UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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


                                    FORM 10-Q

(Mark One)

X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
  SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 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 000-22327

                             PSW TECHNOLOGIES, INC.
             (Exact name of registrant as specified in its charter)

 Delaware                                                
(State or other jurisdiction of incorporation or organization)                 

74-2796054
(I.R.S. Employer Identification No.)

6300 Bridgepoint Parkway, Building 3, Suite 200, Austin Texas              78730
(Address of principal executive offices)                              (Zip Code)

Registrant's telephone number, including area code                (512) 343-6666
                                                   
         Indicate  by check x whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes _x No __________


         Indicate  the  number of  shares  outstanding  of each of the  issuer's
classes of common stock, as of the latest practicable date:  9,070,651 shares of
the Company's  Common Stock,  $.01 par value,  were  outstanding as of April 30,
1998.


<PAGE>

                             PSW TECHNOLOGIES, INC.

                       Index to March 31, 1998, Form 10-Q



                                                                               
                         Part I -- Financial Information    

Item 1.     Financial Statements...............................................3

            Condensed Balance Sheets -- March 31, 1998 and December 31, 
            1997...............................................................3

            Condensed Statements of Operations -- Three Months Ended
            March 31,1998 and 1997.............................................4

            Condensed Statements of Cash Flows -- Three Months Ended March 31,
            1998 and 1997......................................................5

            Notes to Condensed Financial Statements............................6

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

                                            Part II -- Other Information

Item 1.     Legal Proceedings.................................................16

Item 2.     Changes in Securities.............................................16

Item 3.     Defaults upon Senior Securities...................................16

Item 4.     Submission of Matters to a Vote of Security Holders...............16

Item 5.     Other Information.................................................16

Item 6.     Exhibits and Reports on Form 8-K..................................16

            Signatures........................................................18


<PAGE>

                         Part 1 - FINANCIAL INFORMATION

Item 1. Financial Statements

                             PSW Technologies, Inc.
                            Condensed Balance Sheets
                        (in thousands, except share data)
<TABLE>
<CAPTION>

                                                                   March 31,    December 31,
                                                                      1998        1997
                                                                  (Unaudited)             
Assets
Current assets:
<S> .............................................................        <C>         <C>
   Cash .........................................................   $    809    $    835
   Short-term investments .......................................     21,747      22,470
   Accounts receivable, net of allowance for doubtful
   accounts of $165 at March 31, 1998 and December 31, 1997 .....      7,335       7,429
   Unbilled revenue under customer contracts ....................        419         418
   Prepaid expenses and other current assets ....................        649         483
                                                                    --------    --------    
Total current assets ............................................     30,959      31,635
Other assets ....................................................      3,828       3,785
                                                                    --------    --------

Total assets ....................................................   $ 34,787    $ 35,420
                                                                    ========    ========

Liabilities and stockholders' equity Current liabilities:
   Trade payables ...............................................        525         532
   Accrued expenses and other current liabilities ...............      2,438       3,029
                                                                    --------    --------    
Total current liabilities .......................................      2,963       3,561

Stockholders' equity:
  Preferred stock, par value $.01 per share, 1,000,000
     shares authorized and none issued and outstanding ..........         --          --
  Common stock, par value $.01 per share, 34,000,000
     shares authorized, 9,018,125 and 8,960,935 shares
     issued and outstanding at March 31, 1998 and
     December 31, 1997, respectively ............................         90          90
  Additional paid-in capital ....................................     29,579      29,484
  Deferred compensation .........................................       (200)       (243)
  Accumulated other comprehensive income ........................         12         (27)
  Retained earnings .............................................      2,343       2,555
                                                                    --------    --------    
Total stockholders' equity ......................................     31,824      31,859
                                                                    --------    --------    
Total liabilities and stockholders' equity ......................   $ 34,787    $ 35,420
                                                                    ========    ========
</TABLE>


                             See accompanying notes.


                                       3
<PAGE>

                             PSW Technologies, Inc.
                       Condensed Statements of Operations
                      (in thousands, except per share data)
                                   (unaudited)
<TABLE>
<CAPTION>

                                                                                            Three Months Ended
                                                                                                   March 31,
                                                                                               1998        1997
                                                                                           --------    --------

<S> ....................................................................................        <C>         <C>
Revenue ................................................................................   $  9,758    $ 10,307
Operating expenses:
   Technical staff .....................................................................      5,803       5,284
   Selling and administrative staff ....................................................      2,549       1,886
   Other expenses ......................................................................      1,927       1,961
   Special compensation expense ........................................................         43         119
                                                                                           --------    --------
Total operating expenses ...............................................................     10,322       9,250
                                                                                           --------    --------

Income (loss) from operations ..........................................................       (564)      1,057

Interest income (expense), net .........................................................        252         (89)
                                                                                           --------    --------
Income (loss) before provision (benefit) for income taxes ..............................       (312)        968
                                                                                           --------    --------

Provision (benefit) for income taxes ...................................................       (100)         --
                                                                                           --------    --------

Net income (loss) ......................................................................   $   (212)   $    968
                                                                                           ========    ========

Basic earnings (loss) per share ........................................................   $  (0.02)
                                                                                           ========

Diluted earnings (loss) per share ......................................................   $  (0.02)
                                                                                           ========

Pro forma information:
Historical income before provision for income taxes ....................................               $    968

Pro forma provision for income taxes ...................................................                    368
                                                                                                       --------

Pro forma net income ...................................................................               $    600
                                                                                                       ========

Pro forma basic earnings per share .....................................................               $   0.11
                                                                                                       ========

Pro forma diluted earnings per share ...................................................               $   0.09
                                                                                                       ========


Shares used in basic earnings (loss) per share calculation .............................      8,990       5,546
                                                                                           ========    ========

Shares used in diluted earnings (loss) per share calculation ...........................      8,990       6,740
                                                                                           ========    ========
</TABLE>

                             See accompanying notes.


