing product
enhancements or new products that respond to technological change, evolving
industry standards and changing customer requirements; that the Company will not
experience difficulties that could delay or prevent the successful development,
introduction and marketing of these products or product enhancements; or that
its product enhancements or new products will adequately meet the requirements
of the marketplace and achieve any significant degree of market acceptance. The
Company has in the past experienced delays in the introduction of product
enhancements and new products and may experience such delays in the future.
Furthermore, as the number of applications, systems and platforms supported by
the Company's products increases, the Company could experience difficulties in
developing on a timely basis product enhancements which address the increased
number of new versions of applications, systems or platforms served by its
existing products. Failure of the Company, for technological or other reasons,
to develop and introduce product enhancements or new products in a timely and
cost-effective manner or to anticipate and respond adequately to changing market
conditions, as well as any significant delay in product development or
introduction, could cause customers to delay or decide against purchases of the
Company's products, which could have a material adverse effect on the Company's
business, operating results and financial condition.

     The Company may, in the future, seek to develop and market enhancements to
existing products or new products which are targeted for applications, systems
or platforms which the Company believes will achieve commercial acceptance.
These efforts could require the Company to devote significant development and
sales and marketing personnel as well as other resources to such efforts which
would otherwise be available for other purposes. There can be no assurance that
the Company will be able to successfully identify such applications, systems or
platforms, or that such applications, systems or platforms will achieve
commercial acceptance or that the Company will realize a sufficient return on
its investment. Failure of these targeted applications, systems or platforms to
achieve commercial acceptance or the failure of the Company to achieve a
sufficient return on its investment could have a material adverse effect on the
Company's business, operating results and financial condition.

     In addition, the introduction or announcement by the Company, or by one or
more of its current or future competitors, of products embodying new
technologies or features could render the Company's existing products obsolete
or unmarketable. There can be no assurance that the introduction or announcement
of enhanced or new product offerings by the Company or its current or future
competitors will not cause customers to defer or cancel purchases of existing

                                       27
<PAGE>

Company products. Such deferment or cancellation of purchases could have a
material adverse effect on the Company's business, operating results and
financial condition.

     Dependence upon Development of Distribution Channels.  An integral part of
the Company's strategy is to expand both its direct sales force and its indirect
sales channels such as Value-Added Resellers ("VARs"), Independent Software
Vendors ("ISVs"), Systems Integrators ("SIs") and distributors. Although VARs,
ISVs, SIs and distributors have not accounted for a substantial percentage of
the Company's total revenues historically, the Company is increasing resources
dedicated to developing and expanding its indirect distribution channels. There
can be no assurance that the Company will be successful in expanding the number
of indirect distribution channels for its products. Furthermore, any new VARs,
ISVs, SIs or distributors may offer competing products, or have no minimum
purchase requirements of the Company's products. There can also be no assurance
that such third parties will provide adequate levels of services and technical
support. The inability of the Company to enter into additional indirect
distribution arrangements, the failure of such third parties to perform under
agreements with the Company and to penetrate their markets, or the inability of
the Company to retain and manage VARs, ISVs, SIs and distributors with the
technical and industry expertise required to market the Company's products
successfully could have a material adverse effect on the Company's business,
operating results and financial condition. There can be no assurance that the
Company's planned efforts to expand its use of VARs, ISVs, SIs and distributors
will be successful. To the extent that the Company is successful in increasing
its sales through indirect sales channels, it expects that those sales will be
at lower per-unit prices than sales through direct channels, and revenue to the
Company for each such sale will be less than if the Company had licensed the
same product to the customer directly.

     Selling  through indirect channels may limit the Company's contacts with
its customers. As a result, the Company's ability to accurately forecast sales,
evaluate customer satisfaction and recognize emerging customer requirements may
be hindered. The Company's strategy of marketing its products directly to end-
users and indirectly through VARs, ISVs, SIs and distributors may result in
distribution channel conflicts. The Company's direct sales efforts may compete
with those of its indirect channels and, to the extent different resellers
target the same customers, resellers may also come into conflict with each
other. Although the Company has attempted to manage its distribution channels to
avoid potential conflicts, there can be no assurance that channel conflicts will
not materially and adversely affect its relationships with existing VARs, ISVs,
SIs or distributors or adversely affect its ability to attract new VARs, ISVs,
SIs and distributors.

     The Company has hired additional sales personnel in 1997. The Company
expects to continue hiring additional sales personnel through 1998. The
Company's future success will depend in part upon the ability of the Company to
attract, integrate, train, motivate and retain new sales personnel. There can be
no assurance that the Company's efforts to expand its direct sales force will be
successful or that the cost of such efforts will not exceed the revenue
generated. In addition, the Company expects to experience a significant time lag
between the date sales personnel are hired and the date such personnel become
fully productive. The Company's inability to manage its sales force expansion
effectively could have a material adverse effect on the Company's business,
operating results and financial condition.

     Management of Growth.  The growth of the Company's business has placed, and
is expected to continue to place, a strain on the Company's administrative,
financial, sales and operational resources and increased demands on its systems
and controls. In particular, the

                                       28
<PAGE>

Company noted an increase in days sales outstanding from December 31, 1996 to
December 31, 1997 from approximately 70 days to approximately 88 days, and an
increase in total accounts receivable from $4.4 million to $7.9 million.
Accounts Receivable DSOs were higher at December 31, 1997 versus December 31,
1996 due to the increased maintenance billings and higher proportion of new
sales billed during the last month of the Company's fourth quarter of 1997
as compared to the fourth quarter of 1996.


     The Company has implemented or is in the process of implementing and will
be required to implement in the future a variety of new and upgraded operational
and financial systems, procedures and controls and to hire additional
administrative personnel. There can be no assurance that the Company will be
able to complete the implementation of these systems, procedures and controls or
hire such personnel in a timely manner. The failure of the Company or its
management to respond to, and manage, its growth and changing business
conditions, or to adapt its operational, management and financial control
systems to accommodate its growth could have a material adverse effect on the
Company's business, operating results and financial condition. To promote growth
in the Company's sales and operations, the Company will also continue to expand
its sales and marketing organizations, expand and develop its distribution
channels, fund increasing levels of product development and increase the size of
its training, professional services and customer support organization to
accommodate expanded operations, and there can be no assurance that the Company
will be successful in these endeavors.


ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES
          ABOUT MARKET RISK

     Not applicable.


ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

          Financial Statements of the Company meeting the requirements of
          Regulation S-X are filed on pages F1 to F17 of this Annual Report on
          Form 10-K.  See Part IV, Item 14.


ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURE.

     Not applicable.

                                   PART III


ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS

     Information regarding the Company's directors as required by this item will
be included in the Company's proxy statement, to be delivered to stockholders in
connection with the Company's annual meeting of stockholders to be held in June
1998.  Such information is incorporated herein by reference.

