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, 1998; 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)

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

                                   ----------

         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 February 23, 1999:

                                  $558,800,109

     As of that date, there were 11,232,163  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 March,  1999
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, 1998


                                TABLE OF CONTENTS

                                                                           Page
                                                                           ----

                                     PART I

Item 1.    Business .......................................................   2

Item 2.    Properties .....................................................  10

Item 3.    Legal Proceedings ..............................................  10

Item 4.    Submission of Matters to a Vote of Security Holders ............  10

                                     PART II

Item 5.    Market for Registrant's Common Equity and Related 
           Stockholder Matters ............................................  11

Item 6.    Selected Financial Data ........................................  13

Item 7.    Management's Discussion and Analysis of Financial Condition 
           and Results of Operations ......................................  14

Item 7A.   Quantitative and Qualitative Disclosures About Market Risk .....  23

Item 8.    Financial Statements and Supplementary Data ....................  23

Item 9.    Changes in and Disagreements with Accountants on 
           Accounting and Financial Disclosure ............................  23

                                    PART III

Item 10.   Directors and Executive Officers of the Registrant .............  24

Item 11.   Executive Compensation .........................................  26

Item 12.   Security Ownership of Certain Beneficial Owners and Management .  26

Item 13.   Certain Relationships and Related Transactions .................  26

                                     PART IV

Item 14.   Exhibits, Financial Statement Schedules and 
           Reports on Form 8-K ............................................  27

Signatures ................................................................  30




TSI, the TSI Software 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.


                                       1

<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  currently  available to the Company,  and the
Company assumes no obligation to update any 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) TSI  Software's  ability to  increase  sales of its
Mercator  product  for other EQP  Systems or in other  industry  segments,  (vi)
uncertainties in attracting and retaining needed management,  marketing,  sales,
professional  services and product  development  personnel,  (vii) the Company's
ability to manage growth, (viii) customer acceptance of TSI Software's services,
(ix) the success of the Company's  Mercator  product line, and (x) the Company's
ability to develop additional distribution channels for its products.

     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  Ltd.(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 an enterprise application  integration
(EAI)  product  that  permits  enterprises  to  integrate  their major  business
systems,  including ERP applications  from companies such as SAP and PeopleSoft,
legacy  systems,   best-of-breed  applications,   data  warehouses,   databases,
electronic   commerce  data,  and  Web-based   applications.   Unlike  messaging
middleware   software  tools,  which  focus  on  the  connectivity   aspects  of
application  integration,  Mercator enables  business-level by addressing a wide
range of integration issues, including  cross-application  process flow control,
application  adaptation,  data  transformation,   and  messaging  and  transport
services. To date, the Company has directly licensed its products to over 11,000
customers  worldwide,  representing a broad range of  industries.  The Company's
customers  include American  Express Travel Related  Services,  Inc.,  Citibank,
N.A., Eli Lilly and Company,  General  Motors,  Hershey  Foods,  Hewlett-Packard
Company,  Hoechst  AG,  International  Business  Machines  Corporation,   Lucent
Technologies,  Inc., Mitsui & Co. Ltd., Nestle,  Prudential Insurance Company of
America and Texas Instruments.


                                       2
<PAGE>

Products and Services

     The Company's 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
           ------------         ------------   --------------     -----------------------
<S>                                 <C>          <C>             <C>
Mercator Products:
Mercator for the Desktop            12/93          12/98         from $9,700 (Standard Edition) to $25,000 (S.W.I.F.T. Edition)
Mercator for the Enterprise         12/93          12/98         from $52,000 to $212,790, variable by platform and server
                                                                 configuration
Trading Partner Products:
Trading Partner PC                   6/88           3/98         $1,495
Trading Partner PC/32               10/96           8/98         $1,995
Trading Partner Kits                10/92        various         from $249 to $995, variable by complexity of kit
Trading Partner EC                  11/90           9/97         from $82,000 to $120,000, variable by server class
</TABLE>

     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
software  solution  used  by  IT  professionals  to  create  interfaces  between
different  business  applications.  Mercator was initially  released in December
1993 and,  as of  December  31,  1998,  had been  licensed  to more  than  1,900
customers worldwide.

     Mercator.   Mercator  enables   application   integration  by  transforming
information   between   and   among   multiple   business   applications.    The
Enterprise-level  product  also  provides  cross-application  flow  control  and
adapters to major  applications,  databases and messaging systems. It provides a
Windows-based Design Client which is used to define data formats and integration
requirements  including rules for data  transformation,  transaction routing and
event  coordination.  Solutions  created  by a Design  Client  are  executed  on
separate  Integration  Servers.  Complete  integration  solutions can be created
without writing custom interface  programs.  Mercator requires no pre-processing
of any data to be integrated.  It integrates data between  multiple  sources and
destinations in a single process, and supports  integration  execution on a wide
range  of  platforms.  Customers  who  create  solutions  that  run on  multiple
platforms license an Integration Server for each platform. The Company currently
offers  integration  support for PC/Intel (DOS, Windows 3.1, Windows 95, Windows
98, Windows NT, SCO Open Server,  SCO Unixware);  IBM AS/400  (OS/400),  RS/6000
(AIX) and mainframe (MVS, CICS, UNIX);  HP9000 (HP-UX);  Siemens-Nixdorf/Pyramid
(SINIX-Reliant);  Sun SPARC  (Solaris,  OS);  Digital  Alpha (UNIX,  Windows NT,
OpenVMS) and VAX (VMS); and Stratus R5 (FTX,VOS).

     Mercator for R/3.  Mercator for R/3 is a version of Mercator  that includes
specific  extensions to meet the requirements  for application  integration with
SAP's R/3 system. Mercator was the first software product to be certified by SAP
for use with its ALE architecture.  In addition,  SAP has certified Mercator for
EDI, the Data Migration  Interface (DMI), the ALE Message Handling Systems (AMS)
and the Business Information  Warehouse (BW). Mercator is thus the first product
to be  certified by SAP for all five  interfaces  (ALE,  EDI,  DMI, AMS and BW).
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
application  integration  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  application  integration
product  featuring  support for  distributed  electronic  commerce.  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 define and manage their own EC programs
and those programs can include the exchange of data in  proprietary  formats and
the new self-defining formats such as XML as well as traditional x12 and EDIFACT
data.



                                       3
<PAGE>

They can include Web e-mail and FTP-based  communications  as well as the
use of EDI  VANs.  In  addition  to  inter-enterprise  integration  through  EC,
Mercator for EC fully supports  application  integration  within the enterprise.
Mercator  for EC thus extends the  underlying  power of Mercator to the world of
electronic  commerce by  providing a flexible,  open  architecture  for creating
robust  inter-enterprise and intra-enterprise  integration solutions for today's
event-driven enterprises.

Trading Partner Products.

     The Company's  Trading Partner products consist of a set of electronic data
interchange or 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 both to 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  or  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 5,900 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
Computer  Corporation,  Floor  Link/Carpet One,  Hewlett-Packard,  International
Business Machines Corporation, J.C. Penney Company, Inc., Kohler Company, Kaiser
Permanente,  Sears, Roebuck and Company, and Target Stores. In 1998, the Company
introduced  important  kits for the automotive  industry -- for General  Motors,
Chrysler and Ford, plus a new facility enabling  customers to download kits from
the company's Web site.  The Company's  OnCall*EDI  products are a series of EDI
kits for electronic  purchasing for the healthcare provider market and have been
licensed to more than 1,300 hospitals.

     Trading Partner EC. Trading Partner EC is a mainframe-based  EDI management
product which  provides EDI  management  capability for companies with large EDI
programs.  It includes Mercator as its core application  integration  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 application  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,  or provide consulting or
implementation  assistance for SAP and ERP system  integration.  The Company has
expanded  the  number of  service  professionals  and the scope of the  services
offered  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 ensure that its customers are successful in using its
products,  the  Company  provides  training  in its four  training  centers,  at
customer locations and at SAP training  facilities.  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, 1998, the Company had directly  licensed its software to
more  than  11,000  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>    
American Express                                              Abaton.com
American Family Insurance                                     Allenbrook
Apria Healthcare                                              American Express Travel Related Services, Inc.
Baker Hughes Inc.                                             American Software, Inc.
Banamex                                                       Anderson Consulting
Betz Dearborn                                                 Arbour Group, Inc.
Bell Atlantic                                                 BEA Systems, Inc.
Blue Cross Blue Shield of Massachusetts                       Candle Corporation
Canadian National Railway Company                             CAS-Nord
Chase Manhattan Bank                                          Catalyst International
Citicorp                                                      CEBRA Inc.
Coors Brewing Company                                         Citibank, N.A.
Deere & Company                                               Compaq Computer Corporation
Dun & Bradstreet                                              Connect, Inc.
EDS                                                           Cross Worlds
Eastman Kodak Company                                         DMR Consulting Group
Eli Lilly                                                     Federal Express Corporation
First Chicago NBD Corporation                                 HBO & Company
General Motors                                                HK Systems
Georgia-Pacific Corporation                                   Hewlett-Packard Company
GTE                                                           ICL Retail Systems
Hershey Foods                                                 Indus International
Hoechst AG                                                    IBM
Home Savings of America                                       Logility
IBM                                                           Logix
Johnson and Johnson                                           Manhattan Associates
Lockheed Martin Corporation                                   Mitsui & Co. Ltd.
Lucent Technologies Inc.                                      Netscape
MCI                                                           Nippon Telephone & Telegraph
Merck-Medco                                                   Omnilogic
Nestle Canada, Inc.                                           Optum.  Inc.
Nestle, U.K.                                                  Osprey Consulting
Nestle, U.S.                                                  Pivotpoint, Inc.
NYNEX Corporation                                             PriceWaterhouse Coopers
Pacificare                                                    Research Triangle Associates
Perrier Group of America                                      Robocom Software
Petroleos de Venezuela, S.A.                                  Saratoga Systems
Phillips Consumer Products                                    Synergistics
Pioneer Hi-Bred International                                 TIBCO Software, Inc.
Prudential Insurance Company of America
Royal Canadian Mounted Police
Sara Lee Hosiery, Inc.
Tennaco Packaging
Texas Instruments
The Toronto Dominion Bank
Whirlpool Corporation
The World Bank
U.S. Surgical
</TABLE>

No one customer  accounted  for more than 10% of TSI  Software's  sales in 1998,
1997 or 1996.




                                       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, 1998, the Company's sales  organization  consisted of 86
employees.  The Company's  direct field sales force focuses on sales of Mercator
products to Fortune 2000  companies.  The Company also  maintains as part of its
direct sales force, a telesales  organization  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, 1998,  over 200 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   11.8%  of  the  Company's   total  revenues   during  1998.  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
additional sales staff and distributors.

     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 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,  1998,  there were 13  employees  in the  Company's  marketing
organization.

Technology

     The  Company's  core Mercator  technology  provides a platform for creating
application integration solutions which satisfy requirements across a variety of
computing  environments.  The architecture of the Mercator  platform is based on
object concepts, providing reusability, interoperability, and scalability 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.