                                       4
<PAGE>


                             PSW Technologies, Inc.
                       Condensed Statements of Cash Flows
                                 (in thousands)
                                   (unaudited)
<TABLE>
<CAPTION>
                                                                                                     Three Months
                                                                                                    Ended March 31,
                                                                                                  ------------------
                                                                                                     1998       1997
                                                                                                  -------    -------
Operating activities
<S> ...........................................................................................       <C>        <C>
Net income (loss) .............................................................................   $  (212)   $   968
Adjustments to reconcile net income to net cash used in
   operating activities:
     Special compensation expense .............................................................        43        119
     Depreciation and amortization ............................................................       236        162
     Bad debt expense .........................................................................        10         30
     Changes in operating assets and liabilities:
        Accounts receivable ...................................................................        84     (1,516)
        Due from related party ................................................................        --        216
        Unbilled revenue under customer contracts .............................................        (1)        91
        Prepaid expenses and other current assets .............................................      (166)       (54)
        Due to related party ..................................................................        --       (581)
        Trade payables ........................................................................        25       (239)
        Deferred revenue ......................................................................        --        268
        Accrued expenses and other current liabilities ........................................      (516)      (415)
                                                                                                  -------    -------
Net cash used in operating activities .........................................................      (497)      (951)
                                                                                                  -------    -------

Investing activities
Proceeds from the sale of short term investments ..............................................       762         --
Acquisition of property and equipment .........................................................      (311)      (965)
                                                                                                  -------    -------
Net cash provided by (used in) investing activities ...........................................       451       (965)
                                                                                                  -------    -------

Financing activities
Proceeds (repayments) from line of credit, net ................................................        --       (475)
Issuance of common stock ......................................................................        20         50
Deferred offering costs .......................................................................        --        (45)
                                                                                                  -------    -------
Net cash provided by (used in) financing activities ...........................................        20       (470)
                                                                                                  -------    -------

Net decrease in cash ..........................................................................       (26)    (2,386)
Cash, beginning of period .....................................................................       835      3,182
                                                                                                  -------    -------

Cash, end of period ...........................................................................   $   809    $   796
                                                                                                  =======    =======

Non-cash activities:
Unrealized gain on investments ................................................................   $    39    $    --
Reduction of income taxes payable associated with the
     exercise of stock options ................................................................   $    75    $    --

</TABLE>

                             See accompanying notes.

                                       5
<PAGE>



                             PSW Technologies, Inc.
                     Notes to Condensed Financial Statements
                                 March 31, 1998
                                   (unaudited)

1.    Basis of Presentation

PSW  Technologies,  Inc.  (the  "Company")  commenced  operations as a separate,
stand-alone  corporation  effective October 1, 1996. The accompanying  unaudited
financial statements have been prepared by the Company pursuant to the rules and
regulations  of the  Securities and Exchange  Commission  (the "SEC")  regarding
interim  financial  reporting.   Accordingly,   they  do  not  include  all  the
information and notes required by generally accepted  accounting  principles for
complete  financial  statements  and  should  be read in  conjunction  with  the
financial  statements  and notes  thereto for the year ended  December  31, 1997
included in the Company's annual report on Form 10-K. The accompanying financial
statements reflect  adjustments,  all of which are of a normal recurring nature,
which are, in the opinion of management, necessary for a fair presentation.
The results for interim  periods  are not  necessarily  indicative  of full year
results.

2.    Significant Accounting Policies

Adoption of Accounting Policies

As described  below,  the Company  adopted  Statement  of  Financial  Accounting
Standards No. 130, Reporting  Comprehensive  Income, ("SFAS No. 130") during the
quarter ended March 31, 1998 (see Note 5).

In March 1998, the American  Institute of Certified  Public  Accountants  issued
Statement  of  Position  98-1,  Accounting  for the Costs of  Computer  Software
Developed or Obtained for Internal Use, which requires certain costs relating to
the acquisition and development of internal-use  software to be capitalized.  In
accordance  with  the  guidance  contained  therein,  the  Company  adopted  the
Statement  effective  January 1, 1998 and  capitalized  $83,000 during the three
months ended March 31, 1998.

Use of Estimates

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
could affect the financial  statements and  accompanying  notes.  Actual results
could differ from those estimates.

3.    Pro Forma Provision for Income Taxes

From commencement  through June 5, 1997 the Company had elected to be treated as
an S  Corporation  under  Subchapter S of the Internal  Revenue Code of 1986, as
amended.  As such,  federal income taxes  attributable to income through June 5,
1997 were the responsibility of the individual stockholders. Pro forma provision
for income taxes  reflect the  estimated  corporate  income tax expense that the
Company  would  have  recognized  had  it  not  elected  to be  treated  as an S
corporation for the period presented.

4.    Pro Forma Earnings Per Share

The pro  forma  basic  and  diluted  earnings  per  share  amounts  prior to the
Company's  initial public offering,  which occurred during the second quarter of
1997,  have been  restated as required to comply  with  Statement  of  Financial
Accounting  Standards  No.  128,  Earnings  Per Share,  and the  Securities  and
Exchange Commission Staff Accounting Bulletin 98.