                                       29
<PAGE>

     The following sets forth certain information with respect to the Company's
executive officers:

Executive Officers

           Name                Age        Position with the Company
  -------------------------    ---      -----------------------------
  Constance F. Galley           56      President and Chief Executive
                                        Officer and Director
  Eric A. Amster...........     43      Vice President, Sales
  Patricia T. Boggs             46      Vice President, Professional
                                        Services
  Robert Bouton............     57      Vice President, Marketing
  Ira A. Gerard............     50      Vice President, Finance and
                                        Administration,
                                        Chief Financial Officer and
                                        Secretary

  James Monks..............     42      Vice President, International
                                        Operations
  David Raye...............     36      Vice President, Operations
  Edward J. Watson.........     60      Executive Vice President, Business
                                        Development
  Saydean Zeldin...........     57      Vice President, Research and
                                        Development


     Constance F. Galley has been President, Chief Executive Officer and a
director of the Company since 1985, when the Company commenced operating as an
independent entity. Prior to 1985, Ms. Galley directed the Company's Marketing
and Development Operations when the Company was part of the Dun & Bradstreet
Corporation. Ms. Galley is a member of the Board of Directors of the software
division of ITAA and of SACIA, the Business Council of Southwestern Connecticut.
Ms. Galley holds a Bachelor of Arts degree in Chemistry from Duke University.

     Eric A. Amster has been Vice President, Sales since joining the Company in
December 1995. From February 1992 until December 1995, Mr. Amster was employed
by General DataComm Industries, Inc., a data communications company, where he
served most recently as Vice President of U.S. Federal and Commercial Sales. Mr.
Amster holds a Bachelor of Science degree in Computer Science from the
University of Maryland.

     Patricia T. Boggs has been Vice President, Professional Services since
joining the Company in June 1997. From February 1991 to 1997, Miss Boggs was
employed by Datalogix International Inc., where she served most recently as Vice
President Client Services. Prior to 1991 Ms. Boggs was an Assistant Professor at
both John Carroll University, University Heights, Ohio and Wright State
University in Dayton, Ohio. Ms. Boggs holds a Masters Degree in Economics and a
Doctorate in Operations Research/Statistics from Kent State University.

                                       30
<PAGE>

  Robert Bouton has been Vice President, Marketing since joining the Company in
March 1992. Prior to March 1992, Mr. Bouton served in various sales and
marketing capacities in the software industry, including Vice President,
Marketing for CGI Systems. Mr. Bouton holds a Bachelor of Science degree in
Electrical Engineering from Cornell University.

  Ira A. Gerard has been Vice President, Finance and Administration, Chief
Financial Officer and Secretary since joining the Company in October 1995. From
March 1994 to October 1995, Mr. Gerard served as Vice President and Chief
Financial Officer of Adage Systems International, Inc., an ERP software company.
From July 1993 to March 1994, Mr. Gerard was an independent consultant. From
December 1989 until July 1993, Mr. Gerard was employed by Gestetner PLC, a
photocopier and photographic equipment company, where he served most recently as
Vice President, Finance and Operations. Mr. Gerard holds a Bachelor of Arts
degree in Economics from Union College and a Master of Business Administration
from Harvard University.

  James Monks has been Vice President, International Operations of the Company
since May 1997 and was Director, International Operations of the Company from
May 1992 until May 1997. From May 1989 until May 1992, Mr. Monks served as the
Company's Director of European Operations and from April 1985 until May 1989,
Mr. Monks served as the Company's U.K. Manager. Prior to April 1985, Mr. Monks
held various technical support and management positions with the Company when
the Company was a part of the Dun & Bradstreet Corporation. Mr. Monks holds an
Honours Degree in Sports Science and Geography from the University of
Loughborough, U.K.

  David Raye has been the Vice President, Operations of the Company since June
1994. From August 1992 until May 1994, Mr. Raye served as Vice President,
KEY/MASTER Operations. From August 1991 until July 1992, Mr. Raye served as the
Company's Director of Operations. Prior to August 1991, Mr. Raye served in
various management capacities in the software industry including Director of
Marketing for Information Sciences and Senior Product Marketing Manager for On-
Line Software, International. Mr. Raye holds a Bachelor of Science degree in
Marketing from Rutgers University and a Master of Business Administration from
St. John's University, New York.

  Edward J. Watson has been Executive Vice President, Business Development of
the Company since June 1994. From January 1994 until June 1994, Mr. Watson
managed the Company's PC Division. From November 1990 until January 1994, Mr.
Watson was a consultant to the Company and a General Partner of DownEast
Partners, a consulting company. Prior to 1990, Mr. Watson served in various
management capacities in the software industry, including President of TSI
International (the predecessor of the Company) and Higher Order Software. Mr.
Watson is married to Ms. Saydean Zeldin, the Vice President, Research and
Development of the Company. Mr. Watson attended Oxford University.

  Saydean Zeldin has been Vice President, Research and Development of the
Company since October 1994. From November 1990 to October 1994, Ms. Zeldin was a
consultant to the Company and a general partner at DownEast Partners, a
consulting company. Prior to 1990, Ms. Zeldin served in several senior
engineering positions in the software industry, including serving

                                       31
<PAGE>

as Founder and President of Touchstone Engineering, a software company that
developed a management planning system using artificial intelligence technology,
and Founder and Executive Vice President of Higher Order Software. Ms. Zeldin
was also responsible for the re-entry guidance development of the Apollo flight
software at the Instrumentation Laboratory, a laboratory of MIT. Ms. Zeldin is
married to Mr. Watson, the Executive Vice President, Business Development of the
Company. Ms. Zeldin holds a Bachelor of Arts degree in Physics from Temple
University.


ITEM 11.  EXECUTIVE COMPENSATION

Compensation Agreements

     Information required by this item will be included in the Company's proxy
statement, to be delivered to stockholders in connection with the Company's
annual meeting of stockholders to be held in June 1998.  Such information is
incorporated herein by reference.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     Information required by this item will be included in the Company's proxy
statement, to be delivered to stockholders in connection with the Company's
annual meeting of stockholders to be held in June 1998.  Such information is
incorporated herein by reference.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Information required by this item will be included in the Company's proxy
statement, to be delivered to stockholders in connection with the Company's
annual meeting of stockholders to be held in June 1998.  Such information is
incorporated herein by reference.


                                    PART IV.

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)  Financial Statements, Financial Statement Schedules and Exhibits

     1.  Financial Statements

         The consolidated financial statements of the Company filed as part of
         the Annual Report on Form 10-K are listed in Item 8 on page 29 of this
         Annual Report on Form 10-K.

                                       32
<PAGE>

     2.  Financial Statement Schedules

         The financial statement schedules required by Regulation S-X are listed
         in Item 14(d) of this Annual Report on Form 10-K.

     3.  Exhibits.

     The Exhibits filed as a part of this Annual Report are listed in Item 14(c)
of this Annual Report on Form 10-K.

(b)  Reports on Form 8-K.

     During the last quarter of the period covered by this Annual Report on Form
10-K, the Company filed no Current Reports on Form 8-K.

(c) Exhibits.

    The Exhibits required by Regulation S-K are set forth in the following list
and filed either by incorporation by reference from previous filings with the
Securities and Exchange Commission or by attachment to this Annual Report on
Form 10-K as so indicated in such list.