     Among the central  components of the Mercator  platform are a Windows-based
Design  Client for  creating  integration  "maps"  and  systems of maps for data
validation,  transformation, and content-based routing, and one or more run-time
Integration Servers for execution.  A map is an executable module that describes
the required  validation,  transformation and integration of data between source
and destination objects such as files, databases, applications and messages. The
Design Client provides an intuitive  drag-and-drop  environment for defining the
source and destination data objects,  creating the integration rules between the
sources and the destinations, and building the resulting map object. Map objects
built  using  Mercator  can be  ported  automatically  to  any  of 22  different
execution environments.

     Through Mercator's graphical interface,  users enter descriptions of source
and  destination  objects are entered by the user. 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,
eliminating the need to explicitly  identify the context of a data object during
map  construction  and  maintaining  the  logical  integrity  of  the  resulting
integration solution.



                                       6
<PAGE>

     Once the source and destination objects have been defined, the user creates
an  integration  map by  specifying  the  rules for  transforming  data from the
sources to the  destinations.  For many  integration  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 operation.  The
user has  point-and-click  access to a variety of pre-built functions to enhance
the integration rules including  support.  Selection,  extraction,  computation,
logical  operations,   parsing,  substitution,   re-ordering,   validation,  and
conversion are all fully supported.

     At a higher level,  the System Editor,  Mercator's  graphical  process flow
manager and another component of the Design Client, enables the user to define a
set of logically related integration  solutions called a system. With the System
Editor,  the user  defines  interactions  among maps and  systems  of maps,  and
specifies the events that trigger the execution of an integration solution.

     Using Mercator`s Design Client, integration objects are built and tested in
the  Windows  environment.  The  resulting  Mercator  integration  object can be
implemented  using a  Mercator  Integration  Server  appropriate  to the  target
platform.  Target platforms  currently  supported include PC/Intel (DOS, Windows
3.1,  Windows 95,  Windows 98, Windows NT, SCO Open Server,  SCO Unixware);  IBM
AS/400 (OS/400),  RS/6000 (AIX) and mainframe (MVS, CICS, UNIX); HP9000 (HP-UX);
Siemens-Nixdorf/Pyramid  (SINIX-Reliant); Sun SPARC (Solaris, OS); Digital Alpha
(UNIX, Windows NT, OpenVMS) and VAX (VMS); and Stratus R5 (FTX, VOS).

     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.  Database adapters are currently  available
for ODBC-compliant  databases and several specific databases  including Oracle7,
Microsoft SQL Server, IBM DB2, and Sybase.  Messaging adapters are available for
SAP's ALE, IBM's MQSeries,  Microsoft MSMQ, TIBCO  Rendezvous,  BEA MessageQ and
Tuxedo,  and Oracle AQ.  Importers are currently  available for COBOL copybooks;
database tables for ODBC-compliant  and Oracle7,  Microsoft SQL Server, IBM DB2,
and Sybase  databases;  SAP R/3 IDocs,  BAPIs,  DXOB and BDC. In  addition,  the
Company  provides  pre-packaged  data  objects for  national  and  international
standards  for EDI,  HL7 (for health  care),  and  S.W.I.F.T.  (for  banking and
financial services).

     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  Design Client and
Integration  Servers by providing  adapters for communicating with SAP's ALE and
BAPI/RFC  architectures  and importers for R/3 data definitions  (IDocs,  BAPIs,
DXOB and BDC).  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  validation,   transformation,  or  content-based  routing  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.  In 1997,  the  Company  added a  graphical  management  tool for cross
application process workflow to the core set of Mercator capabilities.  In 1998,
the Company extended the Mercator product by adding SAP r/3 adapters for BAPI's,
DXOB,and BDC, by adding database adapters for DB2 and Sybase, and by introducing
pre-built definitions for S.W.I.F.T. messages.

     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


                                       7
<PAGE>

changing  customer  requirements,  among other  factors.  The Company may not be
successful in developing and marketing product enhancements or new products that
respond to  technological  change,  evolving  industry  standards  and  changing
customer  requirements.  The Company does not anticipate that it will experience
difficulties   that  could   delay  or  prevent  the   successful   development,
introduction   and  marketing  of  these   products  or  product   enhancements.
Furthermore,  its product  enhancements  or new products may not 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 any reason,  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  could cause  customers to delay or decide  against  purchases of the
Company's products.

     As of December 31, 1998, there were 57 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 1996, 1997 and 1998
were $3.5 million,  $4.5 million,  and $5.7 million,  respectively.  The Company
expects  that it will  continue  to  commit  significant  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,  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 factors,  the
Company may not be able to maintain its competitive position against current and
potential competitors.

     In the enterprise  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  requirements.  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 be able to adequately educate potential
customers to the benefits provided by the Company's products and services.



                                       8
<PAGE>

     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.

     Some  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. Accordingly, the company may
not be  able  to  compete  effectively  in its  markets  and  competition  could
intensify  or future  competition  could have a material  adverse  effect on the
Company's business.

     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.

Proprietary Technology

     The Company's success depends 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.  The steps taken by
the Company may not be sufficient to 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, it is
possible that third parties will  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  which  could  pose  additional  risks of
infringement  as  TSI  Software  expands  internationally.  Any  failure  by  or
inability  of the Company to protect  its  proprietary  technology  could have a
material adverse effect on the Company's business.

     Although the Company does not believe its products infringe the proprietary
rights of any third parties,  infringement  claims could be asserted against the
Company or its customers in the future.  Furthermore,  as described under "Legal
Proceedings" the Company may initiate claims or litigation against third parties
for  infringement  of the  Company's  proprietary  rights,  or for  purposes  of
establishing  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.  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.  If it appears  necessary or
desirable,  the Company may seek  licenses to  intellectual  property that it is
allegedly infringing.  Licenses may not be obtainable on commercially reasonable
terms,  if at all. The terms of any offered  licensed also may not 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. 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. 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.




                                       9
<PAGE>

Employees

     As of December 31, 1998, the Company had 298 full-time employees, including
57 in research  and  development,  107 in  professional  services  and  customer
support,  99 in sales and  marketing and 35 in finance and  administration.  The
Company's employees are not represented by any union. TSI Software 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.  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  direct and indirect sales  activities and to achieve  revenue growth.
Competition  for these  personnel is intense,  particularly  for personnel  with
expertise in the ERP market.  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 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, this could have an adverse affect on the Company's business.

ITEM 2. PROPERTIES

     The  Company's   principal   executive   offices  are  located  in  Wilton,
Connecticut,  and  consist of  approximately  25,000  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  13,000  square  feet of office  space in Boca Raton,
Florida,  which is used  primarily  for  research  and  development  activities;
approximately 4,500 square feet of office space in the United Kingdom; and small
offices in Paris,  France,  and Landover,  Maryland.  During 1998, in connection
with the purchase of SCP, TSI assumed an  additional  lease of 3,500 square feet
of office space in Media,  Pennsylvania to house  employees in its  professional
services organization.

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  has offered to settle  this claim for  $100,000.  There has not been an
answer to this claim, but the company believes it will be settled in 1999 for an
amount paid to TSI Software not to exceed $100,000.


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

     Not applicable.


                                       10
<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 the Nasdaq National Market.

                                                           Reported
                                                          Sale Price
                                                  --------------------------
                                                    High              Low
                                                  --------          --------
     1997
     First Quarter ....................                --                --
     Second Quarter ...................                --                --
     Third Quarter* ...................            15.125              9.00
     Fourth Quarter ...................             14.75             9.125
     1998
     First Quarter ....................            18.625              9.50
     Second Quarter ...................             24.75              17.5
     Third Quarter ....................             36.25            21.125
     Fourth Quarter ...................             51.00             17.00
     1999
     First Quarter ....................             60.50             41.00

*    From July 2, 1997

**   From February 23, 1999

     The closing  price for the Common  Stock on the Nasdaq  National  Market on
February 23, 1999 was $49.75.

     There were approximately  3,400 holders of record of the Common Stock as of
February 23, 1999,  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
currently  anticipates  that any future earnings will be retained to finance the
Company's operations.

Recent Sales of Unregistered Securities

     On November 13, 1998,  the Company agreed to acquire  substantially  all of
the assets of and assume certain liabilities of Software Consulting  Partners, a
Delaware  Corporation  ("SCP").  The 33,922 shares of the Company's common stock
issued to SCP under the Asset Transfer  Agreement (the "Asset  Agreement") dated
November 13, 1998 by and among the Company, SCP and a stockholder of SCP (50% of
such  shares  are  being  held in  escrow  pursuant  to the  terms of the  Asset
Agreement)  were issued in reliance on the exemptions  for non-public  offerings
provided by Rule 506 and section 4(2) of the  Securities Act of 1933, as amended
("The  Act")  and  thus  have  not  been  registered.  These  shares  constitute
"restricted  securities"  under rule  144(d)  regulated  by the  Securities  and
Exchange Commission ("SEC") under the Securities Act. The provisions of rule 144
permits only limited  resale of  "restricted  securities,"  including  that such
securities  must  generally be held for at least one year from the date of their
acquisition and may then be sold only if certain other requirements are met.


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


                                       11
<PAGE>

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  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  an  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.

     Through  December  31, 1998 the net  offering  proceeds to the Company have
been utilized as follows:

<TABLE>
<CAPTION>
                                                           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
                                                               of the Company; and to       indirect payments
           Use                                                affiliates of the Company         to others
           ---                                                -------------------------     -----------------
<S>                                                                      <C>                   <C>
Construction of plant, building and facilities                           --                              0
Purchase and installation of machinery and equipment                     --                    $ 2,190,100
Purchase of real estate                                                  --                              0
Acquisition of other business(es)                                        --                      4,653,000
Repayment of indebtedness                                                --                      2,790,100
Debt/Capital Leases                                                      --                         54,100
Working capital                                                          --                              0
Temporary investment-Purchase Marketable
  Securities and Cash Equivalents                                          --                   14,585,000
Other purposes (specify)                                                 --                             --
                                                                                               -----------
TOTAL NET PROCEEDS                                                                             $24,272,300
                                                                                               ===========
</TABLE>

Second Public Offering

     On June 5,  1998,  the  company  filed a  Registration  Statement  with the
Securities and Exchange  Commission for a public offering of 3,511,000 shares of
its Common Stock. Of the 3,511,000 shares being offered,  1,200,000 were offered
by the Company  and  2,311,000  were  offered by selling  stockholders.  Selling
Stockholders  shares included  382,281 shares subject to warrant which were sold
to the  underwriters  who then  exercised  the  warrant and resold the shares of
common stock.

     On July 5, 1998, the underwriters exercised their 30-day option to purchase
an additional 526,650 shares of the company's stock of which were purchased from
the  Company  and  300,000  of  which  were  purchased   from  certain   selling
stockholders.

     The Company intends to use the approximately  $26.5 million of net proceeds
of this offering  primarily for working capital and general corporate  purposes.
The Company did not receive any proceeds  from the sale of the shares by selling
stockholders,  but did receive an  additional  $764,562 upon the exercise of the
warrant by the Underwriters.