                                       6
<PAGE>

                             PSW Technologies, Inc.
               Notes to Condensed Financial Statements (Continued)
                                   (unaudited)


5.    Comprehensive Income

As of January 1, 1998, the Company adopted SFAS No. 130, Reporting Comprehensive
Income.  SFAS No. 130  establishes  new rules for the  reporting  and display of
comprehensive income and its components; however, the adoption of this Statement
had no impact on the Company's net income or shareholders'  equity. SFAS No. 130
requires  unrealized  gains  or  losses  on  the  Company's   available-for-sale
securities,  which prior to adoption were reported  separately in  shareholders'
equity,  to be  included in other  comprehensive  income.  Prior year  financial
statements  have been  reclassified  to confirm to the  requirements of SFAS No.
130.

The components of  comprehensive  income for the three month periods ended March
31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
                                                                     1998        1997(a)
                                                                    -----       -----
<S> .............................................................     <C>         <C>
Net income (loss) ...............................................   $(212)      $ 600

Unrealized gain on short term investments .......................      39          --
Income tax expense related to items of other comprehensive income     (12)         --
                                                                    =====       =====
Comprehensive income (loss) .....................................   $(185)      $ 600
                                                                    =====       =====
</TABLE>

(a)            Net income and  comprehensive  income  amounts are presented on a
               pro forma basis as if the Company had been subject to federal and
               state income taxes.

The components of accumulated other  comprehensive  income at March 31, 1998 and
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
                                                                         1998   1997
                                                                         ----   ----
<S> ............................................                         <C>     <C>
Unrealized gain (loss) on short term investments                         $ 12   $(27)
                                                                         ====   ====
</TABLE>

                                       7
<PAGE>


                             PSW Technologies, Inc.
               Notes to Condensed Financial Statements (Continued)
                                   (unaudited)


6.    Earnings per Share

The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data) for the three months ended March 31:
<TABLE>
<CAPTION>

                                                1998     1997(1)
                                                -----   ------
Numerator:
<S> ........................................   <C>        <C>
 Net income (loss) .........................   $(212)  $  600
                                               =====   ======
Denominator:
  Shares used in basic earnings (loss) per
    share calculation ......................   8,990    5,546

  Effect of dilutive securities:
    Employee stock options .................    --        689
    Warrants ...............................    --        505
                                               -----   ------
  Shares used in diluted earnings (loss) per
    share calculation ......................   8,990    6,740
                                               =====   ======

Basic earnings (loss) per share ............  $(0.02)  $ 0.11
                                               =====   ======

Diluted earnings (loss) per share ..........  $(0.02)  $ 0.09
                                               =====   ======
</TABLE>



(1) Net income and earnings per share amounts are presented on a pro forma basis
as if the Company had been  subject to federal and state income  taxes.  The pro
forma  basic and pro forma  diluted  earnings  per  share  amounts  prior to the
Company's  initial public offering,  which occurred during the second quarter of
1997,  have  been  restated  as  required  to comply  with SFAS No.  128 and the
Securities and Exchange  Commission Staff Accounting Bulletin 98 ("SAB 98"). The
adoption of the  provisions  of SFAS 128 and SAB 98 did not change  earnings per
share for the three months ended March 31, 1997.


                                       8
<PAGE>

Item 2.

MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF  FINANCIAL  CONDITION  AND RESULTS OF
OPERATIONS

Except for historical  information  contained herein,  some matters discussed in
this report constitute  forward-looking  statements relating to future events or
the future financial performance of the Company. Stockholders are cautioned that
such  statements  are only  predictions  and actual events or results may differ
materially.   In  evaluating  such  statements,   prospective  investors  should
specifically  consider  the risks  discussed  below under the  caption  "Certain
Factors That May Affect Future Results,  Financial Condition and Market Price of
Securities",  as well as those  discussed in the  Company's  filings and reports
with  the   Securities   and  Exchange   Commission,   including  the  Company's
Registration Statement on Form S-1 (File No. 333-21565).

Overview

PSW Technologies,  Inc. is a software  services firm,  operating in one industry
segment,  that provides high value  solutions to information  technology  ("IT")
vendors and IT users by mastering and applying critical  emerging  technologies,
including Web based distributed computing, object oriented development, advanced
operating  systems and systems  management  technologies.  IT vendors  primarily
consist of software  companies who utilize the Company's  services to help bring
their  products to market  faster.  IT users  generally  utilize  the  Company's
services to help  define,  develop and  complete  high value,  mission  critical
enterprise  software systems for internal use. PSW provides joint  project-based
development,  porting  and testing  services  to selected IT vendor  clients and
applies the technical  expertise  learned to the design and  development of high
value, mission critical enterprise business systems for its Fortune 1000 IT user
clients.

To  date,  revenue  has  been  generated  principally  from   time-and-materials
contracts for the Company's software services.  Revenue from  time-and-materials
contracts is  recognized  during the period in which the services are  provided.
The Company also enters into fixed price  contracts  for its software  services.
Revenue    from   fixed    price    contracts    is    recognized    using   the
percentage-of-completion  method over the term of the client contract,  measured
by the  labor  incurred  as a  percentage  of the  estimated  total  labor.  The
cumulative  impact  of  revisions  in  percentage  of  completion  estimates  is
reflected  in the  period  in which  the  revisions  are  made.  Provisions  for
estimated  losses on  uncompleted  contracts  are made on a contract by contract
basis and are  recognized  in the  period in which such  losses are  determined.
There  can  be no  assurance  of  the  accuracy  of the  Company's  future  work
completion  estimates,  and  operating  results  may be  adversely  affected  by
inaccurate estimates of contract related labor.