Exhibit
Number                 Exhibit Title
-------                -------------

3.01     Amended and Restated Certificate of Incorporation/(1)/
3.02     Registrant's Bylaws/(1)/
4.01     Form of Specimen Certificate for Registrant's Common Stock/(1)/
4.02     Stockholders Agreement dated as of June 1, 1989, as amended/(1)/
4.03     1989 Stock Purchase Agreement dated as of June 1, 1989, as amended/(1)/

10.01    *Registrant's 1993 Stock Option Plan and related documents/(1)/
10.02    *Registrant's 1997 Equity Incentive Plan/(1)/
10.03    *Registrant's 1997 Directors Stock Option Plan/(1)/
10.04    *Registrant's 1997 Employee Stock Purchase Plan/(1)/
10.05    *Registrant's Profit Participation Plan/(1)/
10.06    Form of Indemnification Agreement to be entered into by Registrant
         with each of its directors and executive officers/(1)/
10.07    Lease Agreement dated as of January 2, 1990 between Registrant and
         Robert D. Scinto, as amended/(1)/
10.08    Office Building Lease dated as of February 4, 1994 between Registrant
         and American National Bank and Trust Company of Chicago, not
         individually but solely as Trustee under Trust No. 42978, as
         amended/(1)/
10.09    Lease Agreement dated as of July 1, 1996 between Registrant and Boca
         Corners, L.P., Ltd., as amended/(1)/
10.10    Credit Agreement dated as of July 31, 1994 between Registrant and The
         Bank of New York, as amended/(1)/
10.11    Security Agreement dated as of July 31, 1994 between Registrant and
         The Bank of New York/(1)/
10.12    Guarantee Agreement dated as of August 22, 1994 by and between the
         Connecticut Development Authority and The Bank of New York, as
         amended/(1)/
10.13    *Letter Agreement, between Registrant and Constance Galley/(1)/
10.14    *Letter Agreement dated as of December 5, 1995 between Registrant and
         Eric Amster/(1)/
10.15    *Letter Agreement dated as of October 5, 1995, between Registrant and
         Ira Gerard/(1)/

                                       33
<PAGE>

10.16    *Letter Agreement dated as of January 1, 1994 between Registrant and
         Edward Watson/(1)/
10.17    *Letter Agreement dated as of October 1, 1994, between Registrant and
         Saydean Zeldin/(1)/
10.18    Series E Preferred Stock Purchase Agreement dated as of May 15, 1997
         between the Company and the Purchasers named therein/(1)/
11.01    Statement of Earnings Per Share
23.01    Independent Auditors' Report on Schedules
23.02    Consent of KPMG Peat Marwick LLP, Independent Accountants
24.01    Power of Attorney
27.01    Financial Data Schedule

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

*     Indicates a management contract or compensatory plan or arrangement.
(1)   Previously filed as an exhibit to the Company's Registration Statement on
      Form S-1 (File No. 333-27293) and incorporated herein by reference.


(d) Financial Statement Schedules.

         Schedule II Valuation and Qualifying Accounts

                        TSI International Software Ltd.
                         Financial Statement Schedule
                       Valuation and Qualifying Accounts

<TABLE>
<CAPTION>
                                                                Charged
                                                  Balance at    to Costs    Charged to                          Balance at
                                                  Beginning       and         Other                               End of
               Description                        of Period     Expenses    Accounts/(1)/    Deductions/(2)/      Period
               -----------                        ---------     --------    --------         ----------           ------
<S>                                               <C>           <C>         <C>              <C>                  <C>
Allowance for  Doubtful Accounts Receivable
Year ended December 31, 1995                       $152,100       65,000      65,800          (124,800)          158,100
Year ended December 31, 1996                        158,100      431,700       1,400          (271,300)          319,900
Year ended December 31, 1997                        319,900      431,600     100,000          (380,200)          471,300
</TABLE>
-------------

(1) Recoveries of balances previously written off.
(2) Write-offs of receivables and reversals of unneeded balances.

  All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission have been omitted because
they are not required under the related instructions or are inapplicable, or
because the information has been provided in the Consolidated Financial
Statements or the Notes thereto.

                                       34
<PAGE>

                                   SIGNATURES


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

March __, 1998
                                       TSI INTERNATIONAL SOFTWARE, LTD.



                                       By:
                                          ------------------------------
                                           Constance F. Galley
                                           President and Chief Executive Officer

                                       35
<PAGE>

                        TSI INTERNATIONAL SOFTWARE LTD.

                         INDEX TO FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                                                                          Page
                                                                                                          ----
<S>                                                                                                       <C>
Independent Auditors' Report............................................................................  F-2
Balance Sheets as of December 31, 1996 and 1997.........................................................  F-3
Statements of Income for the years ended December 31, 1995, 1996 and 1997...............................  F-4
Statements of Stockholders' Equity (Deficit) as of December 31, 1995, 1996 and 1997.....................  F-5
Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997...........................  F-6
Notes to Financial Statements...........................................................................  F-7
</TABLE>

                                      F-1
<PAGE>


                         INDEPENDENT AUDITORS' REPORT



The Board of Directors
TSI International Software Ltd.:

  We have audited the accompanying balance sheets of TSI International Software
Ltd. (the "Company") as of December 31, 1996 and 1997, and the related
statements of income, stockholders' equity (deficit) and cash flows for each of
the years in the three year period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

  In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of TSI International Software Ltd.
as of December 31, 1996 and 1997, and the results of its operations and its cash
flows for each of the years in the three year period ended December 31, 1997 in
conformity with generally accepted accounting principles.



                                  KPMG PEAT MARWICK LLP
New York, New York
February 4, 1998

                                      F-2
<PAGE>

                        TSI INTERNATIONAL SOFTWARE LTD.

                                BALANCE SHEETS

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
                                                                December 31,
                                                        ---------------------------
                                                            1996           1997
                                                        ------------   -----------
<S>                                                     <C>            <C>
                    ASSETS
Current assets:
  Cash                                                  $     41,300   $10,912,500
  Investments in marketable securities                            --    10,490,500
  Accounts receivable, less allowances of
    $319,900 and $471,300                                  4,380,900     7,864,100
  Current portion of investment in licensing
    contracts receivable, net of unearned
    finance income of $84,200 and $60,000 (note 3)           742,000       678,100

  Prepaid expenses and other current assets                  388,000       745,000
                                                        ------------   -----------
      Total current assets                                 5,552,200    30,690,200
Furniture, fixtures and equipment, net (note 4)            1,304,400     1,587,300
Investment in licensing contracts receivable, net of
  unearned finance income of $50,100 and $38,700
  (note 3)                                                   551,600       421,800
Other assets                                                 113,100       242,400
                                                        ------------   -----------
                                                        $  7,521,300   $32,941,700
                                                        ============   ===========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
  Accounts payable                                      $    694,800   $   600,200
  Accrued expenses (note 10)                               1,486,500     2,207,900
  Current portion of deferred maintenance revenue          4,591,200     4,511,000
                                                        ------------   -----------
    Total current liabilities                              6,772,500     7,319,100
Long-term debt (note 5)                                    2,790,100
Other long-term liabilities                                   27,400        17,800
Deferred maintenance revenue, less current portion           225,000       188,400
                                                        ------------   -----------
  Total liabilities                                        9,815,000     7,525,300
                                                        ------------   -----------
Stockholders' equity (deficit)(note 6)
  Convertible preferred stock (authorized 5,000,000
  shares; $8,219,000 aggregate liquidation
  preference in 1996)                                          8,600            --
  Common stock ($.01 par value; authorized
    20,000,000 shares; issued 3,000,000 shares and
    9,056,542 shares, respectively)                           30,000        90,600
  Additional paid-in capital                               7,888,800    33,134,200
  Accumulated deficit                                    (10,036,600)   (7,557,000)
  Cumulative foreign currency translation
    adjustment                                              (119,500)     (199,300)
  Treasury stock, at cost (113,428 and 102,478
    shares, respectively)                                    (65,000)      (52,100)
                                                        ------------   -----------
  Total stockholders' equity (deficit)                    (2,293,700)   25,416,400
                                                        ------------   -----------
  Total liabilities and stockholders' equity (deficit)  $  7,521,300   $32,941,700
                                                        ============   ===========
-----------------------------------------------------------------------------------
</TABLE>
                See accompanying notes to financial statements.