                                       12
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

Statements of Operations Data:
(In thousands, except per share data)

<TABLE>
<CAPTION>
                                                                                   Year Ended December 31,
                                                        ----------------------------------------------------------------------------
                                                          1994             1995             1996             1997             1998
                                                        --------         --------         --------         --------         --------
<S>                                                     <C>              <C>              <C>              <C>              <C>     
Revenues:
Software licensing .............................        $  6,275         $  7,553         $  9,310         $ 14,603         $ 29,105
Service, maintenance and other .................           7,659            8,508            9,694           12,067           16,211
                                                        --------         --------         --------         --------         --------
     Total revenues ............................          13,934           16,061           19,004           26,670           45,316
                                                        --------         --------         --------         --------         --------
Cost of revenues:
Software licensing .............................           1,035              725              495              778            1,482
Service, maintenance and other .................           2,522            2,200            2,006            2,490            5,407
                                                        --------         --------         --------         --------         --------
     Total cost of revenues ....................           3,557            2,925            2,501            3,268            6,889
                                                        --------         --------         --------         --------         --------
Gross profit ...................................          10,377           13,136           16,503           23,402           38,427
                                                        --------         --------         --------         --------         --------
Operating Expenses:
Product development ............................           2,231            3,068            3,452            4,462            5,699
Selling and marketing ..........................           6,124            7,160            8,715           13,095           22,033
General and administrative .....................           1,927            2,001            2,922            3,792            6,232
                                                        --------         --------         --------         --------         --------
     Total operating expenses ..................          10,282           12,229           15,089           21,349           33,964
                                                        --------         --------         --------         --------         --------
Operating income ...............................              95              907            1,414            2,053            4,463
Other income (expense), net ....................            (199)             (49)            (150)             503            2,015
                                                        --------         --------         --------         --------         --------
Income before taxes ............................            (104)             858            1,264            2,556            6,478
Income tax (expense) benefit ...................              (9)             (35)             (36)             (76)             679
                                                        --------         --------         --------         --------         --------
Net income (loss) ..............................        $   (113)        $    823         $  1,228         $  2,480         $  7,157
                                                        ========         ========         ========         ========         ========
Net income (loss) per share
--Basic ........................................        $   (.04)        $   0.29         $   0.43         $   0.42         $   0.71
--Diluted ......................................        $   (.02)        $   0.15         $   0.21         $   0.29         $   0.60
Weighted average number of common
  and common equivalent shares
  outstanding
--Basic ........................................           2,815            2,846            2,887            5,917           10,150
--Diluted ......................................           5,425            5,455            5,811            8,567           11,908

<CAPTION>

                                                                                     December 31,
                                                        ----------------------------------------------------------------------
                                                          1994           1995            1996            1997           1998
                                                        -------         -------         -------         -------        -------
                                                                                      (In thousands)
<S>                                                     <C>             <C>             <C>             <C>            <C>    
Balance Sheet Data:
Cash and marketable securities .................        $   450         $   143         $    41         $21,403        $47,945
Working capital ................................         (2,630)         (2,128)         (1,220)         23,371         53,742
Total assets ...................................          6,387           6,237           7,521          32,942         78,187
Total stockholders' equity (deficit) ...........         (4,393)         (3,570)         (2,294)         25,416         61,899
</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.


                                       13
<PAGE>

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

Overview

     The Company was incorporated in Connecticut in 1985 and  reincorporated  in
Delaware in September 1993. 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. The Company believes it cannot  accurately  predict the amount of revenues
that will be attributable to this product line or the life of such products.  To
the extent the  Company's  Mercator  products do not maintain  continued  market
acceptance, the Company's business, will be 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 these  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
these  arrangements on a  present-value  basis at the inception of the contract.
The Company does not actively  market new term-use  contracts for KEY/MASTER but
continues to receive  maintenance  revenues.  As a result,  maintenance  revenue
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 continue 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  continue to account for a larger  portion of its revenues  than
service, maintenance and other revenues.

     Mercator can be used by Information  Technology (IT)  professionals as well
as Value Added Resellers (VARs),  Independent Software Vendors (ISVs),  Software
Integrators  (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 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 9.4% and 11.8% of total  revenues for 1997
and 1998, respectively. The Company maintains an international sales and support
office in the United Kingdom.  The Company intends to increase its international
direct  sales  force by  establishing  an  office in  Germany  and  focusing  on
additional international distributor and reseller relationships.

     The size of the Company's  orders can range from a few thousand  dollars to
over  $150,000  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 recognition 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.

     On November 13, 1998, TSI Software agreed to acquire  substantially  all of
the assets and assume certain  liabilities of Software Consulting  Partners,  or
SCP. SCP is a professional  services  organization which provides  installation,
maintenance and user support  consulting  services to enterprises  utilizing SAP
software. The 


                                       14
<PAGE>

transaction  was  recorded  for  accounting  purposes  as  a  purchase  and  was
structured to be a "tax-free" reorganization for federal income tax purposes.

     In connection with the  transaction,  TSI Software issued SCP 33,922 shares
of its Common  Stock,  with 50% of these  shares  subject to an escrow to secure
certain  indemnification  obligations  of  SCP  and a  stockholder  of  SCP.  In
addition,  the Company may issue a maximum of an additional 33,921 shares of its
Common Stock  (Earnout  Shares)  within ten days following the date on which TSI
Software  announces its balance sheet and results of operations  for fiscal year
1999. The number of Earnout Shares to be issued will be based upon  professional
fee revenues generated and the number of employees who are continuously employed
that are related to the SCP business.

     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.

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,
                                                 ------------------------------
                                                  1996        1997        1998
                                                 ------      ------      ------
Revenues:
     Software licensing .....................      49.0%       54.7%       64.2%
     Service, maintenance and other .........      51.0        45.3        35.8
                                                 ------      ------      ------
          Total revenues ....................     100.0       100.0       100.0
                                                 ------      ------      ------
Cost of revenues:
     Software licensing .....................       2.6         2.9         3.3
     Service, maintenance and other .........      10.6         9.3        11.9
                                                 ------      ------      ------
          Total cost of revenues ............      13.2        12.2        15.2
                                                 ------      ------      ------
Gross profit ................................      86.8        87.8        84.8
                                                 ------      ------      ------
Operating expenses:
     Product development ....................      18.2        16.7        12.6
     Selling and marketing ..................      45.9        49.1        48.6
     General and administrative .............      15.3        14.2        13.8
                                                 ------      ------      ------
          Total operating expenses ..........      79.4        80.0        75.0
                                                 ------      ------      ------
     Operating income (loss) ................       7.4         7.8         9.8
     Other income (expense), net ............      (0.7)        1.8         4.5
                                                 ------      ------      ------
     Income (loss) before taxes .............       6.7%        9.6%       14.3%
     Income taxes (expense), benefit ........       (.2)        (.3)        1.5
                                                 ------      ------      ------
     Net income .............................       6.5         9.3        15.8
                                                 ------      ------      ------
Gross profit:
     Software licensing .....................      94.7%       94.8%       94.9%
     Service, maintenance and other .........      79.3        81.3        66.6


                                       15
<PAGE>

Year Ended December 31, 1998 Compared with Year Ended December 31, 1997

Revenues

     Total Revenues.  Total revenues increased 70% from $26.7 million in 1997 to
$45.3 million in 1998.

     Software  Licensing.  Software  licensing revenues increased 99% from $14.6
million in 1997 to $29.1  million in 1998.  This increase was primarily due to a
154% increase in Mercator license  revenues to $23.8 million in 1998,  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 34% from $12.1 million in 1997 to $16.2 million in 1998.  The increase
was primarily due to a 70% increase in  professional  services  revenues to $6.4
million in 1998, particularly professional services associated with Mercator. To
a  lesser  extent,  this  increase  was  also  due to 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 $4.2  million and $3.8
million for 1997 and 1998, 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
90% from  $778,000 in 1997 to  $1,481,000  in 1998.  This increase was due to an
increase in product sales of Mercator.  Software licensing gross margin remained
constant at 95% in 1997 and 1998.

     Cost of Service,  Maintenance and Other.  Cost of service,  maintenance and
other revenues increased 116% from $2.5 million in 1997 to $5.4 million in 1998.
The increase was primarily due to an increase in the number of support personnel
related  to the  Company's  Mercator  product,  and  the  purchase  of  Software
Consulting Partners. Service,  maintenance and other gross margin decreased from
80% in 1997 to 67% in 1998 due to the  larger  amount of  professional  services
business which has lower margin due to high labor costs.

Operating Expenses

     Product   Development.   Product  development   expenses  include  expenses
associated  with the  development of new products and  enhancements  to existing
products.  These expenses  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  27% from $4.5 million in 1997 to
$5.7 million in 1998.  This increase was  primarily  due to increased  headcount
associated  with  the  development  of  new  Mercator-based  products.   Product
development  expenses  represented  17% and 13% of total  revenues  for 1997 and
1998, 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 1999. 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 costs.



                                       16
<PAGE>

     Selling and marketing  expenses increased 68% from $13.1 million in 1997 to
$22.0 million in 1998.  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  remained  constant at 49% of total revenues for
1997 and 1998, respectively.

     The  Company  expects to continue  hiring  additional  sales and  marketing
personnel and to increase promotional expenses through at least the remainder of
1999 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 from $3.8 million in 1997 to
$6.2 million in 1998. The increase was primarily due to increased  personnel and
management  information  system  support,  increased  depreciation  expenses for
computer  equipment  and system  upgrades,  and the  amortization  of intangible
assets of $303,000  related to the purchase of SCP.  General and  administrative
expenses represented 14% of total revenues for both 1997 and 1998.

     The  Company   believes   that  the  dollar   amount  of  its  general  and
administrative  expenses  will  continue to increase as the Company  expands its
administrative staff and incurs additional costs.

Other Income (Expense), Net

     Interest  income  increased from $688,000 in 1997 to $2,025,000 in 1998 due
to  investment  income  earned on proceeds  from the  Company's  initial  public
offering in July,  1997 and follow on public offering in June,  1998.  Borrowing
expenses decreased from $185,800 in 1997 to $10,900 in 1998 due to the repayment
of the Company's bank debt with the proceeds of its initial public offering.

Taxes

     At December 31, 1998, the Company had remaining  federal net operating loss
carryforwards of $1.9 million.  The Company has concluded that it is more likely
than  not that all of its  federal  net  operating  loss  carryforwards  will be
utilized; accordingly, the company reversed its valuation allowance for deferred
income taxes which  resulted in the  recording of a net tax benefit for the year
ending   December  31,  1998.   Due  to   utilization   of  net  operating  loss
carryforwards, the provision for income taxes in 1997 was insignificant.

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 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.  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.



                                       17
<PAGE>

     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 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.

     Selling and Marketing.  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.

     General and Administrative.  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.

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 $185,800 in 1997 due to
the  repayment of the  Company's  bank debt with the  proceeds  from its initial
public offering.

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.

Liquidity and Capital Resources

     At December 31, 1998 the Company had net working  capital of $53.7 million,
which includes cash and marketable securities of $47.9 million.  Working capital
at December 31, 1997 was $23.4 million, including cash and marketable securities
of $21.4 million. In 1998, cash provided by operations was $5.7 million compared
to cash used of ($195,500) in 1997.