Year 2000 Compliance

Many currently  installed  computer  systems and software  products are coded to
accept  only  two-digit  entries in the date code field.  Beginning  in the Year
2000,  these  date code  fields  will  need to  accept  four  digit  entries  to
distinguish  21st century dates from 20th century dates.  As a result,  computer
systems and  software  used by many  companies  may need to be updated to comply
with  such  "Year  2000"  requirements.  Significant  uncertainty  exists in the
consulting and software  development  services industry concerning the potential
effects associated with such compliance.  Although all of the services currently
offered by the Company are designed to be Year 2000  compliant,  there can be no
assurance  that the  Company's  services  will be  compatible  with  third-party
software  that may be  integrated  or used in  conjunction  with  the  Company's
services. The Company believes that its internal and financial reporting systems
will be  operational  through  and  beyond  the year  2000  without  significant
additional expense to the Company.


                                       9
<PAGE>


Results of Operations

The  following  table sets  forth the  percentage  of  revenue of certain  items
included in the  Company's  condensed  statement  of  operations  for the period
indicated:
<TABLE>
<CAPTION>
                                                                     Three Months ended
                                                                           March 31,
                                                                         1998     1997

<S> ..................................................................    <C>      <C>
Revenue ..............................................................    100%    100%..
Operating expenses:
   Technical staff ...................................................     59       52
   Selling and administrative staff ..................................     26       18
   Other expenses ....................................................     20       19
   Special compensation expense ......................................      1        1
                                                                         ----     ----
Total operating expense ..............................................    106       90
                                                                         ----     ----
Income (loss) from operations ........................................     (6)      10
Interest income (expense), net .......................................      3       --
Provision (benefit) from income taxes ................................     (1)       4(a)
                                                                         ----     ----
Net income (loss) ....................................................     (2)%      6%(a)
                                                                         ====     ====
</TABLE>

(a)      Net income is presented on a pro forma basis as if the Company had been
         fully subject to federal and state income taxes.

First Three Months of 1998 Compared with First Three Months of 1997

Revenue

The Company's revenue consists primarily of fees for software services provided.
Revenue was $9.8 million in the first three  months of 1998,  down 5% from $10.3
million for the first three  months of 1997,  principally  due to the decline in
IBM business partially offset by 49 new projects and 15 new clients in the first
quarter of 1998.  Revenue  attributable  to  software  services  rendered  to IT
vendors was $6.3  million and $6.2 million in first three months of 1998 and the
first three months of 1997,  respectively,  an increase of 1% in the first three
months of 1998 over the first  three  months of 1997.  Revenue  attributable  to
software services rendered to IT users was $3.5 million and $4.1 million for the
first three months of 1998 and the first three months of 1997,  respectively,  a
decrease of 15% in the first three months of 1998 over the first three months of
1997.

One client,  including its wholly owned subsidiaries,  accounted for 34% and 48%
of revenue in each of the first three months of 1998 and 1997, respectively.  No
other client accounted for more than 10% of revenue for either period.

 Technical Staff

Technical staff expenses consist of the cost of salaries,  payroll taxes, health
insurance and workers'  compensation,  for technical staff personnel assigned to
client  projects and  unassigned  technical  staff  personnel,  and fees paid to
subcontractors for work performed in connection with a client project. Technical
staff  expenses were $5.8 million in the first three months of 1998, an increase
of 10% over $5.3  million for the first three  months of 1997.  The  increase in
technical  staff  expenses  was  primarily  due to the  addition of personnel to
service  the  increase  in scope  and  number of client  projects  during  1997.
Technical  staff expenses  increased to 59% of revenue in the first three months
of 1998 from 52% in the first  three  months of 1997,  primarily  as a result of
lower utilization of technical staff and lower revenues.


                                       10
<PAGE>

Selling and Administrative Staff

Selling  and  administrative  staff  expenses  consist of the cost of  salaries,
payroll  taxes,  health  insurance  and  workers'  compensation  for selling and
administrative personnel, all commissions and bonuses, and the cost of technical
staff salaries for technical staff personnel assigned to methodology development
projects  or  performing   selling  or  training  related  tasks.   Selling  and
administrative  staff  expenses  were $2.5  million in the first three months of
1998,  an increase of 35% from $1.9  million in the first three  months of 1997.
The increase in selling and  administrative  staff expenses was primarily due to
the addition of sales and  administrative  personnel,  and  increased  technical
staff training. Selling and administrative staff expenses were 26% of revenue in
the first  three  months of 1998  compared  to 18% of revenue in the first three
months of 1997,  primarily as a result of increases in the sales staff,  greater
technical staff involvement in sales and lower revenues.

Other Expenses

Other expenses consist of all non-staff  related costs, such as occupancy costs,
travel,  business  insurance,  business  development,  recruiting,  training and
depreciation.  Other  expenses  were $1.9  million in the first three  months of
1998,  an decrease of 2% over other  expenses of $2.0 million in the first three
months of 1997,  principally due to expense controls and lower recruiting costs.
Other expenses were 20% of revenue in the first three months of 1998 compared to
19% in the first three months of 1997 due to lower revenues.

Special Compensation Expense

Special compensation expense consists of stock-based  compensation in connection
with  the  grants  of  replacement   options  to  the  Company's  employees  who
participated  in the Pencom  Systems  Incorporated  stock option  plan.  Special
compensation  expense was $43,000 in the first three months of 1998 and $119,000
in the first three  months of 1997,  or 1% of revenue in each of the  respective
periods.

Income (Loss) from Operations

The  Company  recorded a loss from  operations  of  $564,000  in the first three
months of 1998,  down from $1.1 million of income from  operations  in the first
three months of 1997.  Due  primarily  from the  decrease in revenue,  loss from
operations was 6% of revenue in the first three months of 1998, down from income
from operations of 10% of revenue in the first three months of 1997.