                                      F-3
<PAGE>

                        TSI INTERNATIONAL SOFTWARE LTD.

                             STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                Years Ended December 31,
                                        ---------------------------------------
                                            1995          1996          1997
                                        -----------   -----------   -----------
<S>                                     <C>           <C>           <C>

Revenues:
 Software licensing...................  $ 7,552,900   $ 9,309,500   $14,602,400
 Service, maintenance and
  other...............................    8,508,500     9,694,400    12,067,300
                                        -----------   -----------   -----------
   Total revenues.....................   16,061,400    19,003,900    26,669,700
                                        -----------   -----------   -----------
Cost of revenues:
 Software licensing...................      724,900       494,800       778,100
 Service, maintenance and
  other...............................    2,200,800     2,005,700     2,490,000
                                        -----------   -----------   -----------
   Total cost of revenues.............    2,925,700     2,500,500     3,268,100
                                        -----------   -----------   -----------
Gross profit..........................   13,135,700    16,503,400    23,401,600
                                        -----------   -----------   -----------
Operating expenses:
 Product development..................    3,067,600     3,452,300     4,461,800
 Selling and marketing................    7,159,800     8,715,200    13,095,100
 General and administrative...........    2,001,200     2,921,500     3,791,600
                                        -----------   -----------   -----------
   Total operating expenses...........   12,228,600    15,089,000    21,348,500
                                        -----------   -----------   -----------
   Operating income...................      907,100     1,414,400     2,053,100
Borrowing expenses (note 5)...........     (419,800)     (285,500)     (185,800)
Investment income.....................      193,200       135,200       688,300
Other income (note 12)................      176,900            --            --
                                        -----------   -----------   -----------
   Income before
    income taxes......................      857,400     1,264,100     2,555,600
Provision for income taxes (note 9)...       34,600        36,200        76,000
                                        -----------   -----------   -----------
   Net income.........................  $   822,800   $ 1,227,900   $ 2,479,600
                                        ===========   ===========   ===========

Net income per share       - Basic....         $.29          $.43          $.42
                                        ===========   ===========   ===========
                           - Diluted..         $.15          $.21          $.29
                                        ===========   ===========   ===========

Average shares outstanding - Basic....    2,845,630     2,886,822     5,916,993
                                        ===========   ===========   ===========
                           - Diluted..    5,455,045     5,811,210     8,566,761
                                        ===========   ===========   ===========
</TABLE>

                See accompanying notes to financial statements.

                                      F-4
<PAGE>

                                          TSI INTERNATIONAL SOFTWARE LTD.

                                   STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>


                                                         Series A, B, C
                                                         --------------
                                                             and E
                                                             -----
                                                           Convertible
                                                           -----------
                                                         Preferred Stock                     Common Stock               Additional
                                                         ---------------                     ------------               ----------
                                                                        Par                                Par            Paid-In
                                                                        ---                                ---            -------
                                                     Shares            Value            Shares            Value           Capital
                                                     ------            -----            ------            -----           -------
<S>                                                  <C>          <C>                  <C>            <C>              <C>
Balance at December 31, 1994 ..............          860,969      $      8,600         3,000,000      $     30,000     $  8,023,800

Stock options exercised ...................             --                --                --                --           (135,000)
Net income ................................             --                --                --                --               --
Currency translation
  adjustment ..............................             --                --                --                --               --
                                                     -------      ------------         ---------      ------------     ------------
Balance at December 31, 1995 ..............          860,969             8,600         3,000,000            30,000        7,888,800
Net income ................................             --                --                --                --               --
Currency translation
  adjustment ..............................             --                --                --                --               --
                                                     -------      ------------         ---------      ------------     ------------
Balance at December 31, 1996 ..............          860,969             8,600         3,000,000            30,000        7,888,800
Issuance of Series E Preferred ............           50,000               500              --                --            992,900
Stock, net
Net proceeds from initial
public offering ...........................             --                --           3,000,000            30,000       24,242,300
Conversion of Preferred Stock .............         (910,969)           (9,100)        2,759,715            27,600          (18,500)
Exercise of warrants on a net
  exercise basis ..........................                                              296,827             3,000           (3,000)
Stock options exercised ...................             --                --                --                --             (4,200)
Net income ................................             --                --                --                --               --
Currency translation
  adjustment ..............................             --                --                --                --               --
Amortization of deferred
    compensation ..........................             --                --                --                --             35,900
                                                     -------      ------------         ---------      ------------     ------------
Balance at December 31, 1997 ..............             --                --           9,056,542      $     90,600     $ 33,134,200
                                                     =======      ============         =========      ============     ============
</TABLE>

<TABLE>
<CAPTION>
                                                                   Cumulative
                                                                   ----------
                                                                    Foreign
                                                                    -------
                                                Accumulated         Currency
                                                -----------         --------
                                                  Deficit          Translation               Treasury Stock
                                                  -------          -----------               --------------
                                                   Value           Adjustment            Shares          Value             Total
                                                   -----           ----------            ------          -----             -----
<S>                                            <C>               <C>                   <C>           <C>               <C>
Balance at December 31, 1994 .............     ($12,087,300)     ($   144,400)         (184,638)     ($   223,700)     ($ 4,393,000)

Stock options exercised ..................             --                --              71,160           158,700            23,700
Net income ...............................          822,800              --                --                --             822,800
Currency translation
  adjustment .............................             --             (23,100)             --                --             (23,100)
                                                ------------      ------------         ---------      ------------      ------------
Balance at December 31, 1995 .............      (11,264,500)         (167,500)         (113,478)          (65,000)       (3,569,600)
Net income ...............................        1,227,900              --                --                --           1,227,900
Currency translation
  adjustment .............................             --              48,000              --                --              48,000
                                                ------------      ------------         ---------      ------------      ------------
Balance at December 31, 1996 .............      (10,036,600)         (119,500)         (113,478)          (65,000)       (2,293,700)
Issuance of Series E Preferred ...........             --                --                --                --             993,400
Stock net
Net proceeds from initial
public offering ..........................             --                --                --                --          24,272,300
Conversion of Preferred Stock ............             --                --                --                --                --
Exercise of warrants on a net
  exercise basis .........................             --                --                --                --                --

Stock options exercised ..................             --                --              11,000            12,900             8,700
Net income ...............................        2,479,600              --                --                --           2,479,600
Currency translation
  adjustment .............................             --             (79,800)             --                --             (79,800)
Amortization of deferred
    compensation .........................             --                --                --                --              35,900
                                                ------------      ------------         ---------      ------------      ------------
Balance at December 31, 1997 .............     ($ 7,557,000)     ($   199,300)         (102,478)     ($    52,100)     $ 25,416,400
                                                ============      ============         =========      ============      ============
</TABLE>

                See accompanying notes to financial statements.

                                      F-5
<PAGE>

                        TSI INTERNATIONAL SOFTWARE LTD.