     Net accounts receivable were $18.0 million at December 31, 1998 compared to
$7.9  million at December 31,  1997.  The number of days of average  revenues in
accounts receivables was 88 at December 31, 1997 compared to 109 at December 31,
1998. The increase in accounts receivable is due to the increase in sales billed
during the last month of the  quarter  as  compared  to 1997,  the  increase  in
deferred  revenue  and the  granting of  extended  terms for certain  customers.
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.  Additions  to  property,  plant  and
equipment accounted for $1,802,200 and $876,200 for 1998 and 1997, respectively.
As of December 31,  1998,  the Company had no material  commitments  for capital
expenditures.

     The Company  believes that its current cash and cash  equivalent  balances,
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


                                       18
<PAGE>

satisfy the Company's  operating  requirements,  the Company may seek additional
debt or equity financing. 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 material acquisitions.

Year 2000 Readiness Disclosure

     Awareness;  The  company  is  aware  of  the  issues  associated  with  the
programming code in existing  computer  systems as the millennium  ("Year 2000")
approaches.  Many currently installed computer systems and software products are
unable to distinguish  between twentieth century dates and twenty-first  century
dates because such systems may have been developed  using two digits rather than
four to determine the applicable year. For example,  computer programs that have
date-sensitive  software may recognize a date using "00" as the year 1900 rather
than the year 2000.  This error could result in system  failures,  generation of
erroneous data or miscalculations  causing  disruption of operations,  including
among other things, a temporary inability to process transactions, send invoices
or engage in similar normal business  activities.  As a result,  many companies'
software and computer systems may need to be upgraded or replaced to comply with
such Year 2000  requirements.  The Year 2000 problem is  pervasive  and complex.
Significant uncertainty exists in the software industry concerning the potential
impact of Year 2000  problems.  The Company is assessing the  potential  overall
impact of the  impending  century  change on the Company's  business,  financial
condition and results of operations.

     State of Readiness;  based on the Company's assessment to date, the Company
believes the current  versions of its  software  products and services are "Year
2000  compliant"  -- that is,  they are  capable  of  adequately  distinguishing
twenty-first  century dates from twentieth century dates. New products are being
designed  to be Year  2000  compliant.  Although  the  Company's  products  have
undergone,  or will undergo,  the Company's  normal quality testing  procedures,
there can, however, be no assurance that the Company's products will contain all
necessary  date code  changes.  Furthermore,  use of the  Company's  products in
connection  with other  products  which are not Year 2000  compliant,  including
non-compliant  hardware,  software  and  firmware  may result in the  inaccurate
exchange  of dates and result in  performance  problems  or system  failure.  In
addition,  OEM  derivative  versions  of  older  products  may not be Year  2000
compliant.  Any failure of the Company's  products to perform,  including system
malfunctions  associated  with the onset of year  2000,  could  result in claims
against the Company.  However,  success of the  Company's  Year 2000  compliance
efforts may depend on the success of its customers in dealing with the Year 2000
issue. We have issued  disclosure  statements to all our existing  customers and
have posted these statements on our website.

     Although the Company has not been a party to any  litigation or arbitration
proceeding to date that involves Year 2000  compliance  issues with its products
or  services,  it could be required  to defend its  products or services in such
proceedings,  or to negotiate  resolutions  of claims based on Year 2000 issues.
The costs of defending and resolving Year 2000-related  disputes,  regardless of
the  merits  of such  disputes,  and  any  liability  of the  Company  for  Year
2000-related damages,  excluding  consequential  damages,  could have a material
adverse effect on the Company's business.

     In addition, the Company believes that purchasing patterns of customers and
potential  customers  of the Company  may be  affected  by Year 2000  compliance
issues as organizations  expend  significant  resources to correct their current
software  systems for Year 2000  compliance.  These  expenditures  may result in
reduced  funding  available to such  entities for other  information  technology
purchases,  such  as  those  products  and  services  offered  by  the  Company.
Furthermore,  customers and potential customers may defer information technology
purchases  generally  until  early in the next  millennium  to avoid  Year  2000
compliance  problems.  Any such deferral of purchases by the Company's customers
or potential  customers  could have a material  adverse  effect on the Company's
business, operating results and financial condition.

     The Company's  business depends on numerous systems that could  potentially
be impacted by Year 2000 related problems.  Those systems include, among others:
hardware  and  software  systems  used by the  Company to deliver  products  and
services  to its  customers  (including  software  supplied  by third  parties);
communications  networks  such as the wide area network and local area  networks
upon  which  the  Company   depends  to   communicate   product  orders  to  its
manufacturing and distribution  operations and to develop products; the internal
systems of the Company's  customers  and  suppliers;  software  products sold to
customers;  the hardware and


                                       19
<PAGE>

software  systems  used  internally  by the  Company  in the  management  of its
business;  and  non-information  technology  systems  and  services  used by the
Company in the management of its business,  such as power, telephone systems and
building systems.

     The Company is  currently  in the  process of  evaluating  its  information
technology infrastructure in order to identify and modify any products, services
or systems that are not Year 2000  compliant.  Based on its initial  analysis of
the  systems  potentially  impacted  by  conduct  business  in the  twenty-first
century,  the Company is applying a phased approach to making such systems,  and
accordingly, the Company's operations, ready for the year 2000. Beyond awareness
of the issues and scope of systems involved, the phases of activities in process
include:  an assessment of specific  underlying  computer systems,  programs and
hardware;  renovation  or  replacement  of Year 2000  non-compliant  technology;
validation and testing of critical systems certified by third-party suppliers to
be Year 2000 compliant;  and implementation of Year 2000 compliant systems.  The
table below describes the status and timing of such phased activities:

<TABLE>
<CAPTION>
       Impacted Systems                                                                             Targeted
          Assessment                                        Status                                 Completion
          ----------                                        ------                                 ----------
<S>                                                  <C>                                           <C>    
Software products sold to customers
  -- Existing Products                               Software products                               Q3 1998
                                                     tested and available                          (completed)
                                                     for distribution

  -- New Products                                    ongoing

Hardware and software                                Assessment in process                           Q1 1999
  systems used to deliver
  products and services

Communication networks used                          Assessment in progress                          Q1 1999
  to carry products and
  provide services

Hardware and software                                Assessment in progress                          Q1 1999
  systems used to manage
  the Company's business

Hardware and software                                Validation, testing                             Q2 1999
  systems used to deliver                            and remediation
  products and services

Communication networks used                          Validation, testing                             Q2 1999
  To carry products and                              and remediation
  provide services

Hardware and software                                Validation, testing                             Q3 1999
  systems used to manage                             and remediation
  the Company's business

Non-information technology                           Systems upgraded or                             Q3 1999
  systems and services                               replaced as appropriate,
                                                     testing and implementation
</TABLE>

     Extensive  Year 2000 Testing  will be  conducted on all systems  considered
critical to the Company.  To date, the Company has not  encountered any material
problems in this regard with its computer  systems or any other  equipment  that
might be  subject  to such  problems.  In the  event  that any of the  Company's
significant suppliers or customers does not successfully and timely achieve Year
2000  compliance,  the  Company's  business  or  operations  could be  adversely
affected.  This could  result in system  failures  or  generation  of  erroneous
information and could cause significant  disruption to business activities.  The
Company is  reviewing  what  further  actions are  required to make all software
systems  used  internally  Year  2000  compliant  as well as  actions  needed to
mitigate  vulnerability  to problems  with  suppliers  and other third  parties'
systems.   Such  actions  include  a  review  of  vendor  contracts  and  formal
communication  with  suppliers to request  certification  that products are Year
2000 compliant.


                                       20
<PAGE>

Cost to Address Year 2000  Issues;The  total cost of these Year 2000  compliance
activities has not been, and is not anticipated to be, material to the Company's
business,  results of operations  and financial  condition.  These costs and the
timing in which the Company  plans to complete  its Year 2000  modification  and
testing processes are based on management's estimates.  However, there can be no
assurance that the Company will timely identify and remedy all significant  Year
2000 problems,  that remediation  efforts will not involve  significant time and
expense,  or that such problems will not have a material  adverse  effect on the
Company's business, results of operations and financial condition.

     Contingency  Plan;The Company does not presently have a formal  contingency
plan for handling Year 2000  problems that are not detected and corrected  prior
to their occurrence, although the company has identified specific individuals to
address and resolve any Year 2000 related issues.

CONVERSION TO A SINGLE EUROPEAN CURRENCY

     The company  has sales in a number of foreign  countries.  However,  as the
majority  of  foreign  sales  are in the UK,  conversion  to a  single  European
currency would not have a material impact on the Company's financial results.

FACTORS THAT MAY AFFECT FUTURE RESULTS

     TSI Software depends on it's 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
future  operating  results are highly  dependent  on the market  acceptance  and
growth of its Mercator product line and enhancements to this line.

     Market  acceptance of the Mercator  product line may not increase or remain
at  current  levels.  The  Company  may not 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.

     TSI  Software  depends 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 


                                       21
<PAGE>

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.

     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.  The Company may not be able to
successfully  identify  such  applications,  systems  or  platforms.  Also these
applications, systems or platforms will achieve commercial acceptance or Company
may not realize a sufficient return on its investment.

     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

     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 (or VARs),  Independent  Software
Vendors (or ISVs), Systems Integrators (or 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.  TSI
Software may not 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.  These third parties may also not provide adequate levels of
services  and  technical  support.  The  inability  of the Company to enter into
additional  indirect  distribution  arrangements,  the  failure  of these  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.  The Company's  planned  efforts to expand its use of VARs,
ISVs, SIs and distributors may not 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.  Therefore  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  also  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,  channel  conflicts  could  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.

     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  Company  noted an  increase  in days sales
outstanding  from December 31, 1997 to December 31, 1998 from  approximately  88
days to  approximately  109 days, and an increase in total  accounts  receivable
from $7.9  million to $18.0  million.  Accounts  Receivable  DSOs were higher at
December  31, 1998 versus  December  31, 1997 due to an increase of  maintenance
billings, an increase in deferred revenue where


                                       22
<PAGE>

amounts have been billed and revenue will be recognized in future periods, and a
higher  proportion  of new sales billed  during the last month of the  Company's
fourth quarter of 1998 as compared to the fourth quarter of 1997.

     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.  TSI  Software  may  not  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.  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.  The  Company  may  not  be
successful in these endeavors.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     TSI is  exposed  to  market  risk  primarily  through  its  investments  in
marketable  securities.  TSI's  investment  policy calls for investment in short
term, low risk instruments.  As of December 31, 1998,  investments in marketable
securities  was  $32.8  million.  Due to the  nature of these  investments,  any
decrease  in rates would not have  material  impact on the  Company's  financial
statements.

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.



                                       23
<PAGE>

                                    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 March
1999. Such information is incorporated herein by reference.