Income Taxes

From commencement  through June 5, 1997 the Company had elected to be treated as
an S  Corporation  under  Subchapter S of the Internal  Revenue Code of 1986, as
amended.  As such,  federal income taxes  attributable to income through June 5,
1997  were the  responsibility  of the  individual  stockholders.  The pro forma
disclosures  on the  statements  of  operations  reflect  adjustments  to record
provisions for income taxes as if the Company had not been an S Corporation.

The pro forma provision for income taxes of $368,000 for the quarter ended March
31, 1997 is computed using an estimated  annual effective tax rate of 38%, which
differs form the federal statutory rate of 34% primarily due to state taxes.

The historical  benefit for income taxes of $100,000 for the quarter ended March
31, 1998, is computed using an estimated annual effective tax rate of 32%, which
differs  from the federal  statutory  rate of 34% as a result of state taxes and
tax-exempt income.


                                       11
<PAGE>


Net Loss and Pro Forma Net Income

Net loss was $212,000 in the first three months of 1998 and pro forma net income
was  $600,000 in the first three  months of 1997.  Net loss was 2% of revenue in
the first three months of 1998 and pro forma net income was 6% of revenue in the
first three months of 1997.

Liquidity and Capital Resources

At March 31,  1998,  the  Company had cash and short term  investments  totaling
$22.6 million, a decrease from $23.3 million at December 31, 1997,  primarily as
a result of funding working capital requirements.

The Company  maintains a Credit Facility with a bank providing for borrowings of
up to $10 million, subject to a borrowing base requirement.  The Credit Facility
expires on May 1, 1999. Available borrowings under the Credit Facility are based
upon a percentage of the Company's  eligible accounts  receivable.  At March 31,
1998,  no amount was  outstanding  under the Credit  Facility and the  available
borrowing amount was $7.5 million.

The Company  anticipates  that its existing capital  resources  described above,
together with cash provided by operating activities will be adequate to fund the
Company's  operations for at least the next 12 months. There can be no assurance
that  changes  will not occur that would  consume  available  capital  resources
before such time. The Company's capital requirements depend on numerous factors,
including  potential  acquisitions,  the  timing  of  the  receipt  of  accounts
receivable,  employee  growth and the  percentage  of projects  performed at the
Company's  facilities.  There can be no assurance that  additional  funding,  if
necessary, will be available on favorable terms, if at all.

Certain Factors That May Affect Future Results, Financial Condition
   and Market Price of Securities

         Industry  Concentration;  Dependence on Large Projects. The Company has
derived and  believes it will  continue to derive a  significant  portion of its
revenue  from  the  technology  vendor  industry.  As a  result,  the  Company's
business,  financial  condition  and results of  operations  are  influenced  by
economic  and  other  conditions  affecting  such  industry,  such  as  economic
downturns  which could lead to a reduction in spending on IT projects,  which in
turn could lead to fewer new research and development outsourcing projects being
undertaken. Further, several of the Company's client contracts limit its ability
to provide  services to competitors  of such clients,  thereby  restricting  the
field of  potential  future  clients.  In  addition,  as a result of the dynamic
nature  of the IT vendor  industry,  the  Company  may lose  clients  due to the
acquisition, merger or consolidation of existing clients with entities which are
not current clients of the Company. The occurrence of any of the foregoing could
have a material adverse effect on the Company's  business,  financial  condition
and results of operations.

         Fixed-Price  Contracts  and Other  Project  Risks.  During 1997 and the
first three  months of 1998,  approximately  20% and 11%,  respectively,  of the
Company's  revenue  was  generated  on a  fixed  price,  fixed-delivery-schedule
("fixed price") basis, rather than on a time-and-materials  basis. The Company's
failure to accurately  estimate the resources required for a fixed price project
or its  failure to  complete  its  contractual  obligations  in a timely  manner
consistent  with the project  plan upon which its fixed price  contract is based
could  have a  material  adverse  effect on the  Company's  business,  financial
condition  and  results of  operations.  In the past,  the  Company has found it
necessary to revise project plans after  commencement  of the project and commit
unanticipated  additional  resources to complete  certain  projects,  which have
negatively  affected  the  profitability  of  such  projects.  The  Company  may
experience similar situations in the future, which could have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, the Company may establish contract prices before the project design
specifications are finalized, which could result in a fixed price that proves to
be too low and therefore  adversely  affects the Company's  business,  financial
condition and results of operations.


                                       12
<PAGE>


         Many of the Company's  engagements  involve projects which are critical
to the operations of its clients' businesses and which provide benefits that may
be difficult to quantify.  The Company's failure to meet a client's expectations
in the  performance  of its services  could damage the Company's  reputation and
adversely  affect its ability to attract new  business,  and may have a material
adverse effect upon its business, financial condition and results of operations.
The Company has undertaken,  and may in the future undertake,  projects in which
the Company guarantees  performance based upon defined operating  specifications
or guaranteed  delivery dates. The Company has also undertaken projects in which
a material  portion  of total  revenue is earned  based upon  meeting  specified
delivery  dates.  Unsatisfactory  performance or  unanticipated  difficulties or
delays in completing  such projects may result in client  dissatisfaction  and a
reduction  in payment to, or payment of damages by, PSW, any of which could have
a material  adverse effect on the Company's  business,  financial  condition and
results of  operations.  There can be no assurance that the Company will be able
to  limit  its  liability  to  clients,  including  liability  arising  from the
Company's failure to meet clients'  expectations in the performance of services,
through contractual provisions, insurance or otherwise.