                           STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                Years Ended December 31,
                                                                        -----------------------------------------
                                                                            1995          1996          1997
                                                                        ------------  ------------  -------------
<S>                                                                     <C>           <C>           <C>

Cash flows from operating activities:
 Net income...........................................................  $   822,800   $ 1,227,900   $  2,479,600
 Adjustments to reconcile net income to net cash provided
  by operating activities:
  Depreciation  of fixed assets.......................................      351,000       436,100        623,300
  Amortization of deferred compensation...............................           --            --         35,900
  Amortization of licenses and purchased software (note 4)............      291,300            --             --
  Provision for losses on accounts receivable.........................       65,000       431,700        281,400
  Changes in operating assets and liabilities:
   Accounts receivable................................................     (977,200)   (1,930,500)    (3,848,600)
   Investment in licensing contracts receivable.......................      502,900       585,300        193,700
   Prepaid expenses and other current assets..........................       69,800       (87,200)      (357,000)
   Other assets.......................................................      (18,400)      (43,500)      (129,300)
   Accounts payable...................................................      133,500       255,700        (94,600)
   Accrued expenses...................................................      155,000       220,000        736,900
   Other long term liabilities........................................      (57,400)           --             --
   Deferred maintenance revenue.......................................      (16,100)     (365,600)      (116,800)
                                                                        -----------   -----------   ------------
    Net cash provided (used) by operating activities..................    1,322,200       729,900       (195,500)
                                                                        -----------   -----------   ------------

Cash used by investing activities:
  Purchase of furniture, fixtures and equipment.......................     (354,300)     (827,500)      (876,200)
  Purchases of marketable securities..................................           --            --    (10,490,500)
                                                                        -----------   -----------   ------------
  Net cash used by investing activities...............................     (354,300)     (827,500)   (11,366,700)
                                                                        -----------   -----------   ------------

Cash flows from financing activities:
 Net proceeds from initial public offering............................           --            --     24,272,300
 Issuance of Preferred Stock..........................................           --            --        993,400
 Net borrowings (repayments) under revolving line of credit...........   (1,150,000)      (50,000)    (2,790,100)
 Payments under capital leases........................................     (143,500)      (51,900)       (55,100)
 Stock options exercised..............................................       23,700            --          8,700
                                                                        -----------   -----------   ------------
    Net cash (used) provided by financing activities..................   (1,269,800)     (101,900)    22,429,200
                                                                        -----------   -----------   ------------

Effect of exchange rate changes on cash...............................       (5,600)       98,300          4,200
                                                                        -----------   -----------   ------------
    Net change in cash................................................     (307,500)     (101,200)    10,871,200
Cash at beginning of period...........................................      450,000       142,500         41,300
                                                                        -----------   -----------   ------------
Cash at end of period.................................................  $   142,500   $    41,300   $ 10,912,500
                                                                        ===========   ===========   ============

Supplemental information:
Cash paid for:
 Interest.............................................................  $   352,200   $   278,900   $    171,500
 Income taxes.........................................................       21,000        27,100         42,200
Non-cash investing and financing activities:
 Acquisition of equipment under capital leases........................  $   104,600   $        --   $     30,000
 Conversion of preferred stock to common stock........................           --            --          9,100
 Net exercise of warrants.............................................           --            --          3,000
                                                                        ===========   ===========   ============
</TABLE>

                See accompanying notes to financial statements.

                                      F-6
<PAGE>

                        TSI INTERNATIONAL SOFTWARE LTD.

                         NOTES TO FINANCIAL STATEMENTS


(1) Summary of Significant Accounting Policies

 The Company

  TSI International Software Ltd. (the "Company") develops, markets, licenses,
and supports computer software and related services which allow organizations to
integrate their business applications within the enterprise and with outside
business partners. The Company's customers are located primarily throughout the
U.S. and Western Europe and represent a broad range of industries.

 (a) Revenue Recognition

  Software licensing revenues are recognized upon shipment of the product if
there are no significant post-delivery obligations, or at a later date once such
obligations are satisfied. Maintenance contract revenue is recognized ratably
over the term of the contracts, which are generally for one year. The
unrecognized portion of maintenance revenue is classified as deferred
maintenance revenue in the accompanying balance sheets. Consulting and training
revenues are recognized as services are performed.

  The Company licenses its KEY/MASTER product on a term-use basis for 15 to 60
month periods. The contracts provide for maintenance and generally do not have
renewal or purchase options. At contract inception, the present value of the
payments to be received under the contract is apportioned between software
licensing revenue and maintenance revenue and recognized as described above. The
present value of the payments to be received is recorded as the investment in
licensing contracts receivable. License interest revenue is recognized over the
term of the contract at a constant rate of return.

 (b) Product Development Costs

  Statement of Financial Accounting Standards (SFAS) No. 86, "Accounting for
the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed,"
requires that software development costs: (i) be expensed as incurred until
technological feasibility (as defined therein) is achieved; and (ii) capitalized
subsequent to achieving technological feasibility and prior to the product being
available to customers. The establishment of technological feasibility of the
Company's products has essentially coincided with the products' general release
to customers. Accordingly, the Company expenses all software development costs
as incurred.

  Purchased software with alternative future use is capitalized and amortized
over its expected useful life.

 (c) Furniture, Fixtures, and Equipment

  Furniture, fixtures, and equipment are carried at cost less accumulated
depreciation computed using the straight-line method over their estimated useful
lives. Furniture, fixtures, and equipment held under capital leases and
leasehold improvements are amortized on a straight-line basis over the lease
term.

 (d) Income Taxes

  Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases.  Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.  The effect on deferred tax
assets and liabilities of a change in tax rates is

                                      F-7
<PAGE>

                        TSI INTERNATIONAL SOFTWARE LTD.

                   NOTES TO FINANCIAL STATEMENTS--Continued

(1) Summary of Significant Accounting Policies (Continued)

recognized in income in the period that includes the enactment date. Valuation
allowances are provided for any portion of the deferred tax assets which are
more likely than not to be realized.

 (e) Earnings per Share

  In December 1997, the Company adopted Statement of Financial Accounting
Standard ("SFAS") No. 128, "Earnings Per Share."  SFAS No. 128 replaced the
calculation of primary and fully diluted net income per share with basic and
diluted net income per share.  Basic earnings per share is computed based upon
the weighted average number of common shares outstanding.  Diluted earnings per
share is computed based upon the weighted average number of common shares
outstanding increased for any dilutive effects of options, warrants, and
convertible securities.  All net income per share data for prior years has been
restated to conform with the provisions of SFAS No. 128

 (f) Cash Equivalents

  The Company considers securities with maturities of three months or less,
when purchased, to be cash equivalents.

 (g) Marketable Securities

  All marketable securities are classified as trading securities under the
provision of Statement of Financial Accounting Standard ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" and
unrealized holding gains and losses are reflected in earnings.

 (h) Long-Lived Assets

  During 1996, the Company adopted Statement of Financial Accounting Standard
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires companies to review
assets for possible impairment and provides guidelines for recognition of
impairment losses related to long-lived assets, certain intangibles, and assets
to be disposed of. The impact of the adoption of SFAS No. 121 was not material.

 (i) Stock Options

  Also during 1996, the Company adopted Statement of Financial Accounting
Standard ("SFAS") No. 123, "Accounting for Stock-Based Compensation." In
accordance with SFAS No. 123, the Company elected not to record any compensation
expense for stock options granted to employees at fair value and will disclose
in the notes to its financial statements the impact on net income and net income
per share as if the fair value based compensation cost had been recognized (see
note 6).