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

Executive Officers

<TABLE>
<CAPTION>
                   Name                         Age                 Position with the Company
                   ----                         ---                 -------------------------
<S>                                             <C>     <C>
Constance F. Galley .................           57      President and Chief Executive Officer and Director

Eric A. Amster ......................           44      Vice President, Sales

Patricia T. Boggs ...................           47      Vice President, Professional Services

Robert Bouton .......................           58      Vice President, Marketing

Albert Denz .........................           48      Vice President, Managing Director EUMA and AP

Ira A. Gerard .......................           51      Vice  President,  Finance  and Administration,
                                                        Chief Financial Officer and Secretary

James Monks .........................           43      Vice President, International Operations

Ulrich K. Neubert ...................           47      Vice President, Consulting

R. Anthony Percy ....................           52      Vice President, Strategic Planning

David Raye ..........................           37      Vice President, Operations

Edward J. Watson ....................           61      Executive Vice President, Business Development

Saydean Zeldin ......................           58      Vice President, Research and Development
</TABLE>

     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 IVANS, and is the former chairperson 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,  Ms.  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.

     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.

     Albert Denz, Managing Director and Vice President International  Operations
joined  TSI  Software  in  January,  1999  from SAP AG where he  served  as vice
president,  corporate  marketing  beginning  in 1996.  Prior to SAP,  Denz had a
19-year career at IBM where he served in various  executive  sales positions and
as IBM's  international  director of SAP  operations.  Denz  graduated  from the
University of Teubingen in Saarbruecken, Germany, with a degree in economics.



                                       24
<PAGE>

     Ira A. Gerard has been Vice President,  Finance and  Administration,  Chief
Financial Officer,  Treasurer 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.

     Ulrich K. Neubert,  Vice  President,  Consulting,  joined TSI Software with
TSI's acquisition of Software  Consulting  Partners in November,  1998. Prior to
joining TSI,  Neubert was  president  of Software  Consulting  Partners,  an SAP
implementation firm he founded in 1994. Prior thereto,  Neubert spent 8 years at
SAP AG, where he last served as a consulting manager. Neubert graduated from the
University of Saarbruecken in Germany, with a degree in informatics.

     R. Anthony Percy, Vice President,  Strategic Planning,  joined TSI Software
in January, 1999 after more than ten years with Gartner Group, where he was Vice
President,  Director of Research and a research  fellow.  Percy is a graduate of
Christ Church, Oxford.

     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 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.

     Appointment  to Board of  Directors.  On August 27,  1998 James P.  Schadt,
Chairman,  Dailey &  Partners  and  retired  chairman  and CEO,  Readers  Digest
Association, Inc. was appointed to TSI Software's Board of Directors.




                                       25
<PAGE>

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 March,  1999. Such  information is
incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS 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 March 26, 1999. 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 March,  1999. Such  information is
incorporated herein by reference.


                                       26
<PAGE>


                                    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 of this  Annual  Report on Form
10-K.

          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.

     The Company filed a report on Form 8-K on November 30, 1998 with respect to
the Company's  acquisition of substantially  all of the assets of and assumption
of certain liabilities of Software Consulting Partners.

     (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
      ------                            -------------

        2.01      Asset Transfer  Agreement dated as of November 13, 1998 by and
                  among the Company,  Software Consulting Partners ("SCP") and a
                  stockholder of SCP/(1)/

        3.01      Amended and Restated Certificate of Incorporation/(2)/

        3.02      Registrant's Amended and Restated Bylaws/(3)/

        3.03      Certificate of Designations specifying the terms of the Series
                  A Junior Participating Preferred Stock of the Company/(4)/

        4.01      Form  of  Specimen   Certificate   for   Registrant's   Common
                  Stock/(2)/

        4.02      Stockholders   Agreement   dated  as  of  June  1,  1989,   as
                  amended/(2)/

        4.03      1989 Stock  Purchase  Agreement  dated as of June 1, 1989,  as
                  amended/(2)/

        10.01     *Registrant's    1993   Stock    Option   Plan   and   related
                  documents/(2)/

        10.02     *Registrant's 1997 Equity Incentive Plan/(2)/

        10.03     *Registrant's 1997 Directors Stock Option Plan/(2)/

        10.04     *Registrant's 1997 Employee Stock Purchase Plan/(2)/

        10.05     *Registrant's Profit Participation Plan/(2)/

        10.06     Form  of  Indemnification  Agreement  to be  entered  into  by
                  Registrant   with  each  of  its   directors   and   executive
                  officers/(2)/

        10.07     Lease Agreement dated as of January 2, 1990 between Registrant
                  and Robert D. Scinto, as amended/(2)/

        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/(2)/

        10.09     Lease  Agreement  dated as of July 1, 1996 between  Registrant
                  and Boca Corners, L.P., Ltd., as amended/(2)/

        10.10     Credit Agreement dated as of July 31, 1994 between  Registrant
                  and The Bank of New York, as amended/(2)/

                                       27
<PAGE>

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

        10.11     Security   Agreement   dated  as  of  July  31,  1994  between
                  Registrant and The Bank of New York/(2)/

        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/(2)/

        10.13     *Letter   Agreement,    between   Registrant   and   Constance
                  Galley/(2)/

        10.14     *Letter  Agreement  dated  as  of  December  5,  1995  between
                  Registrant and Eric Amster/(2)/

        10.15     *Letter  Agreement  dated  as  of  October  5,  1995,  between
                  Registrant and Ira Gerard/(2)/

        10.16     *Letter   Agreement  dated  as  of  January  1,  1994  between
                  Registrant and Edward Watson/(2)/

        10.17     *Letter  Agreement  dated  as  of  October  1,  1994,  between
                  Registrant and Saydean Zeldin/(2)/

        10.18     Series E Preferred  Stock Purchase  Agreement  dated as of May
                  15,  1997  between  the  Company  and  the  Purchasers   named
                  therein/(2)/

        11.01     Statement of Earnings Per Share

        23.01     Independent Auditors' Report on Schedules

        24.01     Power of Attorney (see signature page)

        27.01     Financial Data Schedule

----------

*    Indicates a management contract or compensatory plan or arrangement.

(1)  Previously filed as an exhibit to the Company's  current Report on Form 8-K
     filed on November 30, 1998 and incorporated herein by reference.

(2)  Previously filed as an exhibit to the Company's  Registration  Statement on
     Form S-1 (File No. 333-27293) and incorporated herein by reference.

(3)  Previously filed as an exhibit to the Company's  Registration  Statement on
     Form 8-A (File No.  000-22667)  filed on September 4, 1998 and incorporated
     herein by reference.

(4)  Previously filed as an exhibit to the Company's Report on Form 8-K filed on
     September 4, 1998 and incorporated herein by reference.

(d)  Financial Statement Schedules.


                                       28
<PAGE>

                  Schedule II Valuation and Qualifying Accounts


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

<TABLE>
<CAPTION>
                                                        Charged
                                         Balance at      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, 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
Year ended December 31, 1998 ......        471,300        837,800       800,000        (211,200)      1,897,900
</TABLE>

----------
(1)  Recoveries of balances  previously written off and initial reserve recorded
     upon acquisition of SCP accounts receivable. 

(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.


                                       29
<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


                                By: 
                                    ------------------------------------------
                                Ira A. Gerard
                                Vice President, Finance and Administration,
                                Chief Financial Officer, Treasurer and Secretary


                                       30
<PAGE>

                    INDEPENDENT AUDITORS' REPORT ON SCHEDULE


The Board of Directors
TSI International Software Ltd.

     The audits  referred to in our report dated  February 2, 1998  included the
related  financial  statement  schedule  for the years ended  December 31, 1996,
1997, and 1998, included in the registration statement. This financial statement
schedule is the responsibility of the Company's  management.  Our responsibility
is to  express  an opinion of this  financial  statement  schedule  based on our
audits.

     In our opinion,  such  financial  statement  schedule,  when  considered in
relation to the basic financial statements taken as a whole,  presents fairly in
all material respects, the information set forth therein.


                                                        KPMG PEAT MARWICK LLP


New York, New York
February 2, 1999



                                       31
<PAGE>


                         TSI INTERNATIONAL SOFTWARE LTD.



                          INDEX TO FINANCIAL STATEMENTS


                                                                            Page
                                                                            ----

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


                                      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, 1997 and 1998, 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,  1998.  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, 1997 and 1998, and the results of its operations and its
cash flows for each of the years in the three year  period  ended  December  31,
1998 in conformity with generally accepted accounting principles.



New York, New York

February 3, 1999


                                      F-2
<PAGE>

                        TSI International Software, Ltd.

                                 Balance Sheets


<TABLE>
<CAPTION>
                                                                                       December 31,
                                                                               ----------------------------
                                                                                   1997            1998
                                                                               ------------    ------------
<S>                                                                            <C>             <C>         
                                     Assets
Current Assets
     Cash ..................................................................   $ 10,912,500    $ 15,132,700
     Investments in marketable securities ..................................     10,490,500      32,812,100
     Accounts receivable, less allowances of $471,300 and $1,897,900 .......      7,864,100      17,965,500
     Current portion of investment in licensing contracts receivable,
       net of unearned finance income of $60,000 and $68,100 ...............        678,100         522,000
     Prepaid expenses and other current assets .............................        745,000         729,400
     Deferred tax assets ...................................................             --       2,695,100
                                                                               ------------    ------------
     Total current assets ..................................................     30,690,200      69,856,800
Furniture, fixtures and equipment, net .....................................      1,587,300       2,699,400
Intangible assets, net .....................................................             --       5,155,400
Investment in licensing contracts receivable, net of unearned finance
     income of $38,700 and $51,100 .........................................        421,800         271,300
Other assets ...............................................................        242,400         204,400
                                                                               ------------    ------------
                                                                               $ 32,941,700    $ 78,187,300
                                                                               ============    ============

                      Liabilities and Stockholders' Equity
Current liabilities:
     Accounts payable ......................................................   $    600,200    $  1,546,700
     Accrued expenses ......................................................      2,207,900       6,479,900
     Current portion of deferred revenue ...................................      4,511,000       8,088,000
                                                                               ------------    ------------
          Total current liabilities ........................................      7,319,100      16,114,600
Other long-term liabilities ................................................         17,800          17,500
Deferred revenue, less current portion .....................................        188,400         156,400
                                                                               ------------    ------------
          Total liabilities ................................................      7,525,300      16,288,500
                                                                               ------------    ------------
Stockholders' equity:
     Convertible Preferred Stock (authorized 5,000,000 shares; no par value)             --              --
     Common stock ($.01 par value; authorized 20,000,000 shares;
       issued 9,056,542 shares and 11,141,569 shares); .....................         90,600         111,600
     Additional paid-in capital ............................................     33,359,300      63,956,200
     Deferred Compensation .................................................       (225,100)     (1,430,500)
     Accumulated deficit ...................................................     (7,557,000)       (400,200)
     Other comprehensive income ............................................       (199,300)       (338,300)
     Treasury stock, at cost (102,478 and 0 shares) ........................        (52,100)             --
                                                                               ------------    ------------
          Total stockholders' equity .......................................     25,416,400      61,898,800
                                                                               ------------    ------------
          Total liabilities and stockholders' equity .......................   $ 32,941,700    $ 78,187,300
                                                                               ============    ============
</TABLE>


                                      F-3
<PAGE>

                        TSI International Software, Ltd.