         Management  of Growth.  The  Company's  growth  has placed  significant
demands on its management and other resources.  For example, the Company's staff
increased  from 167  full-time  employees at December 31, 1994 to 447  full-time
employees  at March  31,  1998.  The  Company's  ability  to manage  its  growth
effectively  will require it to continue to develop and improve its operational,
financial  and  other  internal  systems,  as well as its  business  development
capabilities, and to continue to attract, train, retain, motivate and manage its
employees.  In addition,  the Company's future success will depend in large part
on its ability to continue to maintain high rates of employee  utilization,  set
fixed price fees  accurately,  maintain project quality and meet delivery dates,
all as the  Company  seeks to  increase  the number of  projects  in which it is
engaged. If the Company is unable to manage its growth and projects effectively,
such  inability  would  have a  material  adverse  effect on the  quality of the
Company's  services,  its  ability to retain  key  personnel  and its  business,
financial  condition and results of  operations.  No assurance can be given that
the  Company's  growth will  continue to be achieved,  or if  achieved,  will be
maintained or that the Company will be successful in managing any such growth.

         Recent  Organization;  Absence of Operating  History as an  Independent
Business;  Limited  Relevance  of  Historical  Financial  Information.  Prior to
October 1996, the Company  conducted its business and operations as the software
division of Pencom Systems Incorporated,  ("Pencom").  Accordingly,  the Company
has only a limited independent operating history upon which an evaluation of the
Company and its prospects can be based.  Prior to October 1996, the Company also
had limited  accounting  capability and depended upon Pencom for most accounting
functions.  By October 1, 1996, the Company had assumed  responsibility for most
internal accounting  functions,  but continued to depend upon Pencom for limited
accounting  support in connection with the Company's 1996 year-end audit.  There
can be no assurance  that the Company will be  successful  in taking  control of
these functions from Pencom. The Company has also relied upon, and will continue
to rely upon,  Pencom for certain legal services and recruiting  functions.  The
Company's  management  has only limited  experience  operating  the Company as a
stand-alone company, separate and apart from Pencom. Pencom has no obligation to
provide financial or management assistance to the Company and has no plans to do
so.  The  inability  of  the  Company  to  operate  successfully  as  an  entity
independent  from Pencom would have a material  adverse  effect on the Company's
business, financial condition and results of operations.

         Variability of Quarterly  Operating Results.  The Company's revenue and
operating  results may  fluctuate  from quarter to quarter  based on a number of
factors,  including the number,  size and scope of projects in which the Company
is engaged, the contractual terms and degree of completion of such projects, any
delays incurred in connection with a project,  the Company's  success in earning
bonuses or other contingent payments, employee hiring and utilization rates, the
adequacy of  provisions  for losses,  the  accuracy of  estimates  of  resources
required to complete  ongoing projects and general  economic  conditions.  Other
factors which may effect  operating  results include  customer budget cycles and
customer  spending  priorities  such as the Year 2000  compliance  issue. A high
percentage of the Company's operating expenses, particularly personnel and rent,
are fixed in advance of any particular quarter. For example, while the number of
professional  staff the  Company  employs  may be  adjusted  to  reflect  active
projects,  such adjustments take time and the Company must maintain a sufficient
number of senior  professionals  to oversee  existing client  engagements and to
focus on securing new client engagements. As a result,  unanticipated variations
in the number or progress  toward  completion  of the  Company's  projects or in
employee utilization rates may cause significant variations in operating results
in any particular  quarter and could result in adverse  changes to the Company's


                                       13
<PAGE>

business,  financial condition and results of operations.  In the second quarter
of 1998,  revenues  may be adversely  impacted by the  Company's  lengthy  sales
cycle, among other matters,  which may cause the Company's revenues and earnings
to be below the expectations of securities analysts. Any shortfall in revenue or
earnings  from  expected  levels  or  other  failures  to meet  expectations  of
securities  analysts or the market in general  regarding  results of  operations
could have an immediate and material  adverse  effect on the market price of the
Company's Common Stock. Given the possibility of such quarterly  fluctuations in
revenue or earnings,  the Company  believes  that  comparisons  of its quarterly
results of operations are not  necessarily  meaningful and that such results for
one quarter should not be relied upon as an indication of future performance.

         Need to Attract and Retain  Professional  Staff. The Company's  success
will depend in large part upon its ability to attract,  train, retain,  motivate
and manage highly skilled  employees,  particularly  project  managers and other
senior technical  personnel.  Significant  competition exists for employees with
the skills  required to perform the  services  offered by the  Company,  and the
Company  requires that a significant  number of such employees  travel to client
sites to perform  services  on its  behalf,  which may make a position  with the
Company less  attractive to potential  employees.  Qualified  project  managers,
software  architects and senior  technical and  professional  staff are in great
demand worldwide and are likely to remain a limited resource for the foreseeable
future.  Furthermore,  there is a high rate of attrition  among such  personnel.
There can be no assurance that a sufficient  number of highly skilled  employees
will continue to be available to the Company,  that potential  employees will be
willing to travel to client  sites,  or that the Company will be  successful  in
training,  retaining and motivating  current or future employees.  The Company's
inability  to  attract,  train and retain  skilled  employees  or the  Company's
employees'  inability to achieve expected levels of performance could impair the
Company's  ability to adequately  manage and staff its existing  projects and to
bid for or obtain new  projects,  which in turn  would  have a material  adverse
effect on the Company's business, financial condition and results of operations.