 (j) Use of Estimates

  The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.

                                      F-8
<PAGE>

                        TSI INTERNATIONAL SOFTWARE LTD.

                   NOTES TO FINANCIAL STATEMENTS--Continued


 (k) Recently Issued Accounting Standards

  In June 1997, Statement of Financial Accounting Standard ("SFAS") No. 130,
"Reporting Comprehensive Income", and No. 131, "Disclosures about Segments of an
Enterprise and Related Information", were issued.  SFAS No. 130 establishes
standards for reporting and disclosure of comprehensive income and its
components in a full set of general-purpose financial statements.  This
statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.  The Company does not expect comprehensive income to be
materially different from net income reported under existing generally accepted
accounting principles.  SFAS No. 131 establishes standards for the way that
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
shareholders which is currently not required.  It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers.  The Company is required to adopt both standards in the first quarter
of 1998.

  In October 1997 the AICPA issued SOP 97-2, "Software Revenue Recognition",
which supersedes SOP 91-1. The Company will adopt SOP 97-2 for software
transactions entered into beginning January 1, 1998. SOP 97-2 generally requires
revenue earned on software arrangements involving multiple elements, such as
additional software products, upgrades or enhancements, rights to exchange or
return software, postcontract customer support, or services, including elements
deliverable only on a when-and-if-available basis, to be allocated to the
various elements of such sale based on "vendor-specific objective evidence of
fair values" allocable to each such element. If sufficient vendor-specific
objective evidence of fair market values does not exist, revenue from the sale
could be deferred until such sufficient evidence exists, or until all elements
have satisfied the requirements for revenue recognition.

  SOP 97-2 is newly issued and has not yet been subject to interpretation in
practice or in applicable accounting guidelines. The Company has reviewed, and
is continuing to review, its license agreements in light of its requirement to
adopt SOP 97-2 and believes such adoption will not have a material effect on its
operations.

  Other pronouncements issued by the FASB or other authoritative accounting
standard groups with future effective dates are either not applicable or are not
significant to the financial statements of the Company.


(2) Foreign Operations

  The Company's balance sheets include foreign branch assets of $2,574,400 and
$3,867,200 and liabilities of $282,200 and $406,600 at December 31, 1996 and
1997, respectively. The foreign net income for the years ended December 31,
1995, 1996, and 1997, after allocation of corporate charges, was $133,700,
$345,400 and $45,300, respectively.

                                      F-9
<PAGE>

     With the exception of direct sales activities in the United Kingdom and
Canada, the Company utilizes distributors and agents to market its products
outside the United States. Revenues generated through these third parties
amounted to $147,100, $288,700 and $125,400 for the years ended December 31,
1995, 1996, and 1997, respectively.


(3) Investment in Licensing Contracts

     The net investment in licensing contracts at December 31, 1997, is
comprised of future minimum contract payments receivable, net of unearned
interest income. The interest rate implicit in term-use licensing contracts was
9.5% for contracts entered into during the years 1996 and 1997. Total minimum
contract payments receivable at December 31, 1997 are as follows:

     1998..................................        738,100
     1999..................................        368,600
     2000..................................         81,000
     2001..................................         10,900
                                                ----------
                                                 1,198,600
     Less unearned interest income.........        (98,700)
                                                ----------
                                                 1,099,900
     Less current portion..................       (678,100)
                                                ----------
     Non current portion...................     $  421,800
                                                ==========

                                      F-10

<PAGE>

                        TSI INTERNATIONAL SOFTWARE LTD.

                    NOTES TO FINANCIAL STATEMENTS--Continued


(4) Capital Assets

 (a) Furniture, Fixtures, and Equipment

  Furniture, fixtures and equipment consist of the following:

<TABLE>
<CAPTION>


                                                             December 31,         Useful Life
                                                      --------------------------  -----------
                                                          1996          1997         Range
                                                      ------------  ------------  -----------

<S>                                                   <C>           <C>           <C>
  Computer systems..................................  $ 2,421,700   $ 3,175,900     3-7 years
  Furniture and fixtures............................      545,500       607,200     3-7 years
  Office equipment..................................      325,800       335,900     3-7 years
  Leasehold improvements............................      328,500       443,700    3-10 years
  Automobiles.......................................       99,900        64,900       5 years
                                                      -----------   -----------
                                                        3,721,400     4,627,600

  Less accumulated depreciation and
    amortization....................................   (2,417,000)   (3,040,300)
                                                      -----------   -----------
                                                      $ 1,304,400   $ 1,587,300
                                                      ===========   ===========
</TABLE>

     Computer systems and equipment under capital leases included in the above
totals, net of accumulated depreciation, was $56,200 and $30,800 as of December
31, 1996 and 1997, respectively.

 (b) Purchased Software

     In 1990 the Company acquired software from Foretell Corporation which was
available for sale to customers at the time of purchase. The cost of $1,484,200
was amortized over a five year period which ended in 1995. Amortization expense
for 1995 was $272,100.


(5) Long-Term Debt

     The Company has a line of credit facility with The Bank of New York which
provides for Company borrowings equal to the lesser of $4,000,000 or the sum of
80% of eligible accounts receivable, and a lesser percentage of certain other
receivables. Borrowings may take the form of prime rate loans (which bear
interest on borrowings at either the bank's prime rate plus 1.0%) or LIBOR rate
loans (which bear interest at the LIBOR rate plus 3.0%). The Company's
obligations under this credit line are secured by substantially all of the
Company's assets. At December 31, 1997, the Company was in compliance with all
financial covenants. All amounts outstanding under this line of credit were paid
off in July 1997 with proceeds from the Company's initial public offering. The
Company had no borrowings outstanding at December 31, 1997. Borrowing costs and
effective interest rates under this agreement were as follows:

                                     F-11
<PAGE>

                        TSI INTERNATIONAL SOFTWARE LTD.

                    NOTES TO FINANCIAL STATEMENTS--Continued


                                    Years Ended December 31,
                                 -------------------------------
                                   1995       1996       1997
                                 ---------  ---------  ---------

  Interest expense.............  $368,300   $250,200   $181,500
  Guarantee fees...............    31,500     23,600      1,400
  Commitment fees..............    20,000     11,700     12,900
                                 --------   --------   --------
                                 $419,800   $285,500   $195,800
                                 ========   ========   ========
  Effective interest rate......     11.41%      9.51%     13.26%
                                 ========   ========   ========

(6) Stockholders' Equity (Deficit)

 (a) Initial Public Offering

     On July 1, 1997, the Company sold 3,000,000 shares of common stock in an
initial public offering (IPO) which resulted in proceeds of approximately
$24,272,300, net of offering expenses of $837,700. In connection with the
completion of the IPO, the following transactions were completed: (i) The
Company increased the number of authorized shares of common stock and preferred
stock to 20,000,000 shares and 5,000,000 shares, respectively; (ii) the Company
completed a three-for-one common stock split; (iii) all outstanding preferred
shares were converted into 2,759,715 shares of common stock; and, (iv) certain
shareholders of the Company registered and sold 1,600,000 of common stock with
net proceeds to these shareholders of $13,392,000. The accompanying financial
statements have been retroactively adjusted to reflect the common stock split.

     In addition, on May 15, 1997, three new investors acquired a total of
50,000 shares of Series E convertible preferred stock at $20 a share, which at
closing of the IPO converted into 150,000 shares of common stock.