                              Statements of Income

<TABLE>
<CAPTION>
                                                        Years ended December 31,
                                            --------------------------------------------
                                                1996            1997            1998
                                            ------------    ------------    ------------
<S>                                         <C>             <C>             <C>         
Revenues:
     Software licensing .................   $  9,309,500    $ 14,602,400    $ 29,104,700
     Service, maintenance and other .....      9,694,400      12,067,300      16,211,400
                                            ------------    ------------    ------------
          Total revenues ................     19,003,900      26,669,700      45,316,100
                                            ------------    ------------    ------------
Cost of revenues:
     Software licensing .................        494,800         778,100       1,481,900
     Service, maintenance and other .....      2,005,700       2,490,000       5,407,200
                                            ------------    ------------    ------------
          Total cost of revenues ........      2,500,500       3,268,100       6,889,100
                                            ------------    ------------    ------------
          Gross profit ..................     16,503,400      23,401,600      38,427,000
                                            ------------    ------------    ------------
Operating expenses:
     Product development ................      3,452,300       4,461,800       5,699,000
     Selling and marketing ..............      8,715,200      13,095,100      22,032,500
     General and administrative .........      2,921,500       3,791,600       6,232,100
                                            ------------    ------------    ------------
          Total operating expenses ......     15,089,000      21,348,500      33,963,600
                                            ------------    ------------    ------------
          Operating income ..............      1,414,400       2,053,100       4,463,400
Borrowing expenses ......................       (285,500)       (185,800)        (10,900)
Investment income .......................        135,200         688,300       2,025,400
                                            ------------    ------------    ------------
          Income before income taxes ....      1,264,100       2,555,600       6,477,900
Provision for (benefit from) income taxes         36,200          76,000        (678,900)
                                            ------------    ------------    ------------
          Net income ....................   $  1,227,900       2,479,600       7,156,800
                                            ============    ============    ============
Net income per share:
     Basic ..............................   $       0.43    $       0.42    $       0.71
                                            ============    ============    ============
     Diluted ............................   $       0.21    $       0.29    $       0.60
                                            ============    ============    ============
Average shares outstanding:
     Basic ..............................      2,886,822       5,916,993      10,149,503
                                            ============    ============    ============
     Diluted ............................      5,811,210       8,566,761      11,907,804
                                            ============    ============    ============
</TABLE>




                 See accompanying notes to financial statements.


                                      F-4
<PAGE>

                         TSI International Software Ltd.

                            Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                         Years ended December 31,
                                                              --------------------------------------------
                                                                  1996            1997            1998
                                                              ------------    ------------    ------------
<S>                                                           <C>             <C>             <C>         
Cash flows from operating activities:
     Net income ...........................................   $  1,227,900    $  2,479,600    $  7,156,800
     Adjustments to reconcile net income to
       net cash provided by operating activities:
          Depreciation and amortization ...................        436,100         623,300       1,129,500
          Amortization of deferred compensation ...........             --          35,900          65,200
          Tax benefit of options exercised ................             --              --         937,700
          Provision for losses on accounts receivable .....        431,700         281,400         837,800
          Deferred taxes ..................................             --              --      (2,405,100)
          Changes in operating assets and liabilities:
               Accounts receivable ........................     (1,930,500)     (3,848,600)    (10,734,000)
               Investment in licensing contracts receivable        585,300         193,700         306,600
               Prepaid expenses and other current assets ..        (87,200)       (357,000)         15,600
               Other assets ...............................        (43,500)       (129,300)         48,100
               Accounts payable ...........................        255,700         (94,600)        946,500
               Accrued expenses ...........................        220,000         736,900       3,887,500
               Deferred maintenance revenue ...............       (365,600)       (116,800)      3,545,000
                                                              ------------    ------------    ------------
                    Net cash provided (used) by
                      operating activities ................        729,900        (195,500)      5,737,200
                                                              ------------    ------------    ------------
Cash used by investing activities:
     Purchase of furniture, fixtures and equipment ........       (827,500)       (876,200)     (1,802,200)
     Net cash paid to satisfy liabilities of SCP ..........             --              --      (4,653,300)
     Purchases of marketable securities ...................             --     (10,490,500)    (22,316,200)
                                                              ------------    ------------    ------------
                    Net cash used by investing activities .       (827,500)    (11,366,700)    (28,771,700)
                                                              ------------    ------------    ------------
Cash flows from financing activities:
     Net proceeds from public offerings ...................             --      24,272,300      25,378,200
     Issuance of Preferred Stock ..........................             --         993,400              --
     Net borrowings (repayments) under
       revolving line of credit ...........................        (50,000      (2,790,100)             --
     Exercise of warrants .................................             --              --         764,600
     Payments under capital leases ........................        (51,900)        (55,100)        (10,500)
     Stock options exercised ..............................             --           8,700         130,300
     Proceeds from employee stock plan ....................             --              --         988,600
                                                              ------------    ------------    ------------
          Net cash (used) provided by financing activities        (101,900)     22,429,200      27,251,200
                                                              ------------    ------------    ------------
Effect of exchange rate changes on cash ...................         98,300           4,200           3,500
                                                              ------------    ------------    ------------
     Net change in cash ...................................       (101,200)     10,871,200       4,220,200
Cash at beginning of period ...............................        142,500          41,300      10,912,500
                                                              ------------    ------------    ------------
Cash at end of period .....................................   $     41,300    $ 10,912,500    $ 15,132,700
                                                              ============    ============    ============
Supplemental information:
     Cash paid for:
          Interest ........................................   $    278,900    $    171,500    $         --
          Income taxes ....................................         27,100          42,200         615,517
Non-cash investing and financing activities:
     Acquisition of equipment under capital leases ........   $         --    $     30,000    $         --
     Conversion of preferred stock to common stock ........             --           9,100              --
     Net exercise of warrants .............................             --           3,000             500
     Common Stock issued for acquisition of SCP ...........             --              --       1,200,000
</TABLE>

                 See accompanying notes to financial statements.




                                      F-5
<PAGE>

                        TSI INTERNATIONAL SOFTWARE, LTD.

                   STATEMENT OF STOCKHOLDERS EQUITY/(DEFICIT)

<TABLE>
<CAPTION>
                                         Convertible
                                       Preferred Stock                      Common Stock              Additional       
                                -----------------------------       ----------------------------        Paid in          Deferred 
                                  Shares           Par Value           Shares         Par Value         Capital        Compensation
                                -----------       -----------       -----------      -----------      -----------      ------------
<S>                                 <C>                 <C>           <C>                 <C>           <C>            <C>
Balance at
   December 31, 1995 .....          860,969             8,600         3,000,000           30,000        7,888,800               --
Net income ...............                                 --                --               --               --               --
Currency translation
   adjustment ............               --                --                --               --               --               --
Total comprehensive
   income ................               --                --                --               --               --               --

                                ----------------------------------------------------------------------------------------------------
Balance at
   December 31, 1996 .....          860,969             8,600         3,000,000           30,000        7,888,800               --
Issuance of Series E
   Preferred Stock, net ..           50,000               500                --               --          992,900               --
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)              --
Options issued
   under incentive plans..               --                --                --               --          261,000          (261,000)
Amortization of deferred
   compensation ..........               --                --                --               --               --            35,900
Net income ...............               --                --                --               --               --               --
Currency translation
   adjustment ............               --                --                --               --               --               --

Total comprehensive
   income ................               --                --                --               --               --               --

                                ----------------------------------------------------------------------------------------------------
Balance at
   December 31, 1997 .....               --                --         9,056,542           90,600       33,359,300          (225,100)
Stock option exercises ...               --                --            91,730            1,100           91,900               --
Purchases under
   employee stock plan ...               --                --            99,344            1,000          972,800               --
Net proceeds from
   secondary offering ....               --                --         1,426,650           14,300       25,363,900               --
Exercise of warrants .....               --                --           382,281            3,800          760,800               --
Exercise of warrants on a
   net basis .............               --                --            51,100              500             (500)              --
Shares issued in
   connection with the
   acquisition of SCP ....               --                --            33,922              300        1,199,700               --
Options issued
   under incentive plans..               --                --                --               --        1,270,600        (1,270,600)
Amortization of
   deferred comp .........               --                --                --               --               --            65,200
Tax benefit of options
   exercised .............               --                --                --               --          937,700                --
Net income ...............                                 --                --               --               --                --
Currency translation
   adjustment ............               --                --                --               --               --                --

Total comprehensive
   income ................               --                --                --               --               --                --

                                ----------------------------------------------------------------------------------------------------
Balance at
   December 31, 1998 .....               --                --        11,141,569          111,600       63,956,200        (1,430,500)
                                ===========       ===========       ===========      ===========      ===========      =============


<CAPTION>
                                                 Other                                   Treasury Stock
                                   Retained   Comprehensive    Comprehensive      -----------------------------
                                   Earnings      Income           Income            Shares             Value            Total
                                 -----------  -----------       -----------       -----------       -----------       -----------
<S>                              <C>            <C>              <C>                <C>                <C>            <C>
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                --                --         1,227,900
Currency translation              
   adjustment ............                --      48,000            48,000                --                --            48,000
                                                               -----------
Total comprehensive                         
   income ................                --          --         1,275,900                --                --                --
                                                               ===========
                                -------------------------------------------------------------------------------------------------
Balance at                                  
   December 31, 1996 .....      (10,036,600)    (119,500)                           (113,478)          (65,000)       (2,293,700)
Issuance of Series E                        
   Preferred Stock, net ..               --           --                                  --                --           993,400
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
Options issued
   under incentive plans..
Amortization of deferred                    
   compensation ..........               --           --                                  --                --            35,900
Net income ...............        2,479,600           --         2,479,600                --                --         2,479,600
Currency translation                        
   adjustment ............               --      (79,800)          (79,800)               --                --           (79,800)
                                                               -----------
Total comprehensive                         
   income ................               --           --         2,399,800                --                --                --
                                                               ===========
                                ------------------------------------------------------------------------------------------------
Balance at                                  
   December 31, 1997 .....       (7,557,000)    (199,300)                           (102,478)          (52,100)       25,416,400
Stock option exercises ...               --           --                              73,476            37,300           130,300
Purchases under                             
   employee stock plan ...               --           --                              29,002            14,800           988,600
Net proceeds from                           
   secondary offering ....               --           --                                  --                --        25,378,200
Exercise of warrants .....               --           --                                  --                --           764,600
Exercise of warrants on a                   
   net basis .............               --           --                                  --                --                --
Shares issued in                            
   connection with the                      
   acquisition of SCP ....               --           --                                  --                --         1,200,000
Options issued
   under incentive plans..
Amortization of                             
   deferred comp .........               --           --                                  --                --            65,200
Tax benefit of options                      
   exercised .............               --           --                                  --                --           937,700
Net income ...............        7,156,800           --         7,156,800                --                --         7,156,800
Currency translation                        
   adjustment ............               --     (139,000)         (139,000)               --                --          (139,000)
                                                               -----------
Total comprehensive                         
   income ................               --           --         7,017,800                --                --                --
                                                               ===========
                                ------------------------------------------------------------------------------------------------
Balance at                                  
   December 31, 1998 .....         (400,200)    (338,300)               --                --                --        61,898,800
                                ===========  ===========       ===========       ===========       ===========       ===========
</TABLE>                       


                                      F-6
<PAGE>

                        TSI INTERNATIONAL SOFTWARE, LTD.