         Rapid Technological  Advances; Risk of Targeting Emerging Technologies.
The Company has derived,  and will continue to derive, a substantial  portion of
its revenue from projects  based on  client/server  systems.  The  client/server
systems  market is continuing  to develop and is subject to rapid  technological
change.  The Company's future success will also depend in part on its ability to
develop IT  solutions  which keep pace with  continuing  changes in  information
processing   technology,   evolving  industry   standards  and  changing  client
preferences.  There can be no assurance  that the Company will be  successful in
addressing  these  developments  in a timely manner or that,  if addressed,  the
Company will be successful in the marketplace. The Company's delay or failure to
address these developments could have a material adverse effect on the Company's
business,  financial condition and results of operations. In addition, there can
be no assurance that products or technologies developed, or services offered, by
third parties will not render the Company's services noncompetitive or obsolete.
The  Company's  Software   Technology  Unit  also  seeks  to  identify  emerging
technologies  which it believes  will develop into  critical  technologies  with
broad  application  and  longevity.  Once  identified,  the  Company  may commit
substantial   resources  to  provide   services  to  the   developers   of  such
technologies.  No assurance can be given that the technologies identified by the
Company will develop  into  critical  technologies  with broad  application  and
longevity.  The  failure  of the  Company  to align  itself  with such  critical
emerging  technologies  would have a material  adverse  affect on its  business,
financial condition and results of operations.

         Dependence on Key Personnel.  The Company's  future success will depend
in part upon the  continued  services of a number of key  management  employees,
particularly Dr. W. Frank King, Keith D. Thatcher,  Brian E. Baisley,  Dennis P.
Thompson and William C. Cason, and a number of key technical employees. The loss
of the  services of any of the  Company's  key  personnel  could have a material
adverse  effect on the Company's  business,  financial  condition and results of
operations.  In addition,  the  Company's  credit  facility  prohibits  material
changes in management.  The Company does not maintain  key-person life insurance
on any of its  employees.  In  addition,  if one or  more of the  Company's  key
employees  resigns from the Company to join a competitor  or to form a competing
company,  any  resulting  loss of  existing  or  potential  clients  to any such
competitor  could  have a material  adverse  effect on the  Company's  business,
financial  condition and results of operations.  In the event of the loss of any
such  personnel,  there can be no  assurance  that the Company  would be able to
prevent the unauthorized disclosure or use of its technical knowledge, practices
or procedures by such personnel.


                                       14
<PAGE>


         System  Interruption and Security Risks.  The Company's  operations are
dependent on its ability to protect its  intranet  from  interruption  by damage
from  telecommunications  failure,  fire, earthquake,  power loss,  unauthorized
entry or other  events  beyond  the  Company's  control.  Most of the  Company's
computer equipment,  including its processing equipment, is currently located at
a single site.  There can be no assurance that  unanticipated  problems will not
cause any significant  system outage or data loss. Despite the implementation of
security  measures,  the  Company's  infrastructure  may also be  vulnerable  to
computer  viruses,  hackers or similar  disruptive  problems  caused by Internet
users.  Persistent problems continue to affect public and private data networks.
For example,  it is common for Internet service  providers to experience  system
interruptions which cause the Company to lose access to the Internet,  the means
by which the Company posts  internal  information  and provides  e-mail and time
sheet query and entry.  Any damage or failure that causes  interruptions  in the
Company's  operations  could have a  material  adverse  effect on the  Company's
business, financial condition and results of operations.

         Potential  Volatility  of Stock  Price.  The market for  securities  of
early-stage  companies  has been highly  volatile in recent years as a result of
factors  often  unrelated to a company's  operations.  In addition,  the Company
believes   factors  such  as   quarterly   variations   in  operating   results,
announcements  of  technological  innovations or new products or services by the
Company  or its  competitors,  general  conditions  in the  IT  industry  or the
industries in which PSW's clients  compete and changes in earnings  estimates by
securities  analysts,  could  contribute  to the  volatility of the price of the
Company's Common Stock.  These factors,  as well as general economic  conditions
such as  recessions or changes in interest  rates,  could  adversely  affect the
market price of the Company's Common Stock. Furthermore,  in the past, following
periods of volatility in the market price of a company's securities,  securities
class action claims have been brought against the issuing company.  There can be
no assurance that such  litigation  will not occur in the future with respect to
the Company.  Such litigation could result in substantial  costs and a diversion
of management's  attention and resources,  and any adverse determination in such
litigation  could also subject the Company to  significant  liabilities,  all of
which could have a material adverse effect on the Company's business,  financial
condition and results of operations.

         Effect of  Certain  Antitakeover  Provisions.  The  Company's  Board of
Directors has the authority to issue shares of Preferred  Stock and to determine
the designations,  preferences and rights and the qualifications or restrictions
of those  shares  without any further  vote or action by the  stockholders.  The
rights of the holders of Common  Stock will be subject to, and may be  adversely
affected by, the rights of the holders of any Preferred Stock that may be issued
in the future.  The issuance of Preferred  Stock could have the effect of making
it more  difficult  for a third party to acquire a majority  of the  outstanding
voting  stock of the  Company.  In  addition,  the  Company  is  subject  to the
antitakeover  provisions of Section 203 of the Delaware General  Corporation Law
(the  "DGCL").  In general,  this  statute  prohibits a publicly  held  Delaware
corporation  from  engaging  in a  "business  combination"  with an  "interested
stockholder"  for a period of three years after the date of the  transaction  in
which  the  person  became  an  interested  stockholder,   unless  the  business
combination  is approved in a  prescribed  manner.  Furthermore,  certain  other
provisions of the Company's  Amended and Restated  Certificate of  Incorporation
and Amended and Restated Bylaws may have the effect of discouraging, delaying or
preventing a merger, tender offer or proxy contest, which could adversely affect
the market price of the Company's Common Stock.


                                       15
<PAGE>


                          PART II -- OTHER INFORMATION


Item 1.   Legal Proceedings

          The Company is not a party to any material legal proceedings.

Item 2.   Changes in Securities

          None.

Item 3.   Defaults Upon Senior Securities

          None.

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

          None.

Item 5.   Other Information

          None.