     At December 31, 1996, certain owners of preferred and common stock held an
aggregate of nine warrants to purchase common stock at $2.00 a share. During
1997, two warrants were exercised into an aggregate of 296,827 shares. As the
warrants were exercised on a net exercise basis, no proceeds were received by
the Company. At December 31, 1997, there are seven warrants remaining which are
exercisable for 711,771 shares of common stock and expire in 2002.

                                     F-12
<PAGE>

                        TSI INTERNATIONAL SOFTWARE LTD.

                    NOTES TO FINANCIAL STATEMENTS--Continued


(b) Preferred Stock



     The Company has authorized 5,000,000 shares of preferred stock which may be
issued by the Board of Directors on such terms and with such rights,
preferences, and designations as the Board may determine without any vote of the
stockholders. At December 31, 1996 the following shares of preferred stock were
outstanding:

Series A Stock...........................................          297,405
Series B Stock...........................................          115,761
Series C Stock...........................................          447,803
                                                                   -------
  Total outstanding......................................          860,969
                                                                   -------
Series B Stock issuable to prevent dilution..............            8,936
                                                                   -------
                                                                   869,905
                                                                   =======

     On July 1, 1997, in conjunction with the Company's initial public offering,
all preferred shares outstanding were converted into 2,759,715 shares of stock
based on the three-to-one stock split. No preferred shares were issued or
outstanding at December 31, 1997

(c) Stock Option Plans


     The Company established the Equity Incentive Stock Option Plan ("Equity
Plan") in May 1997 which replaces the 1993 Stock Option Plan. The Equity Plan
provides that the Company may grant options to employees to purchase up to
2,641,671 shares of the Company's common stock. The Company granted 250,600
options under the Plan in 1997 at exercise prices from $1.66 to $14.375 per
share. Options have been granted at fair market value. No options may be granted
for a term greater than 10 years.

     In addition, the Company established a Directors Stock Option Plan in May
1997 which authorizes the issuance of options to directors to purchase 225,000
shares of the Company. During 1997, 60,000 options were granted at $6.67 a
share.

     In addition, the Company established an Employee Stock Purchase Plan which
reserves a total of 750,000 shares of the Company's common stock for issuance
thereunder. The plan permits eligible employees to acquire shares of the
Company's common stock through payroll deductions. Eligible employees may select
a deduction of 2 to 15% of their compensation subject to certain maximum
limitations as described in the plan. The offering period began on the date of
offering and will end on July 31, 1998. As of December 31, 1997, no shares had
been purchased under the plan. Purchases of shares will take place at six-month
intervals from the beginning date of each offering period.

                                     F-13
<PAGE>

                        TSI INTERNATIONAL SOFTWARE LTD.

                    NOTES TO FINANCIAL STATEMENTS--Continued



  Transactions under all Plans are summarized below:

                                                Number      Weighted
                                                ------      --------
                                              of Shares   Average Price
                                              ----------  -------------

Shares under option at December 31, 1994        739,767           $0.33
  Exercised                                     (71,160)          $0.33
  Granted                                       367,500           $0.33
  Cancelled                                    (116,250)          $0.33
                                              ---------
Shares under option at December 31, 1995        919,857           $0.33
  Exercised                                          --
  Granted                                       150,000           $1.40
  Cancelled                                      (6,000)          $0.33
                                              ---------
Shares under option at December 31, 1996      1,063,857           $0.48
  Exercised                                     (10,700)          $0.82
  Granted                                       310,600           $6.41
  Cancelled                                          --           $0.00
                                              ---------
Shares under option at December 31, 1997      1,363,757           $1.83
                                              =========

Options exercisable were as follows:
  December 31, 1995                             409,107           $0.33
  December 31, 1996                             576,357           $0.33
  December 31, 1997                             771,907           $0.42

     Options were granted in 1995 and prior years at an exercise price of $0.33
a share, options were granted during 1996 at exercise prices of $0.67 and $1.67
a share and options were granted during 1997 at exercise prices between $1.66 to
$14.375. Substantially all options vest ratably over a four year period from the
date of grant. There were 2,165,464 shares available for grant at December 31,
1997.

     As discussed in Note 1, the Company adopted SFAS No. 123 during 1996 and
elected not to recognize compensation expense relating to employee stock options
where the exercise price of the option equaled the fair value (as estimated by
the Company) of the stock on the date of grant. As a non-public entity prior to
July 1, 1997, for the years 1995 and 1996 the Company utilized the minimum value
method to determine compensation based on the fair value of the options on the
date of grant in accordance with SFAS No. 123. Following are the resultant pro
forma amounts of net income and net income per share:

<TABLE>
<CAPTION>
                                                      1995       1996        1997
                                                    --------  ----------  ----------
<S>                                                 <C>       <C>         <C>
Net income -- as reported.........................  $822,800  $1,227,900   2,479,600
Net income -- pro forma...........................  $819,500  $1,216,600   2,023,600
Earnings per share -- as reported - Basic.........  $    .29  $      .43  $      .42
 - Diluted........................................  $    .15  $      .21  $      .29
Earnings per share -- pro forma -  Basic..........  $    .29  $      .42  $      .34
 - Diluted........................................  $    .15  $      .21  $      .24
</TABLE>

     The weighted average fair value of each option granted in 1995, 1996 and
1997 was $ 0.22, $ 0.92 and $ 4.24 respectively. These values are based on
estimates on the date of grant using the modified Black-Scholes option pricing
model using the following weighted average assumptions:

                                     F-14
<PAGE>

                        TSI INTERNATIONAL SOFTWARE LTD.

                    NOTES TO FINANCIAL STATEMENTS--Continued

                                           1997                   1996 and 1995
                                           ----                   -------------

  Risk-free interest rate.......      5.37% to 7.07%                  6.27%
  Expected life in years........                  6                      6
  Expected volatility...........               59.8%                     0%
  Expected dividend yield.......                  0%                     0%


(7) Earnings per Share

     In February 1997, Statement of Financial Accounting Standard ("SFAS") No.
128, "Earnings per Share" was issued. The statement sets forth guidance on the
presentation of earnings per share and requires dual presentation of Basic and
Diluted earnings per share on the face of the income statement. The computation
of basic earnings per share is based on income available to common stockholders
and the weighted average number of common shares outstanding during each period.
Diluted earnings per share reflect the potential dilution that could occur if
dilutive stock options were exercised resulting in the issuance of common stock
that then shared in the earnings of the Company. In connection with the IPO, all
outstanding preferred stock was converted into common stock on the basis
described in note 6 and, accordingly, are shown as outstanding for the diluted
earnings per share calculation for all periods presented. Following are the
components of common stock used to calculate Basic and Diluted earnings per
share:


                                             Years Ended December 31,
                                          -------------------------------
                                            1995       1996       1997
                                          ---------  ---------  ---------
Weighted average common shares            2,845,630  2,886,822  5,916,993
 outstanding (basic shares)
Common shares issued for conversion       2,609,415  2,609,415  1,304,632
 of preferred stock
Dilutive effect of stock options and             --    314,973  1,345,136
 warrants                                 ---------  ---------  ---------
Total diluted shares                      5,455,045  5,811,210  8,566,761
                                          =========  =========  =========


(8) Employee Bonus and Savings Plans

     The Company maintains a bonus plan for all non-executive officer employees.
The bonus plan is reviewed annually by the Board of Directors and provides for
payments based upon a percentage of pretax income, as defined. Bonus payments
were $100,000, $200,000, and $200,000 in 1995, 1996 and 1997 respectively.