                   NOTES TO CONSOLIDATED 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 United States and Western  Europe and represent a broad range of
industries.

     (a) Revenue Recognition

     The  Company  adopted   Statement  of  Position  (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, post contract 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.  The adoption of SOP
97-2 did not have a material  impact on the  Company's  results of operations or
financial positionl.

     Software  licensing  revenues are recognized  based upon the following four
criteria: persuasive evidence of an agreement exists, delivery has occurred, the
fee is fixed and determinable, and the fee is collectible.  Maintenance contract
revenue is recognized ratably over the term of the contracts, which is 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 has expensed all software  development
costs as incurred.

     (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) Intangible Assets

     Intangible  assets are  comprised of the excess of the  purchase  price and
related costs over the value assigned to the net tangible assets of the business
acquired.  Intangible Assets are being amortized over 3 years on a straight line
basis. Amortization expense was $303,300 in 1998.

     (e) 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


                                      F-7
<PAGE>

                        TSI INTERNATIONAL SOFTWARE, LTD.

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--continued


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 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 not more likely than not to be realized.

     (f) 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.

     (g) Cash Equivalents

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

     (h) 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 gains and losses are reflected in earnings.

     (i) 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.

     (j) Stock Options

     The Company  accounts  for  stock-based  transactions  in  accordance  with
Statement of Financial  Accounting  Standard  ("SFAS") No. 123,  "Accounting for
Stock-Based  Compensation."  In  accordance  with SFAS No. 123,  the Company has
elected to measure stock-based employee compensation  arrangements in accordance
with the provisions of APB No. 25,  "Accounting  for Stock Issued to Employees,"
and comply with the  disclosure  provisions  of SFAS No. 123.  Accordingly,  the
Company recorded  compensation expense for stock options granted to employees in
accordance  with the  provisions of APB 25 and will disclose in the notes to its
financial statements the impact on net income and net income per share (see note
6).

     (k) 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.

     (l) Business Segments

     The  Company  adopted  the  provisions  of SFAS No.  131,  "Disclosure  and
Segments of an  Enterprise  and Related  Information"  in the fourth  quarter of
1998.  SFAS  131  establishes   standards  for  the  way  that  public  business
enterprises  report  information about operating  segments.  It also establishes
standards for related disclosures about products and services,  geographic areas
and  major  customers.  The  Company  has  determined  that it does not have any
separately  reportable  business segments and therefore the adoption of SFAS 131
did not impact the Company's reporting disclosures.



                                      F-8
<PAGE>

                        TSI INTERNATIONAL SOFTWARE, LTD.

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--continued


     (m) Comprehensive Income

     The  Company   adopted  the   provisions   of  SFAS  No.  130,   "Reporting
Comprehensive  Income"  during 1998.  SFAS 130 requires the company to report in
its financial statements,  in addition to its net income,  comprehensive income,
which includes all changes in equity during a period from non-owner sources. The
Company's  comprehensive  income  consists  of net income and  foreign  currency
translation  adjustments  and is  presented in the  Statement  of  Stockholders'
Equity/(Deficit).  The  adoption  of  SFAS  No.  130  had  no  impact  on  total
shareholders'  equity  (deficit).  Prior  year  financial  statements  have been
reclassified to conform to the SFAS 130 requirements.

     (n) Recent Accounting Pronouncements

     In March 1998,  the  American  Institute of  Certified  Public  Accountants
issued  Statement of Position 98-1,  "Accounting for Costs of Computer  Software
Developed or Obtained for Internal Use" (SOP 98-1).  SOP 98-1 provides  guidance
or determining  whether computer software  originally  developed or obtained for
internal use and then subsequently sold to the public. It also provides guidance
on  capitalization  of the costs  incurred  for computer  software  developed or
obtained for internal use. The Company does not believe that the adoption of SOP
98-1 will have a material  impact on its  results  of  operations  or  financial
position.

     In June 1998,  the FASB  issued SFAS No. 133,  "Accounting  for  Derivative
Instruments and Hedging Activities," (SFAS 133) which establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded  in other  contracts,  and for  hedging  activities.  SFAS  No.  133 is
effective  for all fiscal  quarters  of fiscal  years  beginning  after June 15,
19999.  This  statement  is not  expected  to affect the  Company as the Company
currently  does not have  any  significant  derivative  instruments  or  hedging
activities.

(2)  Foreign Operations

     The Company's  balance sheets  include  foreign branch assets of $3,867,200
and $4,278,800 and liabilities of $406,600 and $978,600 at December 31, 1997 and
1998,   respectively.   Revenue  from  foreign   operations   totaled  $968,400,
$2,505,200,  and $5,361,100,  respectively in 1996,  1997, and 1998. The foreign
net  income  for the  years  ended  December  31,  1996,  1997 and  1998,  after
allocation  of  corporate  charges,   was  $345,400,   $45,300  and  $1,565,900,
respectively.

     With the exception of direct sales activities in the United Kingdom, France
and Canada, the Company utilizes  distributors and agents to market its products
outside the United  States.  Revenues  generated  through  these  third  parties
amounted to  $288,700,  $125,400  and $25,000 for the years ended  December  31,
1996, 1997 and 1998, 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 1997 and 1998.  Total minimum
contract payments receivable at December 31, 1998 are as follows:

        1999 ...................................     $ 522,000
        2000 ...................................       261,900
        2001 ...................................       104,500
        2002 ...................................        24,100
                                                     ---------
                                                       912,500
        Less unearned interest income ..........      (119,200)
                                                     ---------
                                                       793,300
        Less current portion ...................      (522,000)
                                                     ---------
        Non current portion ....................     $ 271,300
                                                     =========



                                      F-9
<PAGE>


                        TSI INTERNATIONAL SOFTWARE, LTD.

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--continued


(4)  Furniture, Fixtures, and Equipment

     Furniture, fixtures and equipment consist of the following:

                                            December 31,
                                     ---------------------------     Useful Life
                                        1997             1998           Range
                                     ----------       ----------      ---------
Computer systems .................   $3,175,900       $4,552,500      3-7 years
Furniture and fixtures ...........      607,200          728,900      3-7 years
Office equipment .................      335,900          757,100      3-7 years
Leasehold improvements ...........      443,700          476,400     3-10 years
Automobiles ......................       64,900           51,000        5 years
                                     ----------       ----------
                                      4,627,600        6,565,900
Less accumulated depreciation
  and amortization ...............   (3,040,300)      (3,866,500)
                                     ----------       ----------
                                     $1,587,300       $2,699,400
                                     ==========       ==========

     Depreciation  expense was  $436,100,  $623,300  and  $826,200 for the years
ended  December 31, 1996,  1997,  and 1998  respectively.  Computer  systems and
equipment under capital leases included in the above totals,  net of accumulated
depreciation,  was  $30,800  and  $22,800  as of  December  31,  1997 and  1998,
respectively.

(5)  Long-Term Debt

     The Company had a line of credit  facility  with The Bank of New York which
provided 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  could 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 were  secured by  substantially  all of the
Company's  assets.  This line of credit  expired in November,  1998, and has not
been replaced.  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, 1998. Borrowing costs and
effective interest rates under this agreement were as follows:

                                            Years ended December 31,
                                     --------------------------------------
                                       1996           1997           1998
                                     --------       --------       --------
     Interest expense .........      $250,200       $171,500       $      0
     Guarantee fees ...........        23,600          1,400              0
     Commitment fees ..........        11,700         12,900         10,900
                                     --------       --------       --------
                                     $285,500       $185,800       $ 10,900
                                     ========       ========       ========
     Effective interest rate ..          9.51%         13.26%            --
                                     ========       ========       ========

(6)  Stockholders' Equity

     (a) 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. There were no shares outstanding at December 31, 1997 or 1998.

     (b) Common Stock

     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


                                      F-10
<PAGE>


                        TSI INTERNATIONAL SOFTWARE, LTD.

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--continued


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.

     On June 5, 1998,  the company  sold  1,200,000  shares of common stock in a
second public offering which resulted in proceeds of  approximately  $21,287,200
net of offering  expenses of  $392,800.  Existing  shareholders  sold  2,311,000
shares of stock in connection with this offering.

     On July 5,  1998,  the  underwriters  exercised  their  option to  purchase
526,650 additional shares of the Company's stock of which 226,650 were purchased
from the Company for additional proceeds of approximately $4,091,000.

     (c) Stock Purchase Warrants

     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 and 1998,  warrants were  exercised into an aggregate of 296,827 and 51,100
shares,  respectively.  As these three warrants were exercised on a net exercise
basis,  no proceeds were received by the Company.  Also, in connection  with the
secondary public offering in 1998, one of the remaining warrants was sold to the
underwriters and subsequently  exercised into 382,281 shares with total proceeds
of $764,562.  At December 31, 1998, there are five warrants  remaining which are
exercisable into 269,490 shares.

     (d) Stock Option Plans

     The Company  established  the Equity  Incentive  Stock Option Plan ("Equity
Plan") in May 1997 which  replaced 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 and
606,000 options under the Plan in 1997 and 1998  respectively at exercise prices
from $1.66 to $14.38 and  $11.91 to $44.58 per share,  respectively.  No options
may be granted for a term greater than 10 years.

     In  addition,  the  Company  established  a  Directors  Stock  Option  Plan
("Directors  Plan") in May 1997  which  authorizes  the  issuance  of options to
directors to purchase 225,000 shares of the Company's stock. During 1997, 60,000
options were granted at $6.67 per share.  During 1998,  15,000 and 15,000 shares
were  granted at $22.76 and $26.75 per share,  respectively.  

     In 1997 and 1998 the  Company  recorded  deferred  compensation  expense in
connection  with the grant of certain  options  to  employees  representing  the
difference  between the quoted  market  price of the stock at the grant date and
the exercise  price of the  options.  This amount is presented as a reduction of
stockholders  equity and is amortized  over the vesting period of the applicable
options.

     Transactions  under the Equity Plan and the Directors  Plan are  summarized
below:
                                                                     Weighted
                                                       Number         average
                                                     of shares    exercise price
                                                     ---------    --------------
     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
         Exercised ...........................        (165,206)      $ 0.82
         Granted .............................         636,000       $21.93
         Cancelled ...........................          (9,500)      $11.93
                                                     ---------
     Shares under option at December 31, 1998        1,825,051       $ 8.85
                                                     =========
     Options exercisable were as follows:
         December 31, 1996 ...................         576,357       $ 0.33
         December 31, 1997 ...................         771,907       $ 0.42
         December 31, 1998 ...................         807,601       $ 0.93



                                      F-11
<PAGE>


                        TSI INTERNATIONAL SOFTWARE, LTD.

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--continued


     Options  outstanding at December 31, 1998 have a weighted average remaining
contractual life of 7.3 years.

     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;  options were granted  during 1997 at exercise  prices between $1.66 to
$14.34;  and options were granted  during 1998 at exercise  prices between 11.91
and 44.58.  Substantially  all options vest ratably over a four year period from
the date of grant.  There were  909,174  shares  available  for grant  under the
option plans at December 31, 1998.