Item 6.   Exhibits and Reports on Form 8-K

          (a)Exhibits
<TABLE>
<CAPTION>
Number            Description
     <C>          <S>                                                                    
   **3.1          Amended and Restated Certificate of Incorporation of the Registrant.
   **3.2          Amended and Restated Bylaws of the Registrant.
   **4.1          Specimen Common Stock Certificate.
   **4.2          See  Exhibits  3.1  and  3.2  for  provisions  of  the  Certificate  of
                  Incorporation  and Bylaws of the Registrant  defining rights of holders
                  of Common Stock of the Registrant.
  **10.1          Bridgepoint  Lease  Agreement  dated  October  31,  1996  between  the
                  Registrant and Investors Life Insurance Company of North America.
  **10.2          Lease Guarantee effective January 31, 1997 between the Registrant and Pencom Systems
                  Incorporated.
  **10.3          Office Lease dated April 25, 1996 between G&W Investment Partners and Pencom Systems
                  Incorporated, as amended.
  **10.4          Agreement of Lease dated May 13, 1996 between Newport L.G.-I, Inc. and Pencom Systems
                  Incorporated.
 #**10.5          Software Development Agreement having an effective date of March 9, 1994 between
                  the Registrant and Canon Computer Systems, Inc., as amended.
 #**10.6          Software Licensing Agreement having an effective date of June 13, 1996 between the Registrant and
                  Canon Computer Systems Incorporated.
  **10.7          Service Agreement No. 200.504 dated November 26, 1990 between the Registrant and
                  International Business Machines Corporation, as amended to date.
  X10.8           Software  Task Order  Agreement  dated  November  20, 1995  between the
                  Registrant and Tivoli Systems, Inc., as amended.
  X10.9           Credit Agreement dated November 8, 1997 between the Registrant and Texas
                  Commerce Bank National  Association.  X10.10  Promissory  Note dated November 8,
                  1997 from the Registrant to Texas Commerce Bank National Association.
**10.11           Accounts Receivable Agreement dated October 1, 1996 between the Registrant and Pencom Systems Incorporated.
**10.12           Letter Agreement dated October 2, 1996 between the Registrant and Pencom Systems Incorporated.
**10.13           Recruiting Services Agreement dated January 20, 1997 between the Registrant and Pencom
                  Systems Incorporated.


                                       16
<PAGE>

**10.14           Stockholders Agreement dated October 1, 1996 between the Registrant and certain
                  stockholders of the Registrant.
**10.15           Registration Rights Agreement dated October 1, 1996 between the Registrant and certain
                  stockholders and warrantholders of the Registrant.
**10.16           Employment Agreement dated October 19, 1992 between Dr. William Frank King and
                  Pencom Systems Incorporated.
**10.17           Employment Agreement dated October 1, 1996 between Dr. W. Frank King and the Registrant.
**10.18           Employment Agreement dated July 1, 1993 between the Registrant and Patrick Motola.
**10.19           Employment Agreement dated September 27, 1993 between the Registrant and William Cason.
**10.20           Employment Agreement dated October 19, 1993 between the Registrant and Brian Baisley.
 X10.21           Employment Agreement dated September 15, 1994 between the Registrant and
                  Dennis Thompson. 
**10.22           1996 Stock Option/Stock Issuance Plan.
**10.23           Employee Stock Purchase Plan.
**10.24           PSW Profit Sharing Plan.
**10.25           Description of Executive Bonus Plan.
**10.26           Stock Purchase Agreement dated as of January 1, 1997 between Michael J. Maples and the
                  Registrant.
**10.27           Stock Subscription dated October 1, 1996 between Pencom Systems Incorporated and  the Registrant.
**10.28           Asset Contribution Agreement dated October 1, 1996 between Pencom Systems Incorporated and
                  the Registrant.
**10.29           Assignment and Assumption Agreement dated October 1, 1996 between the Registrant and Pencom Systems Incorporated.
**10.30           Warrant dated October 1, 1996 issued by the Registrant to Pencom Systems Incorporated.
**10.31           Warrant dated October 1, 1996 issued by the Registrant to Stephen Markman.
**10.32           Warrant dated October 1, 1996 issued by the Registrant to Thomas Pallister.
**10.33           Warrant dated October 1, 1996 issued by the Registrant to Joy Venegas.
  27.1            Financial Data Schedule
</TABLE>
---------

**       Incorporated herein by reference to the Company's Registration 
         Statement on Form S-1 (File No. 333-21565).
#        The Company has been  granted  confidential  treatment  with respect to
         certain  portions of these  documents.  The portions of these documents
         which have been  omitted  are  denoted by an  asterisk[*].  The omitted
         portions of these  documents  have been filed with the  Securities  and
         Exchange  Commission  pursuant to Rule 406 under the  Securities Act of
         1933.
X        Incorporated  herein by reference to the  Company's  Form 10-K for the 
         year ended December 31, 1997.

          (b) Reports on Form 8-K

                None.


                                       17
<PAGE>
                                       

                                   SIGNATURES

Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.


                                                          PSW TECHNOLOGIES, INC.
                                                              (Registrant)



Date:  May 15, 1998                            __________/s/____________
                                                    Dr. W. Frank King
                                         President and Chief Executive Officer
                                               (Principal Executive Officer)



Date:  May 15, 1998                             __________/s/____________
                                                      Keith D. Thatcher
                                        Vice President of Finance, Treasurer and
                                                Chief Financial Officer
                                              (Principal Financial Officer)



Date:  May 15, 1998                             __________/s/____________
                                                   Kasaundra L. Simpson
                                       Financial Reporting and Budgeting Manager
                                             (Principal Accounting Officer)



                                       18
<PAGE>