     On July 1, 1990, the Company established a defined contribution plan under
Section 401(k) of the Internal Revenue Code which provides for voluntary
employee salary deferrals but does not require Company matching funds. The
defined contribution plan covers substantially all employees. Employees are
eligible to contribute to the defined contribution plan

                                     F-15
<PAGE>

                        TSI INTERNATIONAL SOFTWARE LTD.

                    NOTES TO FINANCIAL STATEMENTS--Continued



upon completion of three months of service with the Company. Contributions are
subject to established limitations as determined by the Internal Revenue
Service. There have been no Company contributions to the plan to date.  As of
January 1, 1998 the Company  amended the plan to include an employer match of 2%
of participants' contributions up to 4%.


(9) Income Taxes

     The provision for income taxes is comprised of the following for the years
ended December 31, 1995, 1996 and 1997:

                                                  1995       1996       1997
                                                  ----       ----       ----
Federal Alternative Minimum Taxes (AMT)          34,600     36,200     46,000
State Taxes                                          --         --     30,000
                                                 ------     ------     ------
Provision for Income Taxes                       34,600     36,200     76,000
                                                 ======     ======     ======

     At December 31, 1997, the Company had federal tax net operating loss
carryforwards of $6,849,000 expiring between the years 2000 and 2009 and
research and experimentation credits of $655,900 expiring between 2003 and 2008.
Section 382 of the Internal Revenue Code imposes a limitation on the amount of
tax loss carryforwards which can be utilized in any year after there has been a
50% or greater ownership change of the Company. The ownership change is based on
the number of shares of stock or the aggregate market value of the stock within
any consecutive three year period. Future years' utilization of the Company's
tax loss carryforwards could be subject to this limitation.

     At December 31, 1996 and 1997, the components of net deferred taxes
(utilizing a 41.4% combined tax rate) were:

<TABLE>
<CAPTION>
                                                                              1996       1997
                                                                           ----------  --------
<S>                                                                        <C>         <C>
  Deferred tax liabilities...............................................  $1,024,900  $928,200

  Deferred tax assets, net of valuation allowances of $5,294,900 and
    $4,441,500 in 1996 and 1997..........................................  $1,024,900  $928,200
                                                                           ----------  --------
     Net deferred taxes..................................................          --        --
                                                                           ==========  ========
</TABLE>

     Significant temporary differences which give rise to deferred tax (a)
liabilities and (b) assets are: (a) investment in licensing contracts receivable
and depreciation; and (b) net operating loss carryforwards and deferred
maintenance revenues.

     The decrease in the valuation allowance of $853,400 in 1997 is the result
of the utilization of net operating loss carryforwards.

     The following table summarizes the significant differences between the U.S.
Federal statutory tax rate and the Company's effective tax rate for financial
statement purposes:

<TABLE>
<CAPTION>
                                                                 1996        1997
                                                                ------      ------
<S>                                                              <C>        <C>
      U.S. Federal Statutory Rate                                34.0%      34.0%
      Non-deductible expenses                                     7.5%       1.6%
      State income taxes, net of U.S.
       federal tax benefit                                        1.2%       0.8%
      Change in valuation allowance                             (39.8%)    (33.4%)
                                                               ------     ------
       Effective tax rate                                         2.9%       3.0%
                                                               ======     ======
</TABLE>

(10) Accrued Expenses

     Included in accrued expenses as of December 31, 1996 and 1997, are
compensation costs (regular payroll, commissions, bonus, profit sharing, and
other withholdings) of $548,300 and $1,473,500, respectively.

                                     F-16
<PAGE>

                        TSI INTERNATIONAL SOFTWARE LTD.

                    NOTES TO FINANCIAL STATEMENTS--Continued



(11) Commitments and Contingencies

     The Company rents premises and furniture, fixtures, and equipment under
operating leases which expire at various dates through 2011.

     Future minimum payments, by year and in the aggregate, under operating and
capital leases at December 31, 1997 are:


<TABLE>
<CAPTION>
    Year                                                        Capital    Operating
    ----                                                        --------   ----------
    <S>                                                         <C>        <C>
    1998......................................................    20,700    1,172,700
    1999......................................................    10,500    1,097,700
    2000......................................................    10,500    1,080,900
    2001......................................................     1,800      594,100
    2002......................................................        --      144,000
  Thereafter..................................................        --    1,872,000
                                                                --------   ----------
     Total....................................................  $ 43,500   $5,961,400
                                                                           ==========
  Less amount representing interest...........................   (17,400)
                                                                --------
     Present value of minimum capital lease payments..........  $ 26,100
                                                                ========
</TABLE>

     Certain of the aforementioned leases provide for additional payments
relating to taxes and other operating expenses. Rental expense for the years
ended December 31, 1995, 1996, and 1997, under all operating leases aggregated
approximately $820,900, $717,300, and $840,428 respectively.


(12) Litigation Settlement

     In April 1995 the Company received cash in settlement of a lawsuit which,
after payment of legal expenses, resulted in a non-operating gain of $176,900.


(13) Condensed Quarterly Information (Unaudited)

     The following condensed quarterly information has been prepared by
management on a basis consistent with the Company's audited financial
statements. Such quarterly information may not be indicative of future results.
Amounts are in thousands, except per share data.

                                     F-17
<PAGE>

                        TSI INTERNATIONAL SOFTWARE LTD.

                    NOTES TO FINANCIAL STATEMENTS--Continued



<TABLE>
<CAPTION>
                                                                            1996
                                                             ----------------------------------
                                                              First   Second    Third   Fourth
                                                             -------  -------  -------  -------
                                                             Quarter  Quarter  Quarter  Quarter
                                                             -------  -------  -------  -------
<S>                                                          <C>      <C>      <C>      <C>
Total revenues.............................................   $4,089   $4,236  $ 5,046  $ 5,633
Gross profit...............................................    3,564    3,681    4,413    4,845
Net income.................................................      121      186      518      403
Net income per share - Basic...............................      .04      .06      .18      .14
                     - Diluted.............................      .02      .03      .09      .07
Weighted average number of common and common
 equivalent shares outstanding
                     - Basic...............................    2,887    2,887    2,887    2,887
                     - Diluted.............................    5,496    5,648    5,989    6,111
</TABLE>

<TABLE>
<CAPTION>

                                                                             1997
                                                             ----------------------------------
                                                               First   Second    Third   Fourth
                                                             -------  -------  -------  -------
                                                             Quarter  Quarter  Quarter  Quarter
                                                             -------  -------  -------  -------
<S>                                                          <C>      <C>      <C>      <C>
Total revenues.............................................   $5,508   $6,155  $ 7,000  $ 8,007
Gross profit...............................................    4,786    5,491    6,032    7,093
Net income.................................................      313      267      789    1,115
Net income per share - Basic...............................      .11      .09      .09      .12
                     - Diluted.............................      .05      .04      .07      .10
Weighted average number of common and common
 equivalent shares outstanding
                     - Basic...............................    2,887    2,887    8,944    8,950
                     - Diluted.............................    6,369    6,493   10,724   10,682
</TABLE>

     The sum of the quarterly per share amounts does not agree to the respective
annual amounts due to rounding.

                                     F-18