     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  prior to July 1, 1997) of the stock on the date of grant.  In 1996,
the Company utilized the minimum value method to determine compensation based on
the  fair  value of the  options  on the  date of  grant  as the  Company  was a
non-public  entity  prior to July 1, 1997.  The  compensation  expense  has been
calculated  utilizing the Black-Scholes  method in 1997 and 1998.  Following are
the resultant pro forma amounts of net income and net income per share:

<TABLE>
<CAPTION>
                                             1996               1997               1998
                                        -------------      -------------      -------------
<S>                                       <C>                <C>                <C>       
Net income -- as reported ..........      $1,227,900         $2,479,600         $7,156,800
Net income -- pro forma ............       1,216,600          2,023,600          5,012,900
Earnings per share -- as reported:
    Basic ..........................            $.43               $.42               $.71
    Diluted ........................            $.21               $.29               $.60
Earnings per share -- pro forma:
    Basic ..........................            $.42               $.34               $.49
    Diluted ........................            $.21               $.24               $.42
</TABLE>

     The weighted  average fair value of each option  granted in 1996,  1997 and
1998 was  $0.92,  $4.24 and  $21.92,  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:

                                       1996            1997            1998
                                   ------------    ------------    ------------
     Risk-free interest rate .....     6.27%       5.37 to 7.07    4.49 to 5.77
     Expected life in years ......      6               6               6
     Expected volatility .........      0%             59.8%            65%
     Expected dividend yield .....      0%              0%              0%


     (e) Stockholders Rights Plan

     On  September  2, 1998,  the Company  adopted the  Stockholder  Rights Plan
("Rights  Plan")  designed to protect the long-term value of the company for its
stockholders  during any future unsolicited  acquisition  attempt. In connection
with the plan,  the Board  declared a dividend of one preferred  share  purchase
right for each share of the Company's common stock.  Each right will entitle the
holder to  purchase  one-hundredth  of a share of Series A Junior  Participating
Preferred Stock at an exercise price of $140.00.

     Initially,  the rights are neither  exercisable nor traded  separately from
the common stock.  If a person or a group (an  "Acquiring  Person")  acquires or
announces  an intention to make a tender offer to acquire 15 percent (20 percent
if a 5 percent or more  shareholder at August 27, 1998) or more of the Company's
common stock, the rights will become exercisable and thereafter trade separately
from the common  stock.  The  Company's  Board of  Directors  may  exchange  the
outstanding  rights for common stock of the Company at an exchange  ratio of one
share of common stock per right. The Board may also redeem outstanding rights at
any time prior to a person becoming an Acquiring Person at a price of $0.001 per
right.  Prior to such time, the terms of the rights may be amended by the Board.
The rights will expire on September 2, 2008.


                                      F-12
<PAGE>

                        TSI INTERNATIONAL SOFTWARE, LTD.

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--continued


     (f) Employee Stock Purchase Plan

     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 subject to certain limitations.  The shares are
acquired  at 85% of the fair market  value.  As of December  31,  1998,  128,346
shares  had been  purchased  under  the  plan and  621,654  were  remaining  and
available for grant.

(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:

<TABLE>
<CAPTION>
                                                           Years ended December 31,
                                                   ------------------------------------------
                                                      1996            1997            1998
                                                   ----------      ----------      ----------
<S>                                                 <C>             <C>            <C>       
Weighted average common shares
   outstanding (basic shares) ...............       2,886,822       5,916,993      10,149,503
Common shares issuable upon conversion
   of preferred stock .......................       2,609,415       1,304,632              --
Dilutive effect of stock options and warrants         314,973       1,345,136       1,758,301
                                                   ----------      ----------      ----------
Total diluted shares ........................       5,811,210       8,566,761      11,907,804
                                                   ==========      ==========      ==========
</TABLE>

(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 $200,000, $200,000 and $251,000 in 1996, 1997 and 1998, 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 upon completion of three
months of service with the  Company.  Contributions  are subject to  established
limitations as determined by the Internal Revenue Service. As of January 1, 1998
the  Company   amended  the  plan  to  include  an  employer  match  of  50%  of
participants'  contributions up to 4%. The Company has made contributions to the
plan of $210,000 for the year ended December 31, 1998.

(9)  Income Taxes

     The provision for (benefit from) income taxes is comprised of the following
for the years ended December31, 1996, 1997 and 1998:

                                                 1996        1997        1998
                                              ---------   ---------   ---------
Federal ...................................     $36,200     $46,000   $(943,300)
State .....................................          --      30,000      84,500
Foreign ...................................          --          --     179,900
                                              ---------   ---------   ---------
Provision for (benefit from) income taxes .     $36,200     $76,000   $(678,900)
                                              =========   =========   =========


                                      F-13
<PAGE>


                        TSI INTERNATIONAL SOFTWARE, LTD.

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--continued


     At December  31,  1998,  the Company  had  federal tax net  operating  loss
carryforwards  of  $1,900,000  expiring  between  the  years  2000  and 2009 and
research and  experimentation  credits of $1,055,000  expiring  between 2003 and
2008.  At December  31, 1997 and 1998,  the  components  of net  deferred  taxes
(utilizing a 41.4% and 38.8% combined tax rate, respectively) were:

                                                        1997           1998
                                                    -----------    -----------
     Deferred tax assets:
     Other Federal credits ......................      $655,700     $1,372,400
     Deferred revenues ..........................     1,495,400        934,300
     Net operating loss carryforwards ...........     2,835,400      1,011,900
     Allowance for doubtful accounts ............       195,200        736,400
     Other ......................................       188,000         51,800
                                                    -----------    -----------
     Total gross deferred tax assets ............     5,369,700      4,106,800
     Less valuation allowance ...................     4,441,500      1,054,500
                                                    -----------    -----------
     Total deferred tax assets ..................       928,200      3,052,300
                                                    ===========    ===========
     Deferred tax liabilities:
     Licensing contracts receivable .............      (455,400)      (307,800)
     Difference between book and tax depreciation      (472,800)       (49,400)
                                                    -----------    -----------
     Total deferred tax liability ...............      (928,200)      (357,200)
                                                    -----------    -----------
     Net deferred tax assets ....................   $        --     $2,695,100
                                                    ===========    ===========

     The decrease in the valuation allowance of $3,387,000 in 1998 is the result
of the utilization of net operating loss  carryforwards  and the reversal of the
remaining net operating loss carryforward valuation allowance.

     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:

                                                            1997       1998
                                                           ------     ------
     U.S. Federal Statutory Rate .......................     34.0%      34.0%
     Non-deductible expenses ...........................      1.6%       3.7%
     State income taxes, net of U.S. federal tax benefit      0.8%       4.8%
     Tax credits .......................................       --       (7.2%)
     Other .............................................       --        2.2%
     Change in valuation allowance .....................    (33.4%)    (48.0%)
                                                           ------     ------
     Effective tax rate ................................      3.0%     (10.5%)
                                                           ======     ======

(10) Accrued Expenses

     Included  in  accrued  expenses  as of  December  31,  1997 and  1998,  are
compensation costs (regular payroll,  commissions,  bonus,  profit sharing,  and
other withholdings) of $1,473,500 and $3,718,871, respectively.


                                      F-14
<PAGE>

                        TSI INTERNATIONAL SOFTWARE, LTD.

              NOTES TO CONSOLIDATED 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, 1998 are:

Year                                                     Capital     Operating
----                                                     -------     ----------
1999 ................................................    $10,500     $1,379,800
2000 ................................................     10,500      1,318,000
2001 ................................................     10,500        740,000
2002 ................................................      1,800        266,100
2003 ................................................         --        270,400
                                                         -------     ----------
    Total ...........................................    $33,300     $3,974,300
                                                                     ==========
Less amount representing interest ...................     10,500
                                                         -------
  Present value of minimum capital lease payments ...    $22,800
                                                         =======

     Certain  of the  aforementioned  leases  provide  for  additional  payments
relating to taxes and other  operating  expenses.  Rental  expense for the years
ended December 31, 1996, 1997, and 1998,  under all operating leases  aggregated
approximately $717,300, $840,400 and $1,385,000 respectively.

(12) Acquisition of Software Consulting Partners

     On November  13,  1998,  the Company  acquired  certain  assets of Software
Consulting  Partners (SCP) for 33,922 shares of the Company's stock with a total
fair value of $1.2 million and the  assumption of certain  liabilities  totaling
$4.7 million. The purchase price was allocated to the assets based on their fair
values.  The excess of the  purchase  price over the fair value o the net assets
acquired was  approximately  $5.5  million and is being  amortized on a straight
line basis over 3 years.

     The Company issued 33,922 shares of common stock based upon the total value
of $1.2 million as prescribed by the agreement and the market price of the stock
on the  acquisition  date with 50% of such shares subject to an escrow to secure
certain indemnification obligations of SCP and the SCP stockholder. In addition,
the company  may issue a maximum of an  additional  33,921  shares of its common
stock in February 2000, based on the achievement of certain revenue and employee
retention goals relating to the SCP business.

     The  acquisition was accounted for by the purchase method of accounting for
business combinations. Accordingly, the accompanying statements of operations do
not include any revenues or expenses  related to this  acquisition  prior to the
closing date. The amounts used to satisfy the acquired liabilities were financed
through available cash.  Following are the Company's  unaudited proforma results
for the year ended  December 31, 1998,  assuming the  acquisition  took place on
January 1, 1998:

     Revenues ..........................................            $52,633
     Net Income ........................................             $3,832
     Net Income per share:
         Basic .........................................              $0.38
         Diluted .......................................              $0.32
     Weighted average shares outstanding:
         Basic .........................................         10,165,358
         Diluted .......................................         11,923,659

     These  unaudited  proforma  results  have  been  prepared  for  comparative
purposes only and include certain adjustments,  such as additional  amortization
expense as a result of goodwill and a decrease in interest income due to the use
of cash to satisfy  liabilities.  They do not  purport to be  indicative  of the
results of operations  which  actually  would have resulted had the  combination
been in effect on January 1, 1998, or of future results of operations.




                                      F-15
<PAGE>

                        TSI INTERNATIONAL SOFTWARE, LTD.

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--continued


(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.


                                                           1997
                                           -------------------------------------
                                            First    Second     Third     Fourth
                                           Quarter   Quarter   Quarter   Quarter
                                           -------   -------   -------   -------
Total revenues ..........................   $5,508    $6,155    $7,000    $8,007
Gross profit ............................    4,786     5,491     6,032     7,093
Net income ..............................      313       267       785     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


                                                           1998
                                           -------------------------------------
                                            First    Second     Third     Fourth
                                           Quarter   Quarter   Quarter   Quarter
                                           -------   -------   -------   -------
Total revenues ..........................   $8,187   $10,133   $12,124   $14,872
Gross profit ............................    7,193     8,676    10,840    11,718
Net income ..............................      871     1,226     1,871     3,189
Net income per share:
    Basic ...............................      .10       .13       .17       .29
    Diluted .............................      .08       .11       .15       .25
Weighted average number of common and
    common equivalent shares outstanding:
    Basic ...............................    9,044     9,541    10,962    11,049
    Diluted .............................   10,827    11,434    12,627    12,743


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


                                      F